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answers to selected questions in the textbook AS Unit 1
Introduction to Financial ing 1
What is financial ing?
1
3
Double-entry book-keeping: further transactions
3
2
4
5
AS ing for AQA second edition
TUTOR MATERIAL: ANSWERS TO SELECTED QUESTIONS
6
7
8
9
10 11
12
Double-entry book-keeping: first principles Business documents
Balancing s – the trial balance
Division of the ledger – the use of subsidiary books The main cash book
1
5
7
9
11
Bank reconciliation statements
12
The general journal and correction of errors
15
Introduction to final s Control s
Adjustments to final s
14
18
19
AS Unit 2
Financial and Management ing 13
Business organisations
21
15
Further aspects of final s
23
14
© Osborne Books Limited 2012 All answers are the responsibility of the publisher. Published by Osborne Books Limited
Tel 01905 748071
Email [email protected]
www.osbornebooks.co.uk
16
17
18 19
20
ing concepts and inventory valuation Preparing sole trader final s
Financial statements of limited companies Ratio analysis
Budgeting and budgetary control
The impact of computer technology in ing
22
25
28 31
34
36
1.7
CHAPTER 1 What is financial ing?
1.2
1.3
Purposes of ing: To quantify items such as sales, expenses and profit 1. 2. To present the s in a meaningful way so as to measure the success of the business 3. To provide information to the owner of the business and to other stakeholders
•
•
•
•
• •
1.4
trial balance extraction of figures from all the double-entry s to check their accuracy
•
overheads and expenses to date
•
•
2.1
assets owned
trade receivables – total amount owed to the business, and individual trade receivables
liabilities owed
profit during a particular period
trade payables – total amount owed by the business, and individual trade payables
providers of finance, eg the bank manager if the business wants to borrow from the bank
•
suppliers, who wish to assess the likelihood of receiving payment from the business
•
employees and trade unions, who wish to check on the financial prospects of the business
•
•
•
•
(a) (b) •
•
•
•
asset of bank increases by £3,000 liability of loan increases by £3,000 asset £11,000 – liability £3,000 = capital £8,000
asset of van increases by £6,000 asset of bank decreases by £6,000 asset £11,000 – liability £3,000 = capital £8,000
Dr
Capital
Dr
Computer
Cr
Rent Paid
Cr
Wages
Cr
Dr
Bank Loan
Bank
Cr
£ 2,500
Dr
Commission Income
Cr
Dr
Drawings
Dr
20-1 8 Feb
customers, who wish to ensure that the business has the financial strength to continue selling the goods and services that they buy
the tax authorities, who will wish to see that tax due by the business on profits and for Value Added Tax has been paid
Dr
20-1 12 Feb 25 Feb
competitors, who wish to assess the profitability of the business
potential investors in the business
the local community and national interest groups, who may be seeking to influence business policy
government and official bodies, eg Companies House who need to see the final s of limited companies
£
Bank
Bank
Bank Bank
20-1
Business entity – the s record and report on the financial transactions of a particular business, and not the owner's personal financial transactions.
Money measurement – the ing 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 .
assets – items owned by a business; liabilities – items owed by a business
purchases – goods bought, whether on credit or for cash, which are intended to be resold later; sales – the sale of goods, whether on credit or for cash, in which the business trades
20-1 23 Feb
1
£ 2,000
£ 750
£ 425 380
£
20-1
trade receivables – individuals or businesses who owe money in respect of goods or services supplied by the business; trade payables – individuals or businesses to whom money is owed by the business
credit purchases – goods bought, with payment to be made at a later date; cash purchases – goods bought, with immediate payment made in cash, by cheque, debit card, credit card, or bank transfer
asset of computer increases by £4,000 asset of bank decreases by £4,000 asset £8,000 – liability £0 = capital £8,000
20-1
20-1 6 Feb
Other stakeholders – any four from
•
•
1.6
purchases of goods for resale to date
asset of bank increases by £8,000 capital increases by £8,000 asset £8,000 – liability £0 = capital £8,000
CHAPTER 2 Double-entry book-keeping: first principles
final s production of an income statement and a balance sheet
•
•
1.5
•
double-entry s system transfer from subsidiary books into the double-entry book-keeping system of s in the ledger
turnover (cash and credit sales) to date
•
•
initial recording of transactions recording ing transactions in subsidiary books (or books of prime entry)
•
•
•
documents processing of source documents relating to ing transactions
Information from the ing system includes:
•
£
Bank
£ 200
20-1 1 Feb
Bank
20-1
£
20-1
20-1 20 Feb
20-1
£ 7,500
£
20-1
20-1 14 Feb
Cr
£
Bank
£ 145
Cr £
Dr 20-1 28 Feb
2.3
Dr 20-5 1 Aug 15 Aug 20 Aug 25 Aug
Bank
Van £ 20-1 6,000
Cr £
Capital S Orton: loan Office fittings Commission received
Bank £ 20-5 5,000 3 Aug 1,000 7 Aug 250 12 Aug 150 27 Aug
Computer Rent paid Office fittings S Orton: loan
Cr £ 1,800 100 2,000 150
Bank
Cr £ 5,000
Capital £ 20-5 1 Aug
Dr 20-5 Dr 20-5 3 Aug Dr 20-5 7 Aug
Dr 20-5 12 Aug Dr 20-5 27 Aug Dr 20-5 17 Aug
Dr
20-7 1 Nov 7 Nov 23 Nov 25 Nov 28 Nov
Dr
20-7 3 Nov Dr
Bank
Bank
Rent Paid £ 20-5 100
Cr £
20-7 10 Nov
Cr £ 200 150
20-7 12 Nov
Commission received
Cash £ 20-5 200 17 Aug
Drawings
Bank
Cr £ 250
Bank
Sally Orton: Loan £ 20-5 150 15 Aug Bank
Cr £ 1,000
Cash
Dr
20-7 14 Nov
Cr £ 100
Office Fittings £ 20-5 2,000 20 Aug Bank
Drawings £ 20-5 100
Dr
Dr
20-7 15 Nov
Bank
Bank
Bank
Bank
Commission received
20-7 1 Nov
Photocopier Office premises Business rates Office fittings Wages
Bank
Bank
£ 75,000
Cr
£
20-7 7 Nov
Bank
£
£ 70,000
Office Premises
Cr
Rates
Cr
Office Fittings
Cr
£ 130,000
20-7
£ 3,000
20-7
£ 1,500
20-7 25 Nov
Bank
£ 200
£ 300
20-7 18 Nov 23 Nov
Drawings Bank
£ 125 100
20-7 15 Nov 28 Nov
Cash Bank
£ 300 200
Cash
£ 125
20-7
£ 250
20-7
Wages
£
£
Drawings
Dr
Cr
Bank Loan
20-7
Dr
20-7 20 Nov
£ 2,500 130,000 3,000 1,500 250
Cr
£ 2,500
£
Cash
Cr
Photocopier
Commission Income
20-7 18 Nov
2
20-7 3 Nov 10 Nov 12 Nov 14 Nov 20 Nov
Dr
20-7
Cr £
£ 75,000 70,000 100 200 200 £
20-7 Dr
Bank
Capital
Dr
Cr £
Commission Income £ 20-5 10 Aug Cash 25 Aug Bank
Capital Bank loan Cash Office fittings Commission received
20-7
Computer £ 20-5 1,800
Dr 20-5
Dr 20-5 10 Aug
2.5
Cr
Cr
Cr £
Cr £
2.6
2.7
20-7
1 Nov 3 Nov 7 Nov 10 Nov 12 Nov 14 Nov 20 Nov 23 Nov 25 Nov 28 Nov
Bank Capital Photocopier Bank loan Office premises Rates Office fittings Wages Cash Office fittings Commission received
Debit £ 75,000
70,000
100 200 200
2,500
130,000 3,000 1,500 250
Balance £ 75,000 72,500 142,500 12,500 9,500 8,000 7,750 7,850 8,050 8,250
Dr 20-2 1 Oct 4 Oct 8 Oct 12 Oct 18 Oct 30 Oct
Dr 20-2
Dr 20-2 2 Oct 6 Oct 14 Oct
Dr 20-2
Capital Sales Sales K Smithson: loan Sales Sales
Bank Bank Bank
Bank £ 20-2 2,500 2 Oct 150 6 Oct 125 14 Oct 2,000 22 Oct 155 25 Oct 110
Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr
Capital £ 20-2 1 Oct
Purchases £ 20-2 200 90 250 Sales £ 20-2 4 Oct 8 Oct 18 Oct 30 Oct
Purchases Purchases Purchases Delivery van Wages
Cr £ 200 90 250 4,000 375
Bank
Cr £ 2,500
Dr 20-2 22 Oct Dr 20-2 25 Oct
Bank Bank Bank Bank
3.5
Dr 20-2 2 Apr 4 Apr Dr 20-2 9 Apr 20 Apr Dr 20-2 26 Apr
Dr 20-2 5 Apr Dr 20-2 7 Apr 12 Apr 22 Apr Dr 20-2
3
Cr £ 2,000
Bank
Delivery Van £ 20-2 4,000
Bank
Wages £ 20-2 375
Cr £
Purchases £ 20-2 200 250
Cr £
Wyvern Producers Ltd A Larsen
Purchases returns Bank
Purchases returns
Wyvern Producers Ltd £ 20-2 50 2 Apr Purchases 150 £ 45
A Larsen 20-2 4 Apr
Sales £ 20-2 5 Apr 7 Apr 12 Apr 28 Apr
Dr 20-2
Cr £
Cr £ 150 125 155 110
J Smithson: Loan £ 20-2 12 Oct Bank
Dr 20-2
Guidance to the trainee to include: • the use of s to record different types of transactions • the principles of double-entry book-keeping whereby one is debited and one is credited for every business transaction • the debit entry is made in the which gains value, or records an asset, or an expense • the credit entry is made in the which gives value, or records a liability, or an income item • examples can be given using bank where money in is recorded on the debit side, and money out is recorded on the credit side • an explanation of various s including – capital – the amount of money invested in the business by the owner – non-current assets – items purchased by a business for use on a long-term basis (noting the distinction between capital expenditure and revenue expenditure) – expenses – the day-to-day running expenses (revenue expenditure) of the business – income – amounts of income received by the business – owner’s drawings – where the owner takes money in cash or by cheque (or sometimes goods) from the business for personal use – loans – where a business receives a loan, eg from a relative or the bank
CHAPTER 3 Double-entry book-keeping: further transactions
3.1
Credit £
Sales
Sales Sales Pershore Patisserie
Cr £ 200
Purchases
Cr £ 250
Pershore Patisserie Bank Bank Cash
Cr £ 150 175 110 100
Pershore Patisserie £ 20-2 150 15 Apr Sales returns 22 Apr Bank Bank £ 20-2 175 20 Apr 110 30 Apr 125
Cr £
Cr £ 25 125
Wyvern Producers Ltd Amery Scales Ltd
Cr £ 150 250
Purchases Returns £ 20-2 9 Apr Wyvern Producers Ltd 26 Apr A Larsen
Cr £ 50 45
Dr 20-2 15 Apr Dr 20-2 17 Apr Dr 20-2 30 Apr Dr 20-2 28 Apr Dr 20-2 29 Apr 3.6
Dr 20-3 2 Jun 7 Jun 23 Jun Dr 20-3 6 Jun 18 Jun
Pershore Patisserie
Amery Scales Ltd
Dr 20-3 5 Jun 20 Jun
Cr £
Weighing Machine £ 20-2 250
Cr £
Bank
Amery Scales Ltd £ 20-2 250 17 Apr Weighing machine
Sales
Cash £ 20-2 100 29 Apr
Cash
Wages £ 20-2 90
Cr £
Purchases £ 20-3 350 400 285
Cr £
Designs Ltd Mercia Knitwear Ltd Designs Ltd
Purchases returns Bank
Designs Ltd £ 20-3 100 2 Jun 250 23 Jun Sales £ 20-3 4 Jun 5 Jun 10 Jun 12 Jun 20 Jun
Dr 20-3
Dr 20-3 4 Jun 12 Jun 28 Jun
Sales Returns £ 20-2 25
Sales Sales Wyvern Trade Supplies Sales Sales
Bank £ 20-3 220 18 Jun 175 300
Cash £ 20-3 115 26 Jun 180
Wages
Dr 20-3 17 Jun
Cr £ 250
Dr 20-3 10 Jun
Cr £ 90
Purchases Purchases
Cr £ 350 285
Bank Cash Wyvern Trade Supplies Bank Cash
Cr £ 220 115 350 175 180
Designs Ltd
Cr £ 250
Rent paid
Cr £ 125
Purchases Returns £ 20-3 6 Jun Designs Ltd 17 Jun Mercia Knitwear Ltd
Dr 20-3
Dr 20-3 15 Jun Dr 20-3 26 Jun 3.7
3.8
Sales
Wyvern Trade Supplies
Cash
Transaction (a) (b) (c) (d) (e) (f) (g) (h)
Mercia Knitwear Ltd £ 20-3 80 7 Jun Purchases
Cr £ 400
Wyvern Trade Supplies £ 20-3 350 15 Jun Sales returns 28 Jun Bank
Cr £ 50 300
Sales Returns £ 20-3 50
Cr £
Rent Paid £ 20-3 125
Cr £
debited purchases bank purchases L Harris Teme Traders sales returns bank cash
credited bank sales Teme Traders sales purchases returns L Harris D Perkins: loan bank
Answers to the trainee: •
Separate s for purchases and sales enable the business to know the amount of goods bought and sold. A combined for ‘goods’ would not provide this information so readily.
•
The purchase of a new delivery van for use in the business is the purchase of a non-current asset, which will be used on a long-term basis. As such the purchase of the van – which is an example of capital expenditure – is entered on the debit side of van .
•
• •
4
Purchases returns
Cr £ 100 80
Purchases and sales s follow the principles of book-keeping in that the debit side of purchases gains value when the business buys goods for resale, while the credit side of sales gives value when the business sells goods.
Purchases returns (or returns out) is where we return goods to a trade payable (supplier). The returns transaction is recorded the opposite way round to a purchases transaction.
Sales returns (or returns in) is where a trade receivable (customer) returns goods to us. The transaction is recorded the opposite way round to a sales transaction.
Carriage inwards and carriage outwards are kept in separate s because they represent different transactions. Carriage inwards is where we pay the carriage cost of goods purchased to have them delivered to us. Carriage outwards is where we pay the carriage charge for goods we have sold, that is we have sold the goods to our customers as ‘delivery free’.
4.3
CHAPTER 4 Business documents
4.2
INVOICE
INVOICE
DEANSWAY TRADING COMPANY
JANE SMITH, FASHION WHOLESALER
The Model Office, Deansway, Rowcester, RW1 2EJ
Unit 21, Eastern Industrial Estate, Wyvern, Wyvernshire, WY1 3XJ invoice to
Excel Fashions 49 Highland Street Longton Mercia LT3 2XL
deliver to
as above
product code
description
Dresses Suits Coats
quantity
5 3 4
2.5% cash discount for full settlement within 14 days Net 30 days
invoice no your reference
2451
date
today
unit price £
30.00 45.50 51.50
unit
total
each each each
£
150.00 136.50 206.00
TOTAL
trade discount %
invoice to
The Card Shop 126 The Cornbow Teamington Spa Wyvernshire WY33 0EG
deliver to
as above
product code
net £
Assorted rubbers Shorthand notebooks Ring Binders
0.00 150.00 0.00 136.50 0.00 206.00
quantity 5 100 250
2.5% cash discount for full settlement within 14 days Net 30 days
492.50
Excel Fashions will pay £480.18 (£492.50 x 97.5%, rounded down) for settlement in full within 14 days.
description
5
invoice no your reference
8234
date
today
unit price £
5.00 4.00 0.50
unit box 10 each
total
trade discount %
net
25.00 40.00 125.00
0.00 0.00 0.00
25.00 40.00 125.00
£
TOTAL
The Card Shop will pay £185.25 (£190.00 x 97.5%) for settlement in full within 14 days.
190.00
£
4.4
Dr 20-4 2 Feb 16 Feb
G Lewis G Lewis
Sales £ 20-4 4 Feb 7 Feb
Dr 20-4
Dr
20-4 10 Feb 10 Feb 24 Feb 24 Feb Dr
20-4 4 Feb
Dr
20-4 7 Feb
Dr
20-4 12 Feb 20 Feb
Bank Discount received Bank Discount received
Sales
Sales
L Jarvis G Patel
20-4 12 Feb 20 Feb
£ 190 10 152 8 360 £ 150
150
£ 240
240
G Lewis
20-4 2 Feb 16 Feb
L Jarvis G Patel
Purchases Purchases
£
L Jarvis G Patel
L Jarvis
20-4 12 Feb 12 Feb
G Patel
20-4 20 Feb 20 Feb
20-4 10 Feb 24 Feb
Bank Discount allowed
Bank Discount allowed
G Lewis G Lewis
20-4 10 Feb 24 Feb
G Lewis G Lewis
Discount Allowed £ 3 6
Cr £ 150 240
20-4
(a) product code
description
quantity
45B
Trend tops (black)
30
35W
Cr
£ 200 160 360
Bank
£ 147 234
4.5
Cr £
Discount Received
Dr
20-4
Dr
Purchases £ 20-4 200 160
Trend tros (white)
20
unit price
unit
12.50
each
£
25.00
5% cash discount for full settlement within 7 days Net 30 days
Cr
£ 147 3 150
(b)
£ 234 6 240
trade net discount %
375.00
10
£
each
500.00
TOTAL
£
10
337.50
450.00
787.50
Trade discount is given, if prearranged: –
to businesses, often in the same trade (but not to the general public)
–
by wholesalers, as a discount off list price to retailers
–
Cr
total
for buying in bulk (this discount is also known as bulk discount)
Cash discount (also known as settlement discount) is given, for prompt payment, if prearranged, and indicated on the invoice
Cr
£ 190 152
4.7
Cr
(c)
Fashion Shop will pay £748.12 (£787.50 x 95%, rounded down) for settlement in full within 7 days.
(a)
A source document is used to update the book-keeping records.
(b)
(i) (ii)
£ 10 8
An invoice is a source document prepared by the seller and states the value of goods sold and, hence, the amount to be paid by the buyer.
A credit note is a source document which shows that the buyer is entitled to a reduction in the amount charged by the seller; it is used if: –
–
Cr
(c)
£
the price charged on the invoice was too high
Any three from:
–
cheque counterfoils
–
cash receipts
–
–
6
some of the goods delivered were faulty, or incorrectly supplied
–
paying-in slip counterfoils till rolls
information from bank statements, such as standing orders, direct debits, BACS, credit transfers, bank charges
4.8
(a)
•
•
•
•
•
•
5 computer desks were ordered (not 10 as shown on the invoice)
CHAPTER 5 Balancing s – the trial balance
10 office chairs were ordered (not 5 as shown on the invoice)
5.1 (a) and (c)
the unit price of the computer desks is £65.00 each (not £70.00 as shown on the invoice)
Dr 20-9 1 Jan 11 Jan 12 Jan 22 Jan
the net amount for computer desks is £292.50 (not £350.00 as shown on the invoice)
the net amount for office chairs is £180.00 (not £20.00 as shown on the invoice)
the invoice total is £472.50 (not £370.00 as shown on the invoice)
(b)
1 Feb 4 Feb 10 Feb 12 Feb 19 Feb 25 Feb 1 Mar
Capital Sales Sales Sales
Balance b/d Sales Sales Rowcester College Sales Sales Balance b/d
Capital £ 20-9 1 Jan
Dr 20-9
Dr 20-9 4 Jan 2 Feb 1 Mar
Dr 20-9 5 Jan 15 Feb
1 Mar
(c)
Wyvern Products Limited will pay £448.87 (£472.50 x 95%) for settlement in full within 14 days.
7
Rent paid Shop fittings Comp Supplies Ltd Balance c/d
Rent paid Shop fittings Comp Supplies Ltd Balance c/d
Cr £ 500 1,500 5,000 6,700 13,700 500 850 6,350 5,300 13,000
Bank
Cr £ 10,000
Bank Bank
Rent Paid £ 20-9 500 28 Feb Balance c/d 500 1,000 1,000
Cr £ 1,000
Bank Bank
Shop Fittings £ 20-9 1,500 28 Feb Balance c/d 850 2,350 2,350
Cr £ 2,350
Purchases £ 20-9 5,000 31 Jan Balance c/d 6,500 11,500
Cr £ 11,500
Balance b/d
Balance b/d
Dr 20-9 7 Jan 25 Jan
Comp Supplies Ltd Comp Supplies Ltd
1 Feb 24 Feb
Balance b/d Comp Supplies Ltd
1 Mar
Bank £ 20-9 10,000 4 Jan 1,000 5 Jan 1,250 20 Jan 1,450 31 Jan 13,700 6,700 2 Feb 1,550 15 Feb 1,300 27 Feb 750 28 Feb 1,600 1,100 13,000 5,300
Balance b/d
11,500 5,500 17,000 17,000
28 Feb
Balance c/d
1,000
2,350
11,500
17,000
17,000
Dr 20-9 20 Jan 31 Jan
5 Feb 27 Feb 28 Feb
Dr 20-9 31 Jan
28 Feb
Bank Balance c/d
Purchases returns Bank Balance c/d
Balance c/d
Balance c/d
Dr 20-9 16 Jan
Sales
1 Feb 26 Feb
Balance b/d Sales
1 Mar
Dr 20-9 27 Jan Dr 20-9
Balance b/d
Rowcester College
Comp Supplies Limited £ 20-9 5,000 7 Jan Purchases 6,500 25 Jan Purchases 11,500 150 1 Feb Balance b/d 6,350 24 Feb Purchases 5,500 12,000 1 Mar Balance b/d Sales £ 20-9 4,550 11 Jan 12 Jan 16 Jan 22 Jan 4,550 11,150 1 Feb 4 Feb 10 Feb 19 Feb 25 Feb 26 Feb 11,150 1 Mar
Bank Bank Rowcester College Bank
Balance b/d Bank Bank Bank Bank Rowcester College
Balance b/d
Rowcester College £ 20-9 850 27 Jan Sales returns 31 Jan Balance c/d 850
750 1,050 1,800 1,050
12 Feb 28 Feb
Bank Balance c/d
Sales Returns £ 20-9 100 Purchases Returns £ 20-9 5 Feb Comp Supplies Ltd
Cr £ 5,000 6,500 11,500 6,500 5,500
(b)
12,000 5,500
Cr £ 1,000 1,250 850 1,450 4,550 4,550 1,550 1,300 1,600 1,100 1,050 11,150 11,150
(d)
Cr £ 100 750 850
5.2
Name of Bank Capital Rent paid Shop fittings Purchases Comp Supplies Limited Sales Rowcester College Sales returns
Name of Bank Capital Rent paid Shop fittings Purchases Comp Supplies Limited Sales Rowcester College Sales returns Purchases returns
Cr £
Cr £ 150
8
Dr £ 6,700
500 1,500 11,500
750 100
Trial balance as at 28 February 20-9
Cr £
10,000
6,500 4,550
21,050
21,050
Dr £ 5,300
Cr £
1,000 2,350 17,000
1,050 100 26,800
Trial balance of Jane Greenwell as at 28 February 20-1 Dr £
Name of Bank Purchases Cash Sales Purchases returns Trade payables Equipment Van Sales returns Trade receivables Wages Capital (missing figure)
750 1,050 1,800
Trial balance as at 31 January 20-9
850 48 2,704 3,200 90 1,174 1,500 9,566
10,000
5,500 11,150 150
26,800
Cr £
1,250
730 144 1,442
6,000
9,566
5.5
Four from:
• • • • • •
Error of omission
(a)
Date 20-2
1 Feb
2 Feb
15 Feb
19 Feb
28 Feb
Date 20-2
8 Feb
14 Feb
18 Feb
Softseat Ltd
Dr
Business transaction completely omitted from the ing records. For example, cash sale omitted from both cash and sales .
20-2
Reversal of entries
£
Debit and credit entries on the wrong side of the two s concerned. For example, cash sale entered wrongly as debit sales , credit cash . Mispost/error of commission
Transaction entered to the wrong person's . For example, a sale of goods on credit to A T Hughes has been entered as debit A J Hughes' , credit sales .
Dr
Error of principle
20-2
Transaction entered in the wrong type of . For example, cost of petrol for vehicles has been entered as debit motor vehicles , credit bank .
Error of original entry (or transcription)
Amount entered incorrectly in both s. For example, sale of £45 entered in both sales and the trade receivable's as £54.
Two errors cancel each other out. For example, balance of purchases calculated wrongly at £10 too much, compensated by the same error in sales .
Details
Invoice
Softseat Ltd
PRK Ltd
Softseat Ltd
High Street Stores
Peter Lounds Ltd
Carpminster College
25 Feb
High Street Stores
28 Feb
Total for month
£
320
529
160
80
984
Total for month
Amount
961
068
Quality Furnishings
Details
Reference
£
Sales Sales
Dr
160
20-2 14 Feb
720
Sales
Dr
Sales Day Book
Invoice 001
002
003
004
Reference
20-2 18 Feb
Amount
Sales
£
440
120
20-2 28 Feb
200 1,080
Dr
9
20-2
Purchases Purchases
PRK Ltd
20-2 2 Feb
20-2 15 Feb
Purchases Day Book
£ 320 160
Cr
Purchases
£ 80
Cr
Purchases
£ 160
High Street Stores
Cr
Peter Lounds Ltd
Cr
Carpminster College
Cr
£ 440 200
£ 120
£ 320
20-2
£
20-2
£
20-2
GENERAL LEDGER
Dr
320
Cr
SALES LEDGER
Dr
20-2 8 Feb 25 Feb
20-2 1 Feb 19 Feb
Quality Furnishings
20-2
Compensating error
Purchases Day Book
£
Dr
CHAPTER 6 Division of the ledger – the use of subsidiary books
6.2
PURCHASES LEDGER
£
Purchases
Cr
Sales
Cr
£ 720
£
20-2
20-2 28 Feb
£
Sales Day Book
£ 1,080
6.3 (a)
Date
20-2
2 May
4 May
10 May
18 May
21 May
25 May
31 May
Date
20-2
18 May
23 May
28 May
31 May
Details
Purchases Day Book
Invoice
Reference
Amount
562
PL 302
190
M Roper & Sons
Wyper Ltd
82
Wyper Ltd
M Roper & Sons
580
M Roper & Sons
589
Wyper Ltd
PL 301
PL 302
91
Total for month
Details
PL 301
86
Purchases Returns Day Book
PL 301
PL 302
200
180
PL 302
30
M Roper & Sons
84
(b) and (c) Dr 20-2 23 May 31 May
PURCHASES LEDGER
Purchases Returns Balance c/d
Wyper Ltd ( no 301) £ 20-2 40 1 May Balance b/d 710 4 May Purchases 10 May Purchases 21 May Purchases 750 1 Jun
Dr 20-2 18 May 28 May 31 May
Purchases Returns Purchases Returns Balance c/d
40
38
Cr
Purchases Returns
Cr
£ 1,118.00
£
Purchases Day Book
quantity
details
unit price
unit
X24
96
Trend tops
£8.50 each
each
20
Jeans
£15 each
Cr £ 100 200 210 240 750
Cr £ 85 190 180 98 553
20-2 31 May
£
product
Y36
M Roper & Sons ( no 302) £ 20-2 30 1 May Balance b/d 38 2 May Purchases 485 18 May Purchases 25 May Purchases 553
20-2
each trade discount 20% total
5% cash discount for full settlement within 7 days Net 30 days
485
10
£ 108.00
(a)
code
108
710
Balance b/d
6.5
£
Balance b/d
1 Jun
Purchases
1,118.00
82
Total for month
20-2
98
M Roper & Sons
PL 301
Purchases Day Book
Dr
240
Amount
PL 302
20-2 31 May
210
Reference
6
Dr
£
Credit Note
Wyper Ltd
GENERAL LEDGER
total amount 816.00
300.00
1,116.00
223.20 892.80
(b)
(c)
(i)
CHAPTER 7 The main cash book
Purchases day book
(ii)
Sales day book
(i)
Trade discount:
7.3
Dr
– given for bulk buying (also known as bulk discount), or for being in the trade, or for regular customers
– deducted from the invoice before entry in the books – usually a larger percentage than cash discount
(ii)
Cash discount (also known as settlement discount):
– given for prompt payment
– not deducted until is paid
– can be disallowed if are not met
– usually a smaller percentage than trade discount
Date
Details
20-7 1 Aug 1 Aug 11 Aug 12 Aug 21 Aug 29 Aug 29 Aug
Balances b/d Wild & Sons Ltd Bank A Lewis Ltd Harvey & Sons Ltd Wild & Sons Ltd Bank
Ref
C
C
Disc allwd £
20 15
Cash
Cash Book
Bank Date
£ £ 276 4,928 398 500 1,755 261 595 275
6.8
Source
Document Invoice for goods sold on
credit to V Singh (a)
Invoice received for
Book
Subsidiary
be debited
to
to
Sales day book
V Singh
Sales
Purchases day
Purchases
Okaro Limited
(b)
Credit note issued to
Sales returns
Sales returns
S Johnson
(c)
Credit note received
Purchases returns
Roper &
Purchases
from Okara Limited S Johnson
from Roper & Company
book
day book day book
Company
1 Sep Balances b/d
be credited
goods bought on credit
35 1,051 7,937 361 3,217
7.4
Dr Date
20-5 1 Mar 3 Mar 8 Mar 11 Mar 13 Mar 22 Mar 25 Mar 29 Mar 31 Mar 31 Mar
returns
*
11
Details Balances b/d Sales* Sales Bank Sales Bank Sales Sales* Hobbs Ltd Pratley & Co
1 Apr Balances b/d
Ref Discount allowed £
C C 30 50
80
Cash
20-7 5 Aug 8 Aug 11 Aug 18 Aug 22 Aug 25 Aug 27 Aug 28 Aug 29 Aug 31 Aug
Cash Book Bank Date
£ £ 106 3,214 100 950 1,680 150 1,800 150 2,108 200 2,000 720 1,160
706 13,632 423 8,259
20-5 2 Mar 5 Mar 9 Mar 11 Mar 16 Mar 18 Mar 20 Mar 22 Mar 26 Mar 27 Mar 30 Mar 31 Mar 31 Mar 31 Mar
Details T Hall Ltd Wages Cash F Jarvis Wages J Jones Salaries Telephone Cash Balances c/d
Ref
Disc recd £ 24
C 33 C 57
Cr
Cash
Bank
£
£ 541
254 436
361 1,051
500 457 628 2,043 276 275 3,217 7,937
Cr Ref Discount Cash Bank received £ £ £ Rent 10674 250 Cleaning expenses 35 Purchases 10675 1,200 Cash 10676 C 150 Postages 50 Telephone 10677 168 Stationery 128 Cash 10678 C 150 Misc expenses 70 Wages 10679 2,000 Electricity 10680 106 Evans & Co 10681 45 855 A Bennett 10682 26 494 Balances c/d 423 8,259 71 706 13,632 Details
An alternative way of showing the transactions of 3 March and 29 March is to record the full amount of sales in the debit cash column, and then to show the amount banked as a separate transfer, ie debit bank, credit cash.
7.6
Standing order Money paid out of the bank directly, at regular intervals, on the business’s order. Usually for the same fixed amount for goods and services supplied
(i)
DR Supplier/Trade payable
DR Bank
Dr
CR Bank
CR Customer/Trade receivable
(a) and (b)
Date 20-6
8.2
Credit transfer for payment by a customer Amounts paid directly into the bank by a trade receivable, who has the necessary bank code information.
(ii)
7.8
CHAPTER 8 Bank reconciliation statements
Details
Disc £
1 Jan Balance b/d
6 Jan R Reed
13 Jan B Brown
4
14 Jan Sales
28 Jan Sales
50
752
642
24 Jan C Denton & Co Ltd C/T
31 Jan Cash
Cash £
C
Bank £ 567
366
248
1,319 4
1 Feb Balance b/d
Cash Book
1,444 50
2,500
Date 20-6
Details
Disc £
1 Jan Balance b/d
2 Jan Bilton Office Supplies
11 Jan Rent
27 Jan Wages
20 Jan British Gas
S/O
31 Jan Bank
C
21 Jan Bank interest
31 Jan Balances c/d
Cash £
3
1,319 3
50
1,444
Bank £
20-6 31 Jan
Dr
20-6
Cash book
£ 4
20-6
Discounts Received £
20-6 31 Jan
Cash book
P GERRARD BANK RECONCILIATION STATEMENT AS AT 31 JANUARY 20-7 £
Balance at bank as per cash book Add: unpresented cheques
1,236
Bryant & Sons P Reid
450
cheque no. 001354
176.50
422
8.3
Cr £
(a) Dr
20-7 1 May 7 May 16 May 23 May 30 May
Balance b/d Cash C Brewster Cash Cash
1 Jun
Balance b/d
1,076.45
Cash Book (bank columns) £ 300 162 89 60 40
651
20-7 2 May 14 May 29 May 16 May 31 May 31 May
P Stone 867714 Alpha Ltd 867715 E Deakin 867716 Standing order: A-Z Insurance Bank charges Balance c/d
428 JANE DOYLE
(b)
BANK RECONCILIATION STATEMENT AS AT 31 MAY 20-7 Balance at bank as per cash book Add:
Cr £ 3
Less:
12
488.50
335.75
Balance at bank as per cash book
2,500
£
923.70
1,412.20
G Shotton Limited
28
Cr £ p 207.95 923.70 1,131.65
312.00
cheque no. 001355
Less: outstanding lodgement
200
422
Discounts Allowed
Cash Book (bank columns) £ p 20-7 Balance b/d 415.15 23 Jan Direct debit: Omni Finance BACS credit: T K Supplies 716.50 31 Jan Balance c/d 1,131.65 Balance b/d 923.70
(b)
Cr
(c) Dr
Dr 20-7 1 Jan 13 Jan 1 Feb
164
75
(a)
unpresented cheque
E Deakin cheque no. 867716 outstanding lodgement cash banked
Balance at bank as per bank statement
£
428 110
538 40
498
Cr
£ 28 50 110 25 10 428 651
8.5
(a)
(i)
(ii)
(iii)
8.7
Standing orders Credit
Regular payments of the same amount made directly from the bank on behalf of the company on the order of the company.
Dr
Date 2003
Direct debits Credit
Payments made from the bank for the customer collected by the payee on the order of the customer usually for changing amounts. Debit or Credit
Credit transfer Balance c/d
Cash Book – Bank £ 540 Balance b/d 534 Standing order Direct debit Bank charges 1,074 Balance b/d
2,459.35
5 Nov B J Patel
3,219.00 √
234.00 √
1,142.00 √ 560.00 √
26 Nov Cash banked
340.00
7,954.35 30 Nov Balance b/d 9 Nov J Black Ltd
C/T
534
2,027.23 246.98
2,274.21 1 Dec Balance b/d
(c)
Date 2003
1 Nov Balance b/d
23 Nov J A Smith Ltd
Cr £ 378 230 420 46 1,074
Cash Book
Bank £ p
5 Nov Dolls and Things
Receipts from customers paid directly into the bank of the payee. Payments to suppliers or wages into the bank of the payee.
Dr
Details
3 Nov Toys for You
Credit transfers
(b)
(a)
1 Nov
1 Nov
10 Nov
12 Nov
23 Nov
25 Nov
25 Nov
30 Nov
12 Nov
18 Nov
23 Nov
30 Nov
Details
Cheque number
Banks Ltd
11346
Books & Paints
Wages
Jones and Son
HGF Finance
Business rates
Bank charges
11349
3,781.95
11351
11352
Balance c/d
Proper Ins Co
276.89
11350
Toy Designs
134.37
11347
11348
Smith and Son
Bank £ p
92.50
139.43
256.00
Cr
√
√
√
√
√
1,245.98
2,027.23
7,954.35 S/O
547.90
S/O
145.65 45.89
Balance c/d
1,534.77
2,274.21
1,534.77
A SMITH AND CO
BANK RECONCILIATION STATEMENT AS AT 31 MARCH 2001 Balance at bank as per cash book
Add:
Less:
£
unpresented cheques
outstanding lodgement (uncleared bankings)
cheque query
Balance at bank as per bank statement
Tutorial note: brackets indicate an overdraft
£
(534)
(b)
469
270
265
(65)
JAMES JOLLY AND CO
BANK RECONCILIATION STATEMENT AS AT 30 NOVEMBER 2003 £
Balance at bank as per cash book Add:
535
(600)
unpresented cheques HGF Finance Toy Designs
Less:
11351
11352
outstanding lodgement cash banked
Balance at bank as per bank statement
13
£
1,534.77
256.00
1,245.98
1,501.98
3,036.75 340.00
2,696.75
CHAPTER 9 Introduction to final s
9.2
TRIAL BALANCE (a) Salaries
√
(b) Purchases
√
(d) Sales returns
√
(f) Vehicle
√
(c) Trade receivables
(e) Discount received
9.5
Debit
(g) Capital
Credit
INCOME
FINAL S
STATEMENT
Debit √
Credit
√
√ √
√
9.7
Debit
Credit
√
√
BALANCE SHEET AS AT 31 DECEMBER 20-4 £ £
Current Assets Inventory Trade receivables
Less Current Liabilities Trade payables Bank overdraft
Net Current Assets or Working Capital NET ASSETS
FINANCED BY Capital Opening capital Add Profit for the year
Less Drawings
13,735
32,335
5,820
√
(ii)
(b)
9.9
9,820 5,500 15,320
(a)
Dr 2002 31 Mar 31 Mar
Dr
2001
Details Balance b/d Monthly total
2001 1 Dec 31 Dec
Details Balance b/d Monthly total
Dr
2001
14
Details
2001 1 Dec 31 Dec Dr
14,375 29,695
Capital £ 2002 12,500 31 Mar 48,341 31 Mar 60,841
1 Apr
Two from: – increased by profit – more capital introduced – reduced by losses – reduced by drawings
Dr
18,600
Details Drawings Balance c/d
Details
£ 56,231 350 56,581
23,980 3,600 4,500 450
Profit for the year
£
25,250 17,756 43,006 13,311 29,695
£
Less expenses: Wages Carriage outwards Motor expenses Bank charges
12,140
17,960
INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 2002
Gross profit Add Discount received
√ √
R MASTERS
(i)
BALANCE SHEET
CLARE LEWIS INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20-4 £ £ Revenue 144,810 Opening inventory 16,010 Purchases 96,318 112,328 Less Closing inventory 13,735 Cost of sales 98,593 Gross profit 46,217 Less expenses: Salaries 18,465 Heating and lighting 1,820 Rent and rates 5,647 Sundry expenses 845 Vehicle expenses 1,684 28,461 Profit for the year 17,756
Non-current Assets Vehicles Office equipment
(a)
Sales £
p
2001 1 Dec 31 Dec
Returns Inwards £ p 1,269.43 236.91
2001
£ p 10,276.41 2,769.56
2001
Purchases
Returns Outwards £
p
2001 1 Dec 31 Dec
32,530 24,051
Details Balance b/d Profit for the year Balance b/d
Details Balance b/d Monthly total
Cr £ 36,790 24,051 60,841
48,341
Cr
£ p 16,493.27 4,560.30
Details
£
Details
£
Details Balance b/d Monthly total
Cr p
Cr p
Cr
£ p 1,039.41 127.50
AMARYLLIS TRADING
(b)
INCOME STATEMENT FOR THE THREE MONTHS ENDED 31 DECEMBER 2001 £
Revenue Less Returns inwards Less Cost of sales: Opening inventory Add Purchases Less Returns out
13,045.97 1,166.91
Add Carriage in
Less Closing inventory Gross profit (c)
9.10
(i) (ii) (iii)
Cost of sales Goods available for sale Net revenue
Date
Today
£
2,560.87 11,879.06 871.26 15,311.19 2,640.96
Subject
Balance sheet queries
1.
Reason:
4. 12,670.23 6,877.00
Date
Details
31 Dec
Inventory
20-8
Capital/Financed by/Represented by
It is cash or goods taken out of the business by the owner, therefore it reduces the capital invested in the business.
Income statement
Inventory valuation at 31 December 20-8 transferred to income statement
Financial ing Student
Reference GL
GL
Dr £
22,600
Cr
£
22,600
(b)
Non-current assets
Date
Details
31 Dec
Income statement
20-8
An asset purchased for use in the business
– not for resale
Telephone expenses
Transfer to income statement of expenditure for the year
– is a tangible asset
Reference GL
GL
Dr £
890
Cr
£
890
(c)
Inventory of dolls for resale Current assets
Date
Details
31 Dec
Drawings
20-8
An asset remaining in the business for the short-term
– less than one year
– the business is expected to sell them shortly
Section:
(a)
– will help generate profits
Reason:
– an amount owed by the business
CHAPTER 10 The general journal and correction of errors
10.2
– will depreciate with use
Section:
Short-term liability
Drawings for the year Reason:
– used over a long period/more than one year
2.
Current liabilities
Tutorial note: the ing treatment for a bill which has not been paid at the balance sheet date – called an accrual of expenses – is covered in detail in Chapter 12
Cost of new delivery van
Section:
Section:
– which needs to be paid within the next 12 months
MEMORANDUM
Mary Arbuthnot, proprietor of Mary’s Doll Shop
Telephone bill due to be paid in one month’s time Reason:
£12,670.23 £15,311.19 £19,547.23
To
From
3.
£ 21,053.57 1,506.34 19,547.23
Motoring expenses
Transfer of private motoring to drawings
continued
15
Reference GL
GL
Dr £
200
Cr
£
200
(d)
(c)
Date
Details
31 Dec
Drawings
20-8
Purchases
Goods taken for own use
by the owner
Reference GL
GL
Dr £
175
Cr
Date
£
Date
31 Dec
Details Bad debts written off
N Marshall
of N Marshall written off as a
175
Vehicle expenses
Correction of error – vehicle no ............
(a) Date
Reference GL
SL
Dr £
125
Cr
(d)
£
Date
125
J Rigby Sales
Sales invoice no ............. omitted from
Date
H Price Limited
H Prince
Correction of mispost – cheque no .....:
GL
£
10,000
Reference
SL
GL
Dr £
150
(e)
Cr
£
Date
150
£
GL
55
Postages
GL
55
GL
GL
on ...................
Reference
Dr
Postages
Correction of reversal of entries
Cr £
10,000
Cr
£
55 55
110
110
Dr
Cr
compensating error Details Purchases
Purchases returns
Correction of under-cast on purchases
Reference GL
GL
£
100
£
100
and purchases returns on .......(date).......
(f)
mispost/error of commission Details
Details
Bank
the s.
(b)
GL
Dr
reversal of entries
Bank
error of omission Details
Reference
invoice no ...............
bad debt - see memo dated ...................
10.4
Details Delivery van
(e) 20-8
error of principle
Reference PL
PL
Dr £
125
Date
Cr
£
error of original entry Details L Johnson
125
16
GL
89
L Johnson
SL
received on ....(date)....
£
98
GL
Correction of error – cheque for £89
Dr
SL
Bank Bank
to H Price Limited
Reference
187
Cr
£
98 89
187
10.6
(a)
(b)
Two from: trial balance – – bank reconciliation statement control s (see Chapter 11) –
(c)
An error of principle has occurred.
JOURNAL
Dr £
(1)
Sales
270
(2)
Returns inwards
500
Returns inwards
300
Suspense
400
Suspense Suspense
Suspense
(3) (4)
Yes
Error
Discount received J Jones
350
A Jones
The sales has been totalled incorrectly.
Cr
3
An invoice has been completely omitted from the books.
£
A cheque has been debited in the cash book as £150 but credited in the customer’s as £105.
270 500
10.10
300
(a)
Dr
Date 2004
30 Apr
400
Details Balance per T/B
Suspense £
450
450
Date 2004
30 Apr 30 Apr
No
3 3
3
Details Sales Rent paid
Cr £
200 250 450
350
Tutorial note: The mispost between J Jones and A Jones needs to be corrected in the sales ledger,
10.8
(a) and (b)
but has no effect on suspense .
H G PATEL: TRIAL BALANCE AS AT 30 APRIL 2003
Wages istration costs Capital Property Motor vehicles Motor expenses Purchases Revenue (Sales) Returns outwards Carriage inwards Carriage outwards Discount received Drawings Suspense TOTAL
Dr £ 23,890 6,000
65,000 5,000 1,650 38,900 367 450
6,900 15,676 163,833
Tutorial notes: •
Cr £
•
Error (2) is an error of original entry which affects both the debit and credit side of the trial balance by the same amount, and will not be revealed by the trial balance. Such an error is not entered in the suspense .
Error (3) has been entered in the suspense , above, as the net amount of £250 (ie £650 – £400); as an alternative, it could have been entered as –
60,000
–
(b) 98,000 3,698 (c)
163,833
17
credit £650 (to enter the correct amount in rent paid )
Error of commission (or mispost): •
•
2,135
debit £400 (to take out the old amount in rent paid )
example – payment to A Brown entered to B Brown’s
explanation – although the entry has been misposted to the wrong person’s , the trial balance will still balance because the entry has been made on the correct side of the .
Sales ledger control (see Chapter 11)
10.11
Jonathon Smith Corrected Profit for the year ended 30 November 2004 1.
Profit calculated by Jonathon
Sales undercast
2.
Discount allowed (2 x £140)
4.
Non-current asset
6.
Closing inventory (reduction in cost of sales)
3. 5.
Wages
Error of commission – no effect on profit Corrected profit
CHAPTER 11 Control s
11.3
(a)
Dr 20-8 1 Feb 3 Feb
Balance b/d Sales
1 Mar
Balance b/d
Dr 20-8 1 Feb Dr 20-8 1 Feb 3 Feb
Balance b/d
Balance b/d Sales
Dr 20-8 1 Feb 17 Feb
Balance b/d Sales
1 Mar
Balance b/d
Dr 20-8 1 Feb 17 Feb
Balance b/d Sales
1 Mar
Balance b/d
add
20-8
£
1 Feb
26,790
28 Feb
450
less
280
less
Balances b/d Credit sales
£ p
2,012.43
1,288.76
3,301.19
34,060
338.59
1 Mar
B Brick (Builders) Limited £ p 20-8 59.28 28 Feb Bad debts written off
Cr £ p 59.28
Mereford Manufacturing Company £ p 20-8 293.49 24 Feb Sales returns 127.48 28 Feb Set-off: purchases ledger 420.97
Cr £ p 56.29 364.68 420.97
Redgrove Restorations £ p 20-8 724.86 7 Feb Sales returns 394.78 28 Feb Balance c/d 1,119.64 954.26
Wyvern Warehouse Limited £ p 20-8 108.40 15 Feb Bank 427.91 15 Feb Discount allowed 28 Feb Balance c/d 536.31
(c)
Cr £ p 805.74 20.66 338.59 1,164.99
Balances b/d
Sales returns
28 Feb
Cash discount allowed
28 Feb
Cr £ p 165.38 954.26 1,119.64
Dr
2001 1 Mar 31 Mar
Set-off: purchases ledger Bad debts written off Balances c/d
221.67
911.43
23.37
364.68
59.28
1,720.76
3,301.19
Reconciliation of sales ledger control with trade receivable balances
Balance b/d Returns Set-off: sales ledger Discounts Cash paid Balance c/d Balance b/d
Cr £ p 105.69 2.71 427.91 536.31
28 Feb
Cheques received from trade receivables
1,720.76
1 February 20-8 £ p 826.40 59.28 293.49 724.86 108.40 2,012.43
Arrow Valley Retailers B Brick (Builders) Limited Mereford Manufacturing Company Redgrove Restorations Wyvern Warehouse Limited Sales ledger control
11.5
Cr
£ p
28 Feb
28 Feb
100
Arrow Valley Retailers £ p 20-8 826.40 20 Feb Bank 338.59 20 Feb Discount allowed 28 Feb Balance c/d 1,164.99
20-8
28 Feb
9,500
SALES LEDGER
427.91
Sales Ledger Control
2,500
add add
(b) Dr
Purchase Ledger Control £ 465 4,679 475 3,674 236,498 24,742 270,533
749
2001 1 Mar 31 Mar
Balance b/d Purchases Cash refunds Balance c/d
Balance b/d
28 February 20-8 £ p 338.59 – – 954.26 427.91 1,720.76
Cr
£ 23,437 245,897 450 749 270,533
24,742
Tutorial note: The cash purchases figure of £25,679 is not shown in the control because it does not involve the s of trade payables – it is a cash purchase (ie debit purchases; credit bank/cash)
18
11.6
Dr
20-5 1 Jan 31 Jan 31 Jan
Balance b/d Sales Returned cheque
1 Feb
Balance b/d
Sales Ledger Control £ 44,359 27,632 275
72,266
20-5 31 Jan 31 Jan 31 Jan 31 Jan 31 Jan
Bank Discount allowed Sales returns Set-off: purchases ledger Balance c/d
44,884
CHAPTER 12 Adjustments to final s
Cr
£ 23,045 1,126 2,964 247 44,884 72,266
12.1
12.2
Tutorial note: The mispost of £685 between J Hampton and Hampton Limited needs to be corrected in the sales ledger, but has no effect on the control . 11.7
(a)
Dr
2003
1 Nov 30 Nov
1 Dec Dr
2003
30 Nov 30 Nov
30 Nov 30 Nov
(b)
(c)
•
•
Details
Balance b/d Sales
Balance b/d
Details
Returns outwards Bank (payments to suppliers) Set-off: sales ledger Balance c/d
Sales Ledger Control £
5,476 26,500 31,976
2003 Details
30 30 30 30
Nov Nov Nov Nov
Returns inwards Bank (receipts from customers) Set-off: purchases ledger Balance c/d
12,086
Purchases Ledger Control £
450
16,300 400 5,410 22,560
2003 Details
1 Nov Balance b/d 30 Nov Purchases
1 Dec Balance b/d
£
£
•
12.7
2,960 19,600
The balances of the individual s of trade receivables in the sales ledger are totalled.
Less expenses: Insurances Vehicle expenses Wages and salaries 86,060 + 3,180 Discount allowed Rates and insurance 6,070 – 450 General expenses Depreciation: vehicles 12,000 x 20% furniture and fittings 25,000 x 10%
The balances of the individual s of trade payables in the purchases ledger are totalled.
19
70,000 280,000 350,000 60,000
9,700 3,100 1,820 36,050 13,750
HAZEL HARRIS INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20-4 £
Less Closing inventory Cost of sales Gross profit Add Discount received
5,410
A control may indicate that there is an error within a ledger section but it will not pinpoint where the error has occurred.
SOUTHTOWN SUPPLIES
INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20-9 £
Revenue Opening inventory Purchases
22,560
Some types of errors (such as a mispost/error of commission) will not be revealed by the control . Thus the s will be thought to be correct when they are not.
Expense in income statement of £1,800; balance sheet shows computer rental prepaid (current asset) of £150.
Expense in income statement of £2,852; balance sheet shows rates prepaid (current asset) of £713.
Profit for the year
Cr
•
(c)
(b)
Less Closing inventory Cost of sales Gross profit Less expenses: Rent and rates 10,250 – 550 Electricity Telephone Salaries 35,600 + 450 Vehicle expenses
590 18,900 400 12,086 31,976
These totals should agree with the balances of sales ledger control and purchases ledger control respectively.
Expense in income statement of £56,760; balance sheet shows wages and salaries accrued (current liability) of £1,120.
Revenue Opening inventory Purchases
Cr
•
(a)
Profit for the year
63,000 465,000 528,000 88,000
8,480 2,680 89,240 10,610 5,620 15,860 2,400 2,500
£ 420,000
290,000 130,000
64,420 65,580
£ 614,000
440,000 174,000 8,140 182,140
137,390 44,750
Non-current Assets Freehold land Vehicles Furniture and fittings Current Assets Inventory Trade receivables Prepayment of expenses
BALANCE SHEET AS AT 31 DECEMBER 20-4 £ £ Cost Prov for dep'n 100,000 – 12,000 4,800 25,000 5,000 137,000 9,800
Less Current Liabilities Trade payables Accrual of expenses Bank
41,850 3,180 2,000
Net Current Assets or Working Capital
47,030
Less Current Liabilities Trade payables Bank Accrual of expenses
12.10
Dr
Date
BETH DAVIS
Profit for the year
(a)
2007
55,217 1,864 4,963 2,246 395 868 2,400
28,176 3,641 163 310 32,290
13,459
31 May
31 May 1 Jun
67,953 27,421
20
Details Cash/bank
Balance c/d Balance b/d
£
12,000 4,800 7,200
18,831 26,031 20,806 27,421 48,227 22,196 26,031
Less Drawings
INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20-8 £ £ 95,374
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%
£
FINANCED BY Capital Add Profit for the year
125,000 44,750 169,750 24,000 145,750
Less Drawings
10,290 3,084 85
Net Current Assets or Working Capital NET ASSETS
93,550 220,750
75,000 145,750
FINANCED BY Capital Opening capital Add Profit for the year
£
Non-current Assets Shop fittings at cost Less provision for depreciation 2,400 + 2,400 Net book value Current Assets Inventory Trade receivables Cash Prepayment of expenses
88,000 52,130 450 140,580
Less non-current Liabilities Bank loan NET ASSETS
12.9
BALANCE SHEET AS AT 31 DECEMBER 20-8
£ Net book value 100,000 7,200 20,000 127,200
Telephone £
2,400
130
2,530 210
Date Details
2007
31 May Income statement 31 May Balance c/d
1 Jun Balance b/d
Cr £
2,320
210
2,530 130
(b)
CHAPTER 13 Business organisations
13.2 MEMORANDUM
•
•
The final s of a sole trader comprise: –
–
income statement balance sheet
The income statement shows:
income minus expenses equals profit (or loss)
To:
The Owner, Beta Batteries
•
The balance sheet shows:
Date:
Today
•
Assets are items owned by the business; liabilities are amounts owed by the business; capital is the amount of the 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”.
From:
Subject:
Student ant
of J Booth 13.3
I note that a customer of Beta Batteries, J Booth, has been declared bankrupt whilst owing you £350. You are of the opinion that none of the debt will be recovered.
(b)
The ing treatment is that the amount of £350 should be treated as a bad debt written off. To do this you will need to:
assets minus liabilities equals capital
Where no partnership agreement exists, then the following ing rules from the Partnership Act 1890 must be followed: •
profits and losses are to be shared equally between the partners
•
partners are not entitled to receive interest on their capital
•
– debit bad debts written off
– credit J Booth’s in your sales ledger
•
If you use a sales ledger control you should also credit this memorandum with the amount.
•
For the year end s, you will need to transfer the amount of the bad debt to income statement as an expense:
no partner is entitled to a salary
interest is not to be charged on partners’ drawings
when a partner contributes more capital than agreed, he or she is entitled to receive interest at five per cent per annum on the excess
Note: the question asks for any three provisions.
– debit income statement
13.5
– credit bad debts written off
The effect of writing off this bad debt will be to reduce your profit for the year by £350 and, at the same time, the trade receivables’ figure in your balance sheet will be reduced by the amount, so reducing the net assets of the business.
Points to cover include: *
Definition of a limited company –
separate legal entity
–
managed by directors
–
•
Types of companies –
public limited company
–
company limited by guarantee
–
•
private limited company
Advantages of forming a limited company –
limited liability
–
ability to raise finance
–
–
–
21
owned by shareholders
separate legal entity hip
other factors
(d)
CHAPTER 14 ing concepts and inventory valuation
14.1
•
•
•
Going concern concept
•
14.2
Accruals concept
14.5
Examples: The accrual of an expense in income statement which has been used in the ing period but not yet paid for. The prepayment of an expense for the next ing period. The recording of opening and closing inventories. The use of trade receivables' and trade payables' s to record amounts owing to the business, or owed by the business. Materiality concept
This means that some items in s have such a low monetary (money) value that it is not worthwhile recording them separately. Examples include:
14.8
small expense items which may not justify their own separate expense and are, instead, grouped together in a sundry expenses
end-of-year quantities of office stationery are often not valued for the purpose of final s because the amount is not material and does not justify the time and effort involved
low-cost non-current assets are often charged as an expense in income statement because, while strictly these should be treated as non-current assets and depreciated each year, in practice they are treated as income statement expenses as the amounts involved are not material – such as a calculator, a stapler
Materiality depends very much on the size of the business – what is material and what is not becomes a matter of judgement. Business entity concept
This refers to the fact that final s record and report on the activities of a particular business. For example, the personal assets and liabilities of those who play a part in owning or running the business are not included on the business balance sheet.
(a)
The concept of prudence means
–
–
–
(b)
–
–
–
(c)
not anticipating profit until it is reasonably certain that it will be realised
–
provision for doubtful debts (see Chapter 15)
(a)
The kettle should be valued at £16.
(b)
Inventory should be valued at the lower of cost or net realisable value whichever is the lower.
Workings: £31 – £15 = £16 net realisable value (which is lower than the cost of £18) This is an example of using the prudence concept.
Gross Profit
Profit for the year
Current Assets
Current Liabilities
Capital
increase £4,000
decrease £4,000
1.
Accruals
2.
Consistency
no change
decrease £15,000
no change
no change
decrease £15,000
3.
Prudence or Consistency
decrease £18,000
decrease £18,000
decrease £18,000
no change
decrease £18,000
4.
Business entity
no change
increase £13,000
no change
no change
no change
14.10
providing for all known liabilities
(a)
no change
decrease £4,000
no change
jacket, £40 (note: replacement cost is not applicable here) shirt, £25 suit, £80
not giving an over-optimistic presentation of the business
tros, £25 – £10 = £15
not overstating the value of assets
electric tro press, £80
valuation of inventory, at the lower of cost and net realisable value
(b)
depreciation of non-current assets, to measure the amount of the fall in value of non-current assets over time
• •
bad debts written off, to reduce the trade receivables’ figure to give a realistic view of the amount that the business can expect to receive
provision for doubtful debts (see Chapter 15), to reduce the trade receivables’ figure
The concept of consistency means that, when a business adopts particular ing policies, it should continue to use such policies consistently
bad debts written off
depreciation of non-current assets
Concept
Examples (question asks for one example):
–
–
By applying the consistency concept, direct comparison between the final s of different years can be made.
This means that expenses and income for goods and services are matched to the same time period.
–
valuation of inventory
–
Example: As a going concern, non-current assets are valued at cost, less accumulated depreciation to date; inventory is valued at cost (unless net realisable value is lower).
–
–
–
This presumes that the business to which the final s relate will continue to trade in the foreseeable future. The income statement and balance sheet are prepared on the basis that there is no intention to reduce significantly the size of the business or to liquidate the business. If the business was not a going concern, assets would have very different values, and the balance sheet would be affected considerably.
–
Examples (question asks for one example)
•
22
The prudence concept says that final s should always, where there is any doubt, report a conservative figure for profit or the valuation of assets.
In inventory valuation it is applied by using the lower of cost and net realisable value. (Note that net realisable value is the selling price of the goods, less further costs to get the inventory into a saleable condition.) A lower closing inventory figure means that profits are not overstated – thus the amount drawn by the owner(s) will be reduced, so helping to ensure the continued financial viability of the business.
(b)
CHAPTER 15 Further aspects of final s
15.2
Dr 20-7 31 Dec
31 Dec
Dr 20-7 31 Dec
31 Dec 20-8 1 Jan
Dr 20-7 31 Dec
20-8 1 Jan
15.4
Balance b/d (accrual of income) Income statement
Balance b/d (accrual of income) Income statement
Balance b/d (accrual of income)
Income statement
Balance b/d (accrual of income)
Advertising Income £ 20-7 150 31 Dec Bank/Cash (receipts for year) 2,820 31 Dec Balance c/d (accrual of income) 2,970 250
20-8
Rent Income £ 20-7 19,260 31 Dec Balance b/d (prepayment of income) 31 Dec Bank/Cash (receipts for year) 31 Dec Balance c/d (accrual of income) 19,260 120
20-8
Cr £ 1,250
20-0
1,250
•
(c)
Provision for Doubtful Debts £ 20-9 1,000 31 Dec Income statement
Balance c/d
20-0 1 Jan
Cr £ 1,000
Balance b/d
1,000
Income statement (expenses)
debit bad debts written off £420
debit provision for doubtful debts £1,000
Explanation: profit for the year is reduced by £1,420
Cr £ 2,720
•
250
Balance sheet
Trade receivables £39,000
Workings: £40,420 – £420 bad debts = £40,000 – £1,000 provision for doubtful debts = £39,000 net trade receivables
2,970
Explanation: current assets are reduced by £420 + £1,000 = £1,420
15.6
Year
Cr £ 850
Income statement
Bad debts written off
18,290 120
19,260
£
20-5
1,800
20-7
1,400
20-6
2,400
Expense
Increase in provision for doubtful debts £
Income
Bad debts recovered
2,585
245
£
150
Decrease in provision for doubtful debts £
110
Trade receivables (after bad debts written off)
Balance sheet
Less prov for doubtful debts
£
£
Webster Limited T Smith Khan and Company
Bad Debts Written Off £ 20-9 110 31 Dec Income statement 210 100 420
Cr £ 420 420
23
£
2,585
100,815
108,800
2,720
106,080
113,200
2,830
20-5
(£105,200 – £1,800) x 2.5% = £2,585 creation of provision
20-7
(£110,200 – £1,400) x 2.5% = £2,720 – £2,830 = £110 decrease in provision
20-6
Net trade receivables
103,400
Workings for doubtful debts provision:
(a)
Dr 20-9 31 Dec 31 Dec 31 Dec
Commission Income £ 20-7 100 31 Dec Bank/Cash (receipts for year) 1,150 1,250
Dr 20-9 31 Dec
(£115,600 – £2,400) x 2.5% = £2,830 – £2,585 = £245 increase in provision
110,370
15.8
(a)
Straight-line method £ 3,000
Year 1
Year 2
(b)
20-8 1 Jan 1 Oct 1 Oct
20-9 1 Jan
3,000
Depreciation is not a method of providing a fund of cash which can be used to replace the asset at the end of its life Profits are lower after depreciation has been deducted – this may discourage drawings from the business
Balance b/d Disposals (part-exchange allowance) Bank (balance paid by cheque)
27,000
Disposals Balance c/d
£ 7,200 3,000 10,200 £
£ 12,000 15,000
Disposals Balance c/d
20-9
1 Jan
Balance b/d Income statement Balance b/d
Vehicles Income statement (profit on sale)
(d) Non-current assets Vehicles
£ 12,000 700
20-8 1 Oct
1 Oct
12,700
£ Cost
15,000
£ Prov for dep’n 3,000
Net book value
21,875
£ 7,200 3,000 10,200 £
Workings
£
Trade-in value
8,000
Profit on disposal
2,000
Non-current Assets Machinery at cost Less prov for depreciation Net book value
6,000
GORG HAMMAN
BALANCE SHEET AS AT 31 DECEMBER 2003
Current Liabilities Trade payable – instalment due on machine
£ 5,500
£
176,000 123,500 52,500
(£170,000 – £24,000 + £30,000) (£105,000 – £18,000 + £36,500)
(11,000)
Tutorial notes: • depreciation for 2003 is calculated at 25% straight-line method (being the rate applied to the old machine) • therefore depreciation on remaining machinery is £170,000 – £24,000 = £146,000 x 25% = £36,500
7,200 12,700
£ Net book value 12,000
3,125
Profit on disposal of old machine = £2,000
(b)
Cr
Cr
BALANCE SHEET EXTRACT AS AT 31 DECEMBER 20-8
25,000
Net book value at date of trade-in
3,000
Vehicles (part-exchange allowance) Prov for depreciation
£
Vehicle at cost
£24,000 – £18,000 depreciation = £6,000 net book value
£
Disposals – Vehicles
Dr
(a)
27,000
20-9
20-8 1 Jan 31 Dec
15.13
Cr
Provision for Depreciation – Vehicles
(c) 20-8 1 Oct 31 Dec
9,500
20-8 1 Oct 31 Dec
£ 15,000
Balance b/d
Dr
20-9
£ 12,000 5,500
BALANCE SHEET EXTRACT AS AT 31 DECEMBER 20-9
Non-current Assets
Tutorial note: Do not deduct the trade in allowance from the cost price of the new vehicle – the cost price is £25,000.
It is an ing adjustment
Vehicles
£20,000 – £12,500 – £4,000 = loss of £3,500
Less provision for depreciation
•
(b) 20-8 1 Oct 31 Dec
1,440 (60%) or 2,400 (to disposal)
Depreciation is a non-cash expense
•
(a) (b)
•
•
15.11 (a) Dr
15.12
Reducing balance method £ 3,600
24
15.16
16.4
THOMAS SALMON
INCOME STATEMENT FOR THE YEAR ENDED 30 NOVEMBER 2004 Gross profit
£
Discount received
119
Rent receivable Wages
Bad debts
Rent and rates
Other expenses
Discount allowed
Income in provision for doubtful debts Depreciation of fixed assets
Loss on sale of van
720
69,611 26,320 340
4,630
21,435 286
*230
**
***
***100
7,270
(b)
(a)
£27,000 provision for depreciation at start of year – £6,000 depreciation on van sold = £21,000, which is deducted from £30,000 provision for depreciation at end of year = £9,000 depreciation for year (as shown in income statement)
Capital expenditure
cost of van
air conditioning
fitted shelving
total
(b)
Revenue expenditure
tax disc
16.5
£ 2,000 1,900 100
11,650 550
350
165
450
total
•
Depreciation, using the straight-line method, at present is £15,000 (see above)
•
Therefore reducing balance depreciation is £3,000 less this year than straight-line method, so profit will increase from £8,100 (see above) to £11,100.
Reducing balance depreciation will be 20% (£150,000 – £90,000) = 20% x £60,000 = £12,000
JOHN HENSON INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20-8
Less expenses: Vehicle running expenses 1,480 + 230 Rent and rates Office expenses 2,220 – 120 Wages and salaries Depreciation: office equipment vehicle
12,550
insurance
tank of fuel
• Rent £2,500 – £220 prepaid
Workings:
Less Closing inventory Cost of sales Gross profit Add income: Discounts received
£
220 40
875
117,800 8,100
• Wages £74,750 + £650 owing
Revenue Opening inventory Purchases
cost of extended warranty
152,500 125,900
New profit: £11,100 •
CHAPTER 16 Preparing sole trader final s 16.1
£ 278,400
• Depreciation £150,000 x 10%
62,341
£1,120 – £890 = £230
Net book value (£8,000 – £6,000) Sale price Loss on sale
ABEL BROWN
INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2001 £ Revenue Less Cost of sales: Opening inventory 12,700 Purchases 153,900 166,600 Less Closing inventory 14,100 Gross profit Less expenses: Wages 75,400 Rent 2,280 Other expenses 25,120 Depreciation 15,000 Profit for the year Workings:
**9,000
Profit for the year *
£
68,772
Add income:
Less expenses:
(a)
25
Profit for the year
£
6,250 71,600 77,850 8,500
1,710 5,650 2,100 18,950 1,000 3,000
£ 122,000
69,350 52,650
285 52,935
32,410 20,525
BALANCE SHEET AS AT 31 DECEMBER 20-8 Non-current Assets Office equipment Vehicle
£
Net book value
12,000
3,000
9,000
10,000
22,000
9,000
Net revenue
18,000
Opening inventory
Purchases 280,797 – 2,170 goods for own use Less Closing inventory Cost of sales
Less expenses:
725
Wages 128,528 + 1,383
Motor expenses 47,870 – 18,500 Rates
Insurances 7,780 – 286
4,910 5,140
Bad debts written off General expenses
Provision for depreciation:
9,430
property
27,430
equipment
motor vehicles
FINANCED BY Capital
Opening capital
Add Profit for the year Less Drawings
39,771
586,624
278,627 318,398
40,135
278,263
308,361
129,911
29,370 7,810
7,494
1,368
33,713 2,900
1,140
13,448
Profit for the year
20,000
£
587,461
837
Gross profit
14,570
230
£
Less Returns inwards
120
Bank
NET ASSETS
Revenue
5,225
Prepayment of expenses
Net Current Assets or Working Capital
4,000
INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 2006
8,500
Trade receivables
Accrual of expenses
1,000
KEN TUCKY
(a)
£
Prov for dep'n
Current Assets
Trade payables
£
Cost
Inventory
Less Current Liabilities
16.6
227,154
81,207
Depreciation calculations
20,525
40,525
•
Property: £145,000 x 2% = £2,900
•
Motor vehicles £42,000 + £18,500 acquisition = £60,500 – £26,880 depreciation to date = £33,620 x 40% = £13,448
•
13,095
27,430 (b)
Additional information 4 •
This is a prepayment of expenses.
•
The amount will be shown as a current asset in the balance sheet.
• •
•
26
Equipment: £11,400 x 10% = £1,140
The amount is deducted from the expense to be shown in income statement, ie £7,780 expense – £286 prepayment = £7,494 to income statement. The £286 will be included in the cost for insurances charged to next year’s income statement.
The ing concept is accruals (or matching) – expenses and revenues for goods and services are matched to the same time period, here the year ended 31 March 2006.
(b)
Additional information 5 •
• • •
(c)
• •
•
•
16.8
(a)
Workings:
The owner has taken some of the goods in which the business trades for his own use.
The amount, here £2,170, is deducted from purchases and added to the owner’s drawings (which will be deducted from capital in the balance sheet).
The ing concept is prudence.
SIOBHAN HUGGETT
Cost of sales
Reduction in provision for doubtful debts
Wages and general expenses
Business rates
Bad debts written off
Provision for depreciation: fixtures and fittings
vehicles
Loss for the year
16.9
122,500
170,600
Add income:
Less expenses:
293,100
131,200
Gross profit
(b)
Example of capital expenditure: purchase of fixtures
(c)
Capital expenditure is expenditure incurred on the purchase, alteration or improvement of fixed assets.
Example of revenue expenditure: wages and general expenses
WULLIE McDUFF
(a)
INCOME STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER 2005
Gross profit
£
Add income:
Bad debts recovered
40
Less expenses:
117,800
Wages
13,330
Rent and rates
750
General expenses
Bad debts written off
10,800
Loss on sale of vehicle
Provision for depreciation: property
174,520
vehicles
3,880
27
Loss for the year
£
807,850
100
Reduction in provision for doubtful debts
170,640
31,840
Provision for depreciation of vehicles: £160,000 – £80,400 depreciation to date = £79,600 x 40% = £31,840
Capital expenditure is shown on the balance sheet (subject to the ing concept of materiality), while revenue expenditure is an expense in the income statement. It is important to classify these items of expenditure correctly in the ing system so that the final s report reliably on the financial state of the business – profit is stated accurately and the balance sheet shows the assets owned by the business.
£
123,400 8,700
Provision for depreciation of fixtures and fittings: £85,000 + £23,000 acquisition = £108,000 x 10% = £10,800
Revenue expenditure is expenditure incurred on running expenses.
INCOME STATEMENT FOR THE YEAR ENDED 30 APRIL 2004
Less Closing inventory
Business rates: £13,510 – £180 prepayment = £13,330
•
If a provision is not made, then profits will be overstated by the amount of doubtful debts.
Purchases
Wages and general expenses: £116,200 + £1,600 accrual = £117,800
•
Creation of a provision for doubtful debts is shown as an expense in income statement, and deducted from trade receivables in the balance sheet.
7,800
Provision for doubtful debts: £9,000 trade receivables x 3% provision = £270, which is deducted from £310 existing provision = £40 reduction in provision for doubtful debts
Closing inventory: valued at the lower of cost, £8,700, and net realisable value, £11,500
•
A provision for doubtful debts should be created so that the balance sheet figure of net trade receivables is a reliable estimate of the amount that will be received.
Revenue
• •
The ing concept is business entity which keeps separate from the business the personal assets and liabilities of the owner.
Opening inventory
Purchases: £149,400 – £3,000 goods for own use – £23,000 fixtures = £123,400
•
The reason for reducing purchases is to ensure that only those purchases used in the business are recorded, which are then matched to the sales derived from them.
£
•
65
808,015 748,432 12,140
37,898
760
200
2,400
7,500
809,330
1,315
Workings:
•
•
•
•
•
•
(b)
CHAPTER 17 Financial statements of limited companies
Provision for doubtful debts: £35,000 trade receivables x 2.5% provision = £875, which is deducted from £940 existing provision = £65 reduction in provision for doubtfut debts.
17.1
Rent and rates: £12,460 – £320 prepayment = £12,140
(a)
General expenses: £36,980 + £918 accrual = £37,898
•
Loss on sale of vehicle: £20,000 cost – £15,000 depreciation to date = £5,000 net book value at date of sale – £4,800 sale proceeds = £200 loss on sale. Provision for depreciation of property: £120,000 x 2% = £2,400
Provision for depreciation of vehicles: £60,000 – £30,000 depreciation to date = £30,000 x 25% = £7,500
The private limited company is the most common form of limited company and is defined as ‘any company that is not a public company’ (Companies Act 2006). Many private limited companies are small companies, often in family ownership and it would seem appropriate for Wullie McDuff to consider this form of business organisation.
(b)
•
(c)
•
(d)
Advantages include: •
•
• •
limited liability – the shareholders of the company can only lose the amount of their investment (together with any money unpaid on their shares); the personal assets of the shareholders are not available to the company’s trade payables
17.2
separate legal entity – a limited company is separate from the owners
ability to raise finance – the smaller company can raise funds from venture capital companies, relatives and friends; debentures can be issued to raise long-term finance from lenders and investors
•
17.4
documentation – there is more documentation – eg the preparation of formal annual s – for a company to produce than for a sole trader business; the costs of istering a company are higher than for a sole trader
•
Market value is the price at which issued shares are traded, ie bought and sold.
Capital reserves are created as a result of a non-trading profit; examples include revaluation reserve, share . Revenue reserves are retained profits from the income statement; examples include retained earnings, general reserve.
A bonus issue is the capitalisation of reserves – either capital or revenue – in the form of free shares issued to existing shareholders in proportion to their holdings; no cash flows into the company.
A rights issue is the raising of cash by offering shares to existing shareholders, in proportion to their holdings, at a favourable price.
corporation tax is shown in the income statement, and any amount not yet paid is shown as a current liability on the balance sheet
(a)
directors' remuneration is shown as an expense in the income statement dividends paid are shown in the statement of changes in equity
revaluation reserve is shown as a capital reserve as a part of the equity section of the balance sheet
goodwill is shown as an intangible asset in the non-current assets section of the balance sheet; it is amortised in the same way as tangible non-current assets are depreciated
MASON MOTORS LTD INCOME STATEMENT (EXTRACT) FOR THE YEAR ENDED 31 DECEMBER 20-1 Profit from operations Finance costs
Profit before tax
Conclusion
•
•
Nominal value is the face value of a share which is entered in the s, eg 5p, 10p, 25p, 50p or £1.
(c)
(f)
hip – all ordinary shareholders have voting rights, so Wullie may lose some control of the business
•
Preference shares usually carry a fixed rate of dividend which is paid in preference to that of ordinary shareholders. In the event of the company ceasing to trade, the preference shareholders will also receive repayment of capital before the ordinary shareholders.
debenture interest is shown as an expense in the income statement
(b)
(e)
a limited company may have a higher standing and status in the business community, allowing it to benefit from economies of scale, and making it of sufficient size to employ specialists
•
Ordinary shares are the most commonly issued class of share. They take a share of the profits which remain after all other expenses of the business. The main risk of ordinary shares is that part or all of the value of the shares will be lost if the company loses money or becomes insolvent.
(a)
(d)
Disadvantages include
•
•
Tax
Profit for the year
Wullie must consider the advantages and disadvantages of changing his business into a private limited company. If he is seeking to expand the business and raise finance, it would be sensible to consider this option. At the same time he would gain the benefit of limited liability.
28
£
75,000
(5,500) 69,500
(20,050) 49,450
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 20-1
(b)
Retained earnings
Balance at 1 January 20-1
49,450
Dividends paid
(10,000)
Balance at 31 December 20-1
119,450
Balance at 1 June 20-2
Profit for the year Dividends paid
Transfer to general reserve
Balance at 31 May 20-3
(b)
(20,000)
Debt
Equity
£20,000,000
£55,000,000*
£50,000,000* £25,000,000
–
– –
–
–
–
–
–
–
(2,000,000) 4,600,000
Conclusion
It seems to be preferable for Srian to finance its expansion scheme with an issue of ordinary shares. This has a much lower gearing ratio than the issue of debentures – the company may have difficulty in the future meeting the extra annual interest cost of £1,800,000.
the new shareholders will have voting rights
the power of the existing shareholders will be diluted because there will be more shares in issue
the company’s gearing ratio will be improved
a different type of financing based on loans and interest, rather than shares and dividends
the interest charge will rise by £1,800,000 from £1,200,000 to £3,000,000
interest must be paid whether or not profits are made
a failure to pay interest could lead the company into insolvency
no voting rights, so no dilution of shareholders’ power
debentures must be repaid at an agreed date in future
interest rate is fixed, whatever may happen to the level of interest rates
debenture holders likely to require security for their loan in the form of a mortgage over company assets; this may restrict the use the company can make of the assets
= 2:1 or 200%
This is an extremely high gearing ratio, well above the ‘normal’ maximum of 1:1 or 100% acceptable to investors. It may be that Srian plc will have difficulty in meeting the annual interest costs of this option.
(2,800,000)
Issue of debentures –
0.36:1 or 36%
* 6% debentures £20,000,000 + £30,000,000
9,400,000
not essential to pay dividends every year, although a failure to do so might cause difficulties with future share issues
=
If debentures are issued, the gearing ratio becomes:
Issue of ordinary shares –
= 0.8:1 or 80%
This is a much improved gearing ratio.
6,000,000
–
£25,000,000
* ordinary shares £25,000,000 + £20,000,000 and share £10,000,000
3,400,000
ordinary shares are not normally repayable, so the company will have the finance for the foreseeable future
£20,000,000
If ordinary shares are issued to raise the money for expansion, the gearing ratio (including share ) becomes:
£
–
=
This is already a high gearing ratio which investors will not wish to see going above 1:1 or 100%.
SRIAN PLC STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 MAY 20-3
Retained earnings
the company’s gearing ratio will be worsened
Without having information on the company’s revenue reserves (retained earnings and general reserve), the gearing ratio is currently:
General reserve is created from profit which has been kept in the company. It belongs to the shareholders, but is represented by assets in the balance sheet and is not a bank balance available to rebuild the garage forecourt.
(a)
if repayment not made at due date, debenture holders can realise assets to obtain repayment
Gearing ratio
149,450
Transfer to general reserve
17.7
–
100,000
Profit for the year
(c)
–
29
17.9
(a)
STOULBY LIMITED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2006 Retained earnings
£
Balance at 1 January 2006
Inventories
1,060,000
Transfer to general reserve
877,000
TOTAL EQUITY AT 31 DECEMBER 2006 £
Issued share capital
4,000,000 ordinary shares of 50p each
Share
General reserve
£
877,000
TOTAL EQUITY
(d)
(e) 17.10
(37,000)
Net Assets
840,000
700,000 ordinary shares of 50p each, fully paid Share
Revenue Reserves Retained earnings
1,297,000
General reserve
TOTAL EQUITY
* Cash and cash equivalents:
Revenue reserves are profits from trading activities which have been retained in the company to help build the company for the future
balance at start share issue
Retained earnings or general reserve
dividend paid
Revenue reserves can be used to fund dividend payments or to provide bonus shares to shareholders
closing balance
(a) DAVID MARK LIMITED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 20-2
Balances at 1 January 20-2
Profit for the year
Dividend paid
Transfer to general reserve
Issue of shares
Balances at 31 December 20-2
250,000
Share £ –
–
–
–
–
100,000
350,000
–
General reserve £
£
–
**(35,000)
(35,000)
–
–
150,000
45,000
50,000
120,000
* £400,000 – £150,000 profit for the year
Total
*250,000
–
50,000
Retained earnings £
(c)
75,000 –
350,000
Capital Reserve
3,797,000
Issued share capital £
240,000
EQUITY
* general reserve: £300,000 + £120,000 transfer (c)
Trade and other payables
Issued Share Capital
*420,000
Retained earnings
277,000
Net Current Assets
500,000
Revenue Reserves
*132,000
Current liabilities
2,000,000
Capital Reserve
60,000
Cash and cash equivalents
(120,000)
£
600,000
85,000
Trade and other receivables
(63,000)
Balance at 31 December 2006
£
Current assets
650,000
Dividend paid
DAVID MARK LIMITED
SUMMARISED BALANCE SHEET AS AT 31 DECEMBER 20-2
Non-current assets
410,000
Profit for the year
(b)
(b)
150,000
(45,000) 320,000
** 500,000 shares x 7p
575,000
150,000 –
840,000
30
50,000 320,000
120,000
440,000
840,000
£
17,000
150,000
(35,000) 132,000
•
Limited company, or •
Private Limited Company
(d)
•
The term ‘Ltd” means that the shareholders of David Mark Limited have limited liability.
•
Thus the risk taken by shareholders is limited.
•
This means that they could lose their investment but cannot be asked to contribute further in the case of liquidation (unless the shares are not fully paid).
CHAPTER 18 Ratio analysis
18.3
Exton gross profit margin 13.4% gross profit mark-up 15.5% overheads in relation to revenue 12.0% net profit margin (profit in relation to revenue) 1.4% rate of inventory turnover 33 days or 10.9 times per year net current asset (current) ratio 1.3:1 liquid capital (acid test) ratio 0.05:1 trade receivable days 1 day* return on capital employed 11%
(a) (b) (c) (d) (e)
(f) (g) (h) (i)
profit
Frimley 44.0% 78.7% 39.8% 4.2% 95 days or 3.8 times per year 2.4:1 1.3:1 60 days 8.1%
(d)
Frimley
18.4
(a)
Return on capital employed (ROCE) expresses the profit of a business in relation to the amount of capital in the business by the owner. gearing
Debt (loan capital + preference shares, if any) Equity (ordinary shares + reserves)
Gearing is concerned with the long-term financial stability of a business. It measures how much of the business is financed by debt (including preference shares) against capital – gearing is often referred to as the debt/equity ratio. The higher the gearing, the less secure will be the ordinary share capital of the business and, therefore, the future of the business. This is because debt is costly in of interest payments.
low overheads/revenue and net profit margin; high inventory turnover; quick trade receivable days, low net current asset and liquid capital ratios; few trade receivables
higher overheads/revenue and net profit margin and low inventory turnover; slow trade receivable days; good net current asset and liquid capital ratios; high figures for non-current assets and trade receivables
18.6
gross profit margin Gross profit Revenue
This ratio expresses, as a percentage, the gross profit in relation to revenue.
(c)
(d)
net current assets
Current assets – Current liabilities
Net current assets or working capital, are needed by all businesses in order to finance day-to-day trading activities. Sufficient net current assets enable a business to hold adequate inventories, allow a measure of credit to its customers (trade receivables) and to pay its suppliers (trade payables) as payments fall due.
(e)
liquid capital
Liquid capital is calculated in the same way as net current assets, except that inventories are omitted. This is because inventories are the most illiquid current asset. Liquid capital provides a direct comparison between the short-term assets of trade receivables and cash and short-term liabilities.
cash
Trade receivables x 365 days Revenues
Trade payables Purchases
x 365 days
trade receivable days
This is the actual amount of money held in the bank or as cash.
trade payable days
20-1
20-2
£43,000 x 365 days £680,000
£32,550 x 365 days £660,000
20-1
20-2
= 23.08 days
£28,500 x 365 days £520,000 = 20 days
= 18 days
£38,500 x 365 days £540,000 = 26.02 days
20-1 Trade payables are paid more quickly than trade receivables are paying, which will cause cash management problems. 20-2 Trade payables are paid more slowly than trade receivables are paying, which aids cash management.
(Current assets – Inventories) – Current liabilities
(c)
In general , investors and lenders would not wish to see debt exceeding equity; thus a gearing ratio of greater than 1:1 is undesirable.
x 100 1
This ratio expresses, as a percentage, the gross profit in relation to cost of sales; often used by businesses to establish selling price. (b)
(a) (b)
x 100 1
gross profit mark-up Gross profit Cost of sales
Profit for the year x 100 Capital employed* 1
sole traders: the amount of the owner’s capital in the business
Exton is the supermarket; Frimley is the engineering company Exton
return on capital employed
* limited companies: ordinary share capital + reserves + preference share capital + loan capital
* revenue figure used for this calculation; this is unrealistic because most supermarket sales will be for cash rather than on credit
Reasons:
This is a calculated figure which shows the surplus of income over expenditure for the year. It takes note of adjustments for accruals and prepayments and non-cash items such as depreciation and provision for doubtful debts.
31
Note: The figure for trade receivables has fallen during the period, while the figure for trade payables has increased. The reasons for the changes need to be investigated to include: – has revenue reduced, or is collection from trade receivables more efficient? – does the company have the money to pay trade payables, or have generous credit been offered by a supplier?
18.7
(a)
(b)
•
Net current assets (current) ratio
=
•
Net profit margin (profit in relation to revenue)
=
•
Liquid capital (acid test) ratio
=
•
Rate of inventory turnover
=
•
Return on capital employed
=
or
Proposal 2
Current assets Current liabilities
£30,000 **£540,000
(Current assets – inventories) Current liabilities Average inventories x 365 days Cost of sales
Profit for the year Capital employed
Tutorial note: bank overdraft is a current liability and is not included in the figure of capital employed.
= number of times per year
(c)
x 100 1
To: From: Date: Subject:
Green Ltd is the supermarket, while Hawke Ltd is the furniture store.
Green Ltd has a low net profit margin and a high inventory turnover. This is a characteristic of the way in which supermarkets operate – low profit margins, but a high level of revenue. Liquidity ratios are lower than the norms as supermarkets usually have few trade receivables.
• •
•
•
•
• 18.10
• •
•
If expenses could be reduced, the net profit margin would improve, and also return on capital employed.
•
A review of buying prices and selling prices may reveal opportunities for increasing profits and return on capital employed.
Advertising could increase sales, but only if the extra revenue generated covers the cost of advertising.
•
Any surplus non-current assets could be sold to improve liquidity ratios.
(b)
Ratio calculation
Return on capital employed
Proposal 1 £30,000 *£600,000
x 100 1
=
Profit for the year Capital employed
Ordinary shareholder Student ant Today Proposals to raise finance
This proposal to issue more ordinary shares means that ownership of the company will be diluted.
Unless the amount paid out by the company in dividends is increased, then your dividend per share will fall. Return on capital employed will be reduced from 7.89% (£30,000 ÷ £380,000) to 5%.
The 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 and £140,000 retained earnings. the company may decide to make a bonus issue of shares in the future.
Proposal 2
Inventory levels could be reduced, so improving the net current asset ratio.
Formula
*
•
If inventory turnover could be increased above 20 times per year, this would generate more cash and improve the liquidity ratios of the business (provided that selling prices do not have to be cut to encourage sales).
(a)
Report
Proposal 1
Hawke Ltd has a higher net profit margin with a lower inventory turnover. This indicates a business that sells higher value items which are not purchased on a regular basis. The liquidity ratios are close to the norms indicating a business with higher inventories and trade receivables than a supermarket. (c)
= 5.56%
** £380,000 equity (ordinary shares + capital and revenue reserves) £160,000 long-term bank loan
Profit for the year x 100 Revenue 1
Cost of sales Average inventories
x 100 1
• •
x 100 1
• •
= 5%
•
£300,000 ordinary shares (£200,000 + £100,000) £160,000 share (£140,000 + £120,000) £140,000 retained earnings
32
The proposal is to fund the expansion entirely from external borrowing – your ownership of the company will not be diluted.
Your dividend per share should remain the same and, if profits are increased after paying interest on the loans, will increase.
The 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.
18.11
(a)
FALCON LIMITED BALANCE SHEET AS AT 31 MARCH 2007
Non-Current Assets
(b) £
£
Net book value 200,000
Property
Fixtures and fittings
217,500
Inventories
14,560
Cash and cash equivalents
31,058
Trade receivables
51,074
Trade payables
(c)
(7,842)
Tax liabilities
(7,900)
(15,742)
Net Current Assets
252,832
Debentures (2011-2013)
= 12.45%
Issued Share Capital
75,000 ordinary shares of £1 each
18.12
75,000
Capital Reserves
10,000
120,000
Revenue Reserve
Retained earnings
TOTAL EQUITY
130,000
•
£28,000 *£224,832
•
The level of debt has remained at £28,000.
•
224,832
•
33
profit is a calculated figure which shows the surplus of income over expenditure for the year.
Example of how a business can make a good profit during a year when the bank balance reduces or the bank overdraft increases (the question asks for two examples):
•
share £5,000 + £5,000 on rights issue = £10,000
A lower gearing ratio reduces the level of risk to the company and enables it to borrow further funds in the future if required.
(b)
•
•
revaluation reserve £200,000 revaluation – £80,000 net book value = £120,000
The impact of the rights issue and the revaluation of the property has been to reduce considerably the gearing ratio from 37.42% to 12.45%. Even before the adjustments, the company was relatively low-geared; the ratio is much lower after the adjustments.
•
•
bank £1,058 + £30,000 (£25,000 + £5,000 ) rights issue = £31,058
Revaluation of the property has added £120,000 (£200,000 – £80,000) to total equity.
(a)
•
19,832
Tutorial notes:
•
=
The rights issue has added £30,000 (£25,000 + £5,000 ) to total equity.
•
•
Debt Equity
•
224,832
EQUITY
Share
After adjustments
•
(28,000)
NET ASSETS
= 37.42%
•
35,332
Non-Current Liabilities
Before adjustments = £28,000 *£74,832
or
* total equity from balance sheet
5,456
Current Liabilities
Debt (loan capital + preference shares, if any) Equity (ordinary shares + reserves)
* £50,000 + £19,832 + £5,000
17,500
Current Assets
Revaluation reserve
Gearing ratio =
cash is the actual amount of money held in the bank or as cash
purchase of non-current assets – cash decreases; no effect on profit (but there is likely to be an amount for provision for depreciation in the income statement repayment of a loan – cash decreases; no effect on profit
payment of drawings/dividends – cash decreases; no effect on profit
an increase in trade receivables – cash decreases; no effect on profit a decrease in trade payables – cash decreases; no effect on profit an increase in inventory – cash decreases; profit increases
19.3
CHAPTER 19 Budgeting and budgetary control
19.1
(a)
Benefits of budgetary control •
• •
• •
•
•
(b)
Cash budget for four months ending 31 October 2002
Sales
co-ordination – when a budget is being set, any anticipated problems should be resolved
decision-making – by planning ahead through budgets, a business can make decisions on how much output can be achieved
Net inflow/outflow
sales (revenue) budget
•
labour budget
•
trade payable budget
•
(b)
(i)
trade receivable budget cash budget
(c)
•
• •
•
12.0
15.6
16.8
14.4
20.4
25.2
26.8
24.0
8.0
8.0
8.0
4.0
5.2
5.6
3.2
(10.8)
costs and benefits – benefits must exceed the cost
accuracy – of information used
(ii)
demotivation – of staff may occur if they have not been involved in planning the budget and/or where budgets are set at too high a level
5.2
18.0
14.0
4.0
5.6
12.0
26.0
22.0
16.0
(10.8)
(11.6)
(6.8)
(0.8)
4.8
(11.6)
(6.8)
8.0
1.2
•
At 31 October 2002, the bank balance is budgeted to be £1,200.
•
The company sells beach buckets and spades, so the seasonal effect is over quickly.
•
Thus, over the four-month period there is expected to be a change from an overdraft of £7,200 at the start, through a maximum overdraft of £11,600 in August, to £1,200 money in the bank at the end of October. Expected amounts due from trade receivables in November are: £ 12,000 4,800 16,800
•
It is likely that the company will go into overdraft again quite quickly, from November onwards.
•
The company needs to make arrangements for an overdraft facility for July, August and September, with a limit of approximately £12,000.
•
disfunctional management – ensure that the budgets co-ordinate
4.8
4.0
1 month £20,000 x 60% 2 months £24,000 x 20%
Relevant factors when implementing budgetary control
•
£000
(7.2)
•
The most likely three budgets for a small business such as Classic Furniture would be cash, sales and production
£000
(3.6)
Closing balance
Oct
£000
24.0
Opening balance
Sept
£000
16.0
Overheads
motivation – a budget can be part of the techniques for motivating managers and other staff to achieve the objectives of the business
production budget
– 1 month
Purchases
control – action can be taken to modify the operation of the business
•
– cash
– 2 months
monitoring – management is able to monitor and compare the actual results against the budget
purchases budget
Aug
July
communication – because a budget is agreed by the business, all the relevant managers and staff will be working towards the same end
•
•
Sunshine Ltd
planning – by formalising objectives through a budget, a business can ensure that its plans are achievable
Any three budgets
•
(a)
Other measures to improve the company’s cash position include: – offering discounts to encourage increased sales
– allowing one month’s credit only, so receiving payment from sales quicker
set too easy – ensure that budgets are set at realistic levels to enable the business to use its resources to best advantage
– encouraging cash sales
– reducing purchases as the summer season draws to a close
34
– reducing overheads
19.5
(a)
July £
Income
Cash from trade receivables Expenditure
Payments to trade payables
Operating expenses
Purchase of non-current assets
Repayment of loan
August £
September
£
October £
November £
December
24,000
28,500
32,500
38,500
*47,760
10,000
11,000
14,000
18,000
24,500
12,500
12,000
12,000
8,500
12,000
12,000
30,000
36,500
64,010
Net cash flow
(2,000)
(7,500)
2,500
2,500
2,000
(16,250)
Closing balance
(1,020)
(1,520)
(17,770)
Opening balance
980
(1,020)
(8,520)
cash from December sales: £60,000 x 20% x 98%
cash from November sales: £50,000 x 60%
cash from October sales: £30,000 x 20%
(b)
(8,520)
(6,020) =
=
=
(6,020)
(3,520)
(3,520)
(d)
(1,520)
19.7
£11,760
•
in December, the company plans to buy new non-current assets at a cost of £19,510 in December, the company plans to make a repayment on the loan of £20,000
See Chaper 20. •
Automatic updating – as amendments are made, the entire budget is changed easily.
What-if calculations – the effect of possible changes can be considered, eg a reduction in the period of credit allowed to customers.
(a) JIM SMITH
£47,760
Jan Receipts
Memorandum
May
Jun
1,250
3,000
4,000
4,000
4,500
–
4,500
4,500
3,500
3,500
3,500
6,750
5,100
5,100
4,150
4,150
4,200
10,000
Trade payables Expenses
Total payments for month
Net cash flow
Add bank balance (overdraft) at beginning of month
Bank balance (overdraft) at end of month
35
Apr
Total receipts for month Van
purchase of non-current assets
Mar
10,000
Payments
the application of the realisation concept – timing of receipts and payments
Feb
£
Capital introduced Trade receivables
The Directors of Hawk Limited Student ant Today Making profits whilst having a bank overdraft
repayment of loans
•
the sales of £60,000 forecast to be made in December are higher than each of October and November; the cash received from 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
CASH BUDGET FOR THE SIX MONTHS ENDING 30 JUNE 20...
a company can make a profit but have a bank overdraft for a number of reasons, including:
•
20% of cash from sales is received in the month of sale; then 60% is paid in the next month, with 20% two months after sale
£6,000
Reasons
•
•
£30,000
= £18,750 total net cash outflow
To: From: Date: Subject:
the purchase of non-current assets affects cash but has no effect on profit
•
£980 (opening balance 1 July) + £17,770 overdraft (closing balance 31 December)
(c)
repayment of loans affects cash but has no effect on profits
•
20,000
26,000
•
•
19,510
31,500
receipts from trade receivables and payments to trade payables are likely to occur some weeks after the sales and purchases have been recorded in the income statement
Hawk Limited
12,000
22,000
•
•
£
20,000
12,000
Explanation
–
6,000
750
£
1,250
600
£
3,000
600
£
4,000
650
4,000
650
4,500
700
(3,850)
(2,100)
(600)
(2,700)
(2,850)
(3,000)
3,250
(600)
(2,700)
(2,850)
(3,000)
(2,700)
3,250
(150)
£
3,250
–
(150)
£
300
Notes:
• no depreciation – a non-cash expense – is shown in the cash budget
• customers pay one month after sale, ie trade receivables from January settle in February
• suppliers are paid one month after purchase, ie trade payables from January are paid in February
(b) The cash budget shows the maximum bank overdraft to be £3,000 in May.
Jim Smith could avoid the need for a bank overdraft in one or more of the following ways (the question asks for two ways): • by commencing his business with a higher initial capital, eg £13,000
• by buying the van on hire purchase or leasing instead of outright purchase
• by reducing his purchases to £3,000 for each of January and February
• by asking his suppliers for two months’ credit for the initial purchases of £4,500 made in January
• by asking his customers to pay more quickly
CHAPTER 20 The impact of computer technology in ing 20.6
Two from each of:
(a)
(b) (c)
-
single entry system which automatically makes entries in all relevant s
-
all arithmetic in entries is performed automatically
-
-
-
-
-
-
-
s are normally already set up in the system
provided that the original figure entered is correct, all entries will be correct all calculations are automatic and therefore accurate
error of omission (entries which have been left out in error) error of original entry (the wrong figure entered in error)
error of principle (entry in the wrong type of )
mispost (entry in the wrong person’s )
36
Introduction to Financial ing 1
What is financial ing?
1
3
Double-entry book-keeping: further transactions
3
2
4
5
AS ing for AQA second edition
TUTOR MATERIAL: ANSWERS TO SELECTED QUESTIONS
6
7
8
9
10 11
12
Double-entry book-keeping: first principles Business documents
Balancing s – the trial balance
Division of the ledger – the use of subsidiary books The main cash book
1
5
7
9
11
Bank reconciliation statements
12
The general journal and correction of errors
15
Introduction to final s Control s
Adjustments to final s
14
18
19
AS Unit 2
Financial and Management ing 13
Business organisations
21
15
Further aspects of final s
23
14
© Osborne Books Limited 2012 All answers are the responsibility of the publisher. Published by Osborne Books Limited
Tel 01905 748071
Email [email protected]
www.osbornebooks.co.uk
16
17
18 19
20
ing concepts and inventory valuation Preparing sole trader final s
Financial statements of limited companies Ratio analysis
Budgeting and budgetary control
The impact of computer technology in ing
22
25
28 31
34
36
1.7
CHAPTER 1 What is financial ing?
1.2
1.3
Purposes of ing: To quantify items such as sales, expenses and profit 1. 2. To present the s in a meaningful way so as to measure the success of the business 3. To provide information to the owner of the business and to other stakeholders
•
•
•
•
• •
1.4
trial balance extraction of figures from all the double-entry s to check their accuracy
•
overheads and expenses to date
•
•
2.1
assets owned
trade receivables – total amount owed to the business, and individual trade receivables
liabilities owed
profit during a particular period
trade payables – total amount owed by the business, and individual trade payables
providers of finance, eg the bank manager if the business wants to borrow from the bank
•
suppliers, who wish to assess the likelihood of receiving payment from the business
•
employees and trade unions, who wish to check on the financial prospects of the business
•
•
•
•
(a) (b) •
•
•
•
asset of bank increases by £3,000 liability of loan increases by £3,000 asset £11,000 – liability £3,000 = capital £8,000
asset of van increases by £6,000 asset of bank decreases by £6,000 asset £11,000 – liability £3,000 = capital £8,000
Dr
Capital
Dr
Computer
Cr
Rent Paid
Cr
Wages
Cr
Dr
Bank Loan
Bank
Cr
£ 2,500
Dr
Commission Income
Cr
Dr
Drawings
Dr
20-1 8 Feb
customers, who wish to ensure that the business has the financial strength to continue selling the goods and services that they buy
the tax authorities, who will wish to see that tax due by the business on profits and for Value Added Tax has been paid
Dr
20-1 12 Feb 25 Feb
competitors, who wish to assess the profitability of the business
potential investors in the business
the local community and national interest groups, who may be seeking to influence business policy
government and official bodies, eg Companies House who need to see the final s of limited companies
£
Bank
Bank
Bank Bank
20-1
Business entity – the s record and report on the financial transactions of a particular business, and not the owner's personal financial transactions.
Money measurement – the ing 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 .
assets – items owned by a business; liabilities – items owed by a business
purchases – goods bought, whether on credit or for cash, which are intended to be resold later; sales – the sale of goods, whether on credit or for cash, in which the business trades
20-1 23 Feb
1
£ 2,000
£ 750
£ 425 380
£
20-1
trade receivables – individuals or businesses who owe money in respect of goods or services supplied by the business; trade payables – individuals or businesses to whom money is owed by the business
credit purchases – goods bought, with payment to be made at a later date; cash purchases – goods bought, with immediate payment made in cash, by cheque, debit card, credit card, or bank transfer
asset of computer increases by £4,000 asset of bank decreases by £4,000 asset £8,000 – liability £0 = capital £8,000
20-1
20-1 6 Feb
Other stakeholders – any four from
•
•
1.6
purchases of goods for resale to date
asset of bank increases by £8,000 capital increases by £8,000 asset £8,000 – liability £0 = capital £8,000
CHAPTER 2 Double-entry book-keeping: first principles
final s production of an income statement and a balance sheet
•
•
1.5
•
double-entry s system transfer from subsidiary books into the double-entry book-keeping system of s in the ledger
turnover (cash and credit sales) to date
•
•
initial recording of transactions recording ing transactions in subsidiary books (or books of prime entry)
•
•
•
documents processing of source documents relating to ing transactions
Information from the ing system includes:
•
£
Bank
£ 200
20-1 1 Feb
Bank
20-1
£
20-1
20-1 20 Feb
20-1
£ 7,500
£
20-1
20-1 14 Feb
Cr
£
Bank
£ 145
Cr £
Dr 20-1 28 Feb
2.3
Dr 20-5 1 Aug 15 Aug 20 Aug 25 Aug
Bank
Van £ 20-1 6,000
Cr £
Capital S Orton: loan Office fittings Commission received
Bank £ 20-5 5,000 3 Aug 1,000 7 Aug 250 12 Aug 150 27 Aug
Computer Rent paid Office fittings S Orton: loan
Cr £ 1,800 100 2,000 150
Bank
Cr £ 5,000
Capital £ 20-5 1 Aug
Dr 20-5 Dr 20-5 3 Aug Dr 20-5 7 Aug
Dr 20-5 12 Aug Dr 20-5 27 Aug Dr 20-5 17 Aug
Dr
20-7 1 Nov 7 Nov 23 Nov 25 Nov 28 Nov
Dr
20-7 3 Nov Dr
Bank
Bank
Rent Paid £ 20-5 100
Cr £
20-7 10 Nov
Cr £ 200 150
20-7 12 Nov
Commission received
Cash £ 20-5 200 17 Aug
Drawings
Bank
Cr £ 250
Bank
Sally Orton: Loan £ 20-5 150 15 Aug Bank
Cr £ 1,000
Cash
Dr
20-7 14 Nov
Cr £ 100
Office Fittings £ 20-5 2,000 20 Aug Bank
Drawings £ 20-5 100
Dr
Dr
20-7 15 Nov
Bank
Bank
Bank
Bank
Commission received
20-7 1 Nov
Photocopier Office premises Business rates Office fittings Wages
Bank
Bank
£ 75,000
Cr
£
20-7 7 Nov
Bank
£
£ 70,000
Office Premises
Cr
Rates
Cr
Office Fittings
Cr
£ 130,000
20-7
£ 3,000
20-7
£ 1,500
20-7 25 Nov
Bank
£ 200
£ 300
20-7 18 Nov 23 Nov
Drawings Bank
£ 125 100
20-7 15 Nov 28 Nov
Cash Bank
£ 300 200
Cash
£ 125
20-7
£ 250
20-7
Wages
£
£
Drawings
Dr
Cr
Bank Loan
20-7
Dr
20-7 20 Nov
£ 2,500 130,000 3,000 1,500 250
Cr
£ 2,500
£
Cash
Cr
Photocopier
Commission Income
20-7 18 Nov
2
20-7 3 Nov 10 Nov 12 Nov 14 Nov 20 Nov
Dr
20-7
Cr £
£ 75,000 70,000 100 200 200 £
20-7 Dr
Bank
Capital
Dr
Cr £
Commission Income £ 20-5 10 Aug Cash 25 Aug Bank
Capital Bank loan Cash Office fittings Commission received
20-7
Computer £ 20-5 1,800
Dr 20-5
Dr 20-5 10 Aug
2.5
Cr
Cr
Cr £
Cr £
2.6
2.7
20-7
1 Nov 3 Nov 7 Nov 10 Nov 12 Nov 14 Nov 20 Nov 23 Nov 25 Nov 28 Nov
Bank Capital Photocopier Bank loan Office premises Rates Office fittings Wages Cash Office fittings Commission received
Debit £ 75,000
70,000
100 200 200
2,500
130,000 3,000 1,500 250
Balance £ 75,000 72,500 142,500 12,500 9,500 8,000 7,750 7,850 8,050 8,250
Dr 20-2 1 Oct 4 Oct 8 Oct 12 Oct 18 Oct 30 Oct
Dr 20-2
Dr 20-2 2 Oct 6 Oct 14 Oct
Dr 20-2
Capital Sales Sales K Smithson: loan Sales Sales
Bank Bank Bank
Bank £ 20-2 2,500 2 Oct 150 6 Oct 125 14 Oct 2,000 22 Oct 155 25 Oct 110
Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr
Capital £ 20-2 1 Oct
Purchases £ 20-2 200 90 250 Sales £ 20-2 4 Oct 8 Oct 18 Oct 30 Oct
Purchases Purchases Purchases Delivery van Wages
Cr £ 200 90 250 4,000 375
Bank
Cr £ 2,500
Dr 20-2 22 Oct Dr 20-2 25 Oct
Bank Bank Bank Bank
3.5
Dr 20-2 2 Apr 4 Apr Dr 20-2 9 Apr 20 Apr Dr 20-2 26 Apr
Dr 20-2 5 Apr Dr 20-2 7 Apr 12 Apr 22 Apr Dr 20-2
3
Cr £ 2,000
Bank
Delivery Van £ 20-2 4,000
Bank
Wages £ 20-2 375
Cr £
Purchases £ 20-2 200 250
Cr £
Wyvern Producers Ltd A Larsen
Purchases returns Bank
Purchases returns
Wyvern Producers Ltd £ 20-2 50 2 Apr Purchases 150 £ 45
A Larsen 20-2 4 Apr
Sales £ 20-2 5 Apr 7 Apr 12 Apr 28 Apr
Dr 20-2
Cr £
Cr £ 150 125 155 110
J Smithson: Loan £ 20-2 12 Oct Bank
Dr 20-2
Guidance to the trainee to include: • the use of s to record different types of transactions • the principles of double-entry book-keeping whereby one is debited and one is credited for every business transaction • the debit entry is made in the which gains value, or records an asset, or an expense • the credit entry is made in the which gives value, or records a liability, or an income item • examples can be given using bank where money in is recorded on the debit side, and money out is recorded on the credit side • an explanation of various s including – capital – the amount of money invested in the business by the owner – non-current assets – items purchased by a business for use on a long-term basis (noting the distinction between capital expenditure and revenue expenditure) – expenses – the day-to-day running expenses (revenue expenditure) of the business – income – amounts of income received by the business – owner’s drawings – where the owner takes money in cash or by cheque (or sometimes goods) from the business for personal use – loans – where a business receives a loan, eg from a relative or the bank
CHAPTER 3 Double-entry book-keeping: further transactions
3.1
Credit £
Sales
Sales Sales Pershore Patisserie
Cr £ 200
Purchases
Cr £ 250
Pershore Patisserie Bank Bank Cash
Cr £ 150 175 110 100
Pershore Patisserie £ 20-2 150 15 Apr Sales returns 22 Apr Bank Bank £ 20-2 175 20 Apr 110 30 Apr 125
Cr £
Cr £ 25 125
Wyvern Producers Ltd Amery Scales Ltd
Cr £ 150 250
Purchases Returns £ 20-2 9 Apr Wyvern Producers Ltd 26 Apr A Larsen
Cr £ 50 45
Dr 20-2 15 Apr Dr 20-2 17 Apr Dr 20-2 30 Apr Dr 20-2 28 Apr Dr 20-2 29 Apr 3.6
Dr 20-3 2 Jun 7 Jun 23 Jun Dr 20-3 6 Jun 18 Jun
Pershore Patisserie
Amery Scales Ltd
Dr 20-3 5 Jun 20 Jun
Cr £
Weighing Machine £ 20-2 250
Cr £
Bank
Amery Scales Ltd £ 20-2 250 17 Apr Weighing machine
Sales
Cash £ 20-2 100 29 Apr
Cash
Wages £ 20-2 90
Cr £
Purchases £ 20-3 350 400 285
Cr £
Designs Ltd Mercia Knitwear Ltd Designs Ltd
Purchases returns Bank
Designs Ltd £ 20-3 100 2 Jun 250 23 Jun Sales £ 20-3 4 Jun 5 Jun 10 Jun 12 Jun 20 Jun
Dr 20-3
Dr 20-3 4 Jun 12 Jun 28 Jun
Sales Returns £ 20-2 25
Sales Sales Wyvern Trade Supplies Sales Sales
Bank £ 20-3 220 18 Jun 175 300
Cash £ 20-3 115 26 Jun 180
Wages
Dr 20-3 17 Jun
Cr £ 250
Dr 20-3 10 Jun
Cr £ 90
Purchases Purchases
Cr £ 350 285
Bank Cash Wyvern Trade Supplies Bank Cash
Cr £ 220 115 350 175 180
Designs Ltd
Cr £ 250
Rent paid
Cr £ 125
Purchases Returns £ 20-3 6 Jun Designs Ltd 17 Jun Mercia Knitwear Ltd
Dr 20-3
Dr 20-3 15 Jun Dr 20-3 26 Jun 3.7
3.8
Sales
Wyvern Trade Supplies
Cash
Transaction (a) (b) (c) (d) (e) (f) (g) (h)
Mercia Knitwear Ltd £ 20-3 80 7 Jun Purchases
Cr £ 400
Wyvern Trade Supplies £ 20-3 350 15 Jun Sales returns 28 Jun Bank
Cr £ 50 300
Sales Returns £ 20-3 50
Cr £
Rent Paid £ 20-3 125
Cr £
debited purchases bank purchases L Harris Teme Traders sales returns bank cash
credited bank sales Teme Traders sales purchases returns L Harris D Perkins: loan bank
Answers to the trainee: •
Separate s for purchases and sales enable the business to know the amount of goods bought and sold. A combined for ‘goods’ would not provide this information so readily.
•
The purchase of a new delivery van for use in the business is the purchase of a non-current asset, which will be used on a long-term basis. As such the purchase of the van – which is an example of capital expenditure – is entered on the debit side of van .
•
• •
4
Purchases returns
Cr £ 100 80
Purchases and sales s follow the principles of book-keeping in that the debit side of purchases gains value when the business buys goods for resale, while the credit side of sales gives value when the business sells goods.
Purchases returns (or returns out) is where we return goods to a trade payable (supplier). The returns transaction is recorded the opposite way round to a purchases transaction.
Sales returns (or returns in) is where a trade receivable (customer) returns goods to us. The transaction is recorded the opposite way round to a sales transaction.
Carriage inwards and carriage outwards are kept in separate s because they represent different transactions. Carriage inwards is where we pay the carriage cost of goods purchased to have them delivered to us. Carriage outwards is where we pay the carriage charge for goods we have sold, that is we have sold the goods to our customers as ‘delivery free’.
4.3
CHAPTER 4 Business documents
4.2
INVOICE
INVOICE
DEANSWAY TRADING COMPANY
JANE SMITH, FASHION WHOLESALER
The Model Office, Deansway, Rowcester, RW1 2EJ
Unit 21, Eastern Industrial Estate, Wyvern, Wyvernshire, WY1 3XJ invoice to
Excel Fashions 49 Highland Street Longton Mercia LT3 2XL
deliver to
as above
product code
description
Dresses Suits Coats
quantity
5 3 4
2.5% cash discount for full settlement within 14 days Net 30 days
invoice no your reference
2451
date
today
unit price £
30.00 45.50 51.50
unit
total
each each each
£
150.00 136.50 206.00
TOTAL
trade discount %
invoice to
The Card Shop 126 The Cornbow Teamington Spa Wyvernshire WY33 0EG
deliver to
as above
product code
net £
Assorted rubbers Shorthand notebooks Ring Binders
0.00 150.00 0.00 136.50 0.00 206.00
quantity 5 100 250
2.5% cash discount for full settlement within 14 days Net 30 days
492.50
Excel Fashions will pay £480.18 (£492.50 x 97.5%, rounded down) for settlement in full within 14 days.
description
5
invoice no your reference
8234
date
today
unit price £
5.00 4.00 0.50
unit box 10 each
total
trade discount %
net
25.00 40.00 125.00
0.00 0.00 0.00
25.00 40.00 125.00
£
TOTAL
The Card Shop will pay £185.25 (£190.00 x 97.5%) for settlement in full within 14 days.
190.00
£
4.4
Dr 20-4 2 Feb 16 Feb
G Lewis G Lewis
Sales £ 20-4 4 Feb 7 Feb
Dr 20-4
Dr
20-4 10 Feb 10 Feb 24 Feb 24 Feb Dr
20-4 4 Feb
Dr
20-4 7 Feb
Dr
20-4 12 Feb 20 Feb
Bank Discount received Bank Discount received
Sales
Sales
L Jarvis G Patel
20-4 12 Feb 20 Feb
£ 190 10 152 8 360 £ 150
150
£ 240
240
G Lewis
20-4 2 Feb 16 Feb
L Jarvis G Patel
Purchases Purchases
£
L Jarvis G Patel
L Jarvis
20-4 12 Feb 12 Feb
G Patel
20-4 20 Feb 20 Feb
20-4 10 Feb 24 Feb
Bank Discount allowed
Bank Discount allowed
G Lewis G Lewis
20-4 10 Feb 24 Feb
G Lewis G Lewis
Discount Allowed £ 3 6
Cr £ 150 240
20-4
(a) product code
description
quantity
45B
Trend tops (black)
30
35W
Cr
£ 200 160 360
Bank
£ 147 234
4.5
Cr £
Discount Received
Dr
20-4
Dr
Purchases £ 20-4 200 160
Trend tros (white)
20
unit price
unit
12.50
each
£
25.00
5% cash discount for full settlement within 7 days Net 30 days
Cr
£ 147 3 150
(b)
£ 234 6 240
trade net discount %
375.00
10
£
each
500.00
TOTAL
£
10
337.50
450.00
787.50
Trade discount is given, if prearranged: –
to businesses, often in the same trade (but not to the general public)
–
by wholesalers, as a discount off list price to retailers
–
Cr
total
for buying in bulk (this discount is also known as bulk discount)
Cash discount (also known as settlement discount) is given, for prompt payment, if prearranged, and indicated on the invoice
Cr
£ 190 152
4.7
Cr
(c)
Fashion Shop will pay £748.12 (£787.50 x 95%, rounded down) for settlement in full within 7 days.
(a)
A source document is used to update the book-keeping records.
(b)
(i) (ii)
£ 10 8
An invoice is a source document prepared by the seller and states the value of goods sold and, hence, the amount to be paid by the buyer.
A credit note is a source document which shows that the buyer is entitled to a reduction in the amount charged by the seller; it is used if: –
–
Cr
(c)
£
the price charged on the invoice was too high
Any three from:
–
cheque counterfoils
–
cash receipts
–
–
6
some of the goods delivered were faulty, or incorrectly supplied
–
paying-in slip counterfoils till rolls
information from bank statements, such as standing orders, direct debits, BACS, credit transfers, bank charges
4.8
(a)
•
•
•
•
•
•
5 computer desks were ordered (not 10 as shown on the invoice)
CHAPTER 5 Balancing s – the trial balance
10 office chairs were ordered (not 5 as shown on the invoice)
5.1 (a) and (c)
the unit price of the computer desks is £65.00 each (not £70.00 as shown on the invoice)
Dr 20-9 1 Jan 11 Jan 12 Jan 22 Jan
the net amount for computer desks is £292.50 (not £350.00 as shown on the invoice)
the net amount for office chairs is £180.00 (not £20.00 as shown on the invoice)
the invoice total is £472.50 (not £370.00 as shown on the invoice)
(b)
1 Feb 4 Feb 10 Feb 12 Feb 19 Feb 25 Feb 1 Mar
Capital Sales Sales Sales
Balance b/d Sales Sales Rowcester College Sales Sales Balance b/d
Capital £ 20-9 1 Jan
Dr 20-9
Dr 20-9 4 Jan 2 Feb 1 Mar
Dr 20-9 5 Jan 15 Feb
1 Mar
(c)
Wyvern Products Limited will pay £448.87 (£472.50 x 95%) for settlement in full within 14 days.
7
Rent paid Shop fittings Comp Supplies Ltd Balance c/d
Rent paid Shop fittings Comp Supplies Ltd Balance c/d
Cr £ 500 1,500 5,000 6,700 13,700 500 850 6,350 5,300 13,000
Bank
Cr £ 10,000
Bank Bank
Rent Paid £ 20-9 500 28 Feb Balance c/d 500 1,000 1,000
Cr £ 1,000
Bank Bank
Shop Fittings £ 20-9 1,500 28 Feb Balance c/d 850 2,350 2,350
Cr £ 2,350
Purchases £ 20-9 5,000 31 Jan Balance c/d 6,500 11,500
Cr £ 11,500
Balance b/d
Balance b/d
Dr 20-9 7 Jan 25 Jan
Comp Supplies Ltd Comp Supplies Ltd
1 Feb 24 Feb
Balance b/d Comp Supplies Ltd
1 Mar
Bank £ 20-9 10,000 4 Jan 1,000 5 Jan 1,250 20 Jan 1,450 31 Jan 13,700 6,700 2 Feb 1,550 15 Feb 1,300 27 Feb 750 28 Feb 1,600 1,100 13,000 5,300
Balance b/d
11,500 5,500 17,000 17,000
28 Feb
Balance c/d
1,000
2,350
11,500
17,000
17,000
Dr 20-9 20 Jan 31 Jan
5 Feb 27 Feb 28 Feb
Dr 20-9 31 Jan
28 Feb
Bank Balance c/d
Purchases returns Bank Balance c/d
Balance c/d
Balance c/d
Dr 20-9 16 Jan
Sales
1 Feb 26 Feb
Balance b/d Sales
1 Mar
Dr 20-9 27 Jan Dr 20-9
Balance b/d
Rowcester College
Comp Supplies Limited £ 20-9 5,000 7 Jan Purchases 6,500 25 Jan Purchases 11,500 150 1 Feb Balance b/d 6,350 24 Feb Purchases 5,500 12,000 1 Mar Balance b/d Sales £ 20-9 4,550 11 Jan 12 Jan 16 Jan 22 Jan 4,550 11,150 1 Feb 4 Feb 10 Feb 19 Feb 25 Feb 26 Feb 11,150 1 Mar
Bank Bank Rowcester College Bank
Balance b/d Bank Bank Bank Bank Rowcester College
Balance b/d
Rowcester College £ 20-9 850 27 Jan Sales returns 31 Jan Balance c/d 850
750 1,050 1,800 1,050
12 Feb 28 Feb
Bank Balance c/d
Sales Returns £ 20-9 100 Purchases Returns £ 20-9 5 Feb Comp Supplies Ltd
Cr £ 5,000 6,500 11,500 6,500 5,500
(b)
12,000 5,500
Cr £ 1,000 1,250 850 1,450 4,550 4,550 1,550 1,300 1,600 1,100 1,050 11,150 11,150
(d)
Cr £ 100 750 850
5.2
Name of Bank Capital Rent paid Shop fittings Purchases Comp Supplies Limited Sales Rowcester College Sales returns
Name of Bank Capital Rent paid Shop fittings Purchases Comp Supplies Limited Sales Rowcester College Sales returns Purchases returns
Cr £
Cr £ 150
8
Dr £ 6,700
500 1,500 11,500
750 100
Trial balance as at 28 February 20-9
Cr £
10,000
6,500 4,550
21,050
21,050
Dr £ 5,300
Cr £
1,000 2,350 17,000
1,050 100 26,800
Trial balance of Jane Greenwell as at 28 February 20-1 Dr £
Name of Bank Purchases Cash Sales Purchases returns Trade payables Equipment Van Sales returns Trade receivables Wages Capital (missing figure)
750 1,050 1,800
Trial balance as at 31 January 20-9
850 48 2,704 3,200 90 1,174 1,500 9,566
10,000
5,500 11,150 150
26,800
Cr £
1,250
730 144 1,442
6,000
9,566
5.5
Four from:
• • • • • •
Error of omission
(a)
Date 20-2
1 Feb
2 Feb
15 Feb
19 Feb
28 Feb
Date 20-2
8 Feb
14 Feb
18 Feb
Softseat Ltd
Dr
Business transaction completely omitted from the ing records. For example, cash sale omitted from both cash and sales .
20-2
Reversal of entries
£
Debit and credit entries on the wrong side of the two s concerned. For example, cash sale entered wrongly as debit sales , credit cash . Mispost/error of commission
Transaction entered to the wrong person's . For example, a sale of goods on credit to A T Hughes has been entered as debit A J Hughes' , credit sales .
Dr
Error of principle
20-2
Transaction entered in the wrong type of . For example, cost of petrol for vehicles has been entered as debit motor vehicles , credit bank .
Error of original entry (or transcription)
Amount entered incorrectly in both s. For example, sale of £45 entered in both sales and the trade receivable's as £54.
Two errors cancel each other out. For example, balance of purchases calculated wrongly at £10 too much, compensated by the same error in sales .
Details
Invoice
Softseat Ltd
PRK Ltd
Softseat Ltd
High Street Stores
Peter Lounds Ltd
Carpminster College
25 Feb
High Street Stores
28 Feb
Total for month
£
320
529
160
80
984
Total for month
Amount
961
068
Quality Furnishings
Details
Reference
£
Sales Sales
Dr
160
20-2 14 Feb
720
Sales
Dr
Sales Day Book
Invoice 001
002
003
004
Reference
20-2 18 Feb
Amount
Sales
£
440
120
20-2 28 Feb
200 1,080
Dr
9
20-2
Purchases Purchases
PRK Ltd
20-2 2 Feb
20-2 15 Feb
Purchases Day Book
£ 320 160
Cr
Purchases
£ 80
Cr
Purchases
£ 160
High Street Stores
Cr
Peter Lounds Ltd
Cr
Carpminster College
Cr
£ 440 200
£ 120
£ 320
20-2
£
20-2
£
20-2
GENERAL LEDGER
Dr
320
Cr
SALES LEDGER
Dr
20-2 8 Feb 25 Feb
20-2 1 Feb 19 Feb
Quality Furnishings
20-2
Compensating error
Purchases Day Book
£
Dr
CHAPTER 6 Division of the ledger – the use of subsidiary books
6.2
PURCHASES LEDGER
£
Purchases
Cr
Sales
Cr
£ 720
£
20-2
20-2 28 Feb
£
Sales Day Book
£ 1,080
6.3 (a)
Date
20-2
2 May
4 May
10 May
18 May
21 May
25 May
31 May
Date
20-2
18 May
23 May
28 May
31 May
Details
Purchases Day Book
Invoice
Reference
Amount
562
PL 302
190
M Roper & Sons
Wyper Ltd
82
Wyper Ltd
M Roper & Sons
580
M Roper & Sons
589
Wyper Ltd
PL 301
PL 302
91
Total for month
Details
PL 301
86
Purchases Returns Day Book
PL 301
PL 302
200
180
PL 302
30
M Roper & Sons
84
(b) and (c) Dr 20-2 23 May 31 May
PURCHASES LEDGER
Purchases Returns Balance c/d
Wyper Ltd ( no 301) £ 20-2 40 1 May Balance b/d 710 4 May Purchases 10 May Purchases 21 May Purchases 750 1 Jun
Dr 20-2 18 May 28 May 31 May
Purchases Returns Purchases Returns Balance c/d
40
38
Cr
Purchases Returns
Cr
£ 1,118.00
£
Purchases Day Book
quantity
details
unit price
unit
X24
96
Trend tops
£8.50 each
each
20
Jeans
£15 each
Cr £ 100 200 210 240 750
Cr £ 85 190 180 98 553
20-2 31 May
£
product
Y36
M Roper & Sons ( no 302) £ 20-2 30 1 May Balance b/d 38 2 May Purchases 485 18 May Purchases 25 May Purchases 553
20-2
each trade discount 20% total
5% cash discount for full settlement within 7 days Net 30 days
485
10
£ 108.00
(a)
code
108
710
Balance b/d
6.5
£
Balance b/d
1 Jun
Purchases
1,118.00
82
Total for month
20-2
98
M Roper & Sons
PL 301
Purchases Day Book
Dr
240
Amount
PL 302
20-2 31 May
210
Reference
6
Dr
£
Credit Note
Wyper Ltd
GENERAL LEDGER
total amount 816.00
300.00
1,116.00
223.20 892.80
(b)
(c)
(i)
CHAPTER 7 The main cash book
Purchases day book
(ii)
Sales day book
(i)
Trade discount:
7.3
Dr
– given for bulk buying (also known as bulk discount), or for being in the trade, or for regular customers
– deducted from the invoice before entry in the books – usually a larger percentage than cash discount
(ii)
Cash discount (also known as settlement discount):
– given for prompt payment
– not deducted until is paid
– can be disallowed if are not met
– usually a smaller percentage than trade discount
Date
Details
20-7 1 Aug 1 Aug 11 Aug 12 Aug 21 Aug 29 Aug 29 Aug
Balances b/d Wild & Sons Ltd Bank A Lewis Ltd Harvey & Sons Ltd Wild & Sons Ltd Bank
Ref
C
C
Disc allwd £
20 15
Cash
Cash Book
Bank Date
£ £ 276 4,928 398 500 1,755 261 595 275
6.8
Source
Document Invoice for goods sold on
credit to V Singh (a)
Invoice received for
Book
Subsidiary
be debited
to
to
Sales day book
V Singh
Sales
Purchases day
Purchases
Okaro Limited
(b)
Credit note issued to
Sales returns
Sales returns
S Johnson
(c)
Credit note received
Purchases returns
Roper &
Purchases
from Okara Limited S Johnson
from Roper & Company
book
day book day book
Company
1 Sep Balances b/d
be credited
goods bought on credit
35 1,051 7,937 361 3,217
7.4
Dr Date
20-5 1 Mar 3 Mar 8 Mar 11 Mar 13 Mar 22 Mar 25 Mar 29 Mar 31 Mar 31 Mar
returns
*
11
Details Balances b/d Sales* Sales Bank Sales Bank Sales Sales* Hobbs Ltd Pratley & Co
1 Apr Balances b/d
Ref Discount allowed £
C C 30 50
80
Cash
20-7 5 Aug 8 Aug 11 Aug 18 Aug 22 Aug 25 Aug 27 Aug 28 Aug 29 Aug 31 Aug
Cash Book Bank Date
£ £ 106 3,214 100 950 1,680 150 1,800 150 2,108 200 2,000 720 1,160
706 13,632 423 8,259
20-5 2 Mar 5 Mar 9 Mar 11 Mar 16 Mar 18 Mar 20 Mar 22 Mar 26 Mar 27 Mar 30 Mar 31 Mar 31 Mar 31 Mar
Details T Hall Ltd Wages Cash F Jarvis Wages J Jones Salaries Telephone Cash Balances c/d
Ref
Disc recd £ 24
C 33 C 57
Cr
Cash
Bank
£
£ 541
254 436
361 1,051
500 457 628 2,043 276 275 3,217 7,937
Cr Ref Discount Cash Bank received £ £ £ Rent 10674 250 Cleaning expenses 35 Purchases 10675 1,200 Cash 10676 C 150 Postages 50 Telephone 10677 168 Stationery 128 Cash 10678 C 150 Misc expenses 70 Wages 10679 2,000 Electricity 10680 106 Evans & Co 10681 45 855 A Bennett 10682 26 494 Balances c/d 423 8,259 71 706 13,632 Details
An alternative way of showing the transactions of 3 March and 29 March is to record the full amount of sales in the debit cash column, and then to show the amount banked as a separate transfer, ie debit bank, credit cash.
7.6
Standing order Money paid out of the bank directly, at regular intervals, on the business’s order. Usually for the same fixed amount for goods and services supplied
(i)
DR Supplier/Trade payable
DR Bank
Dr
CR Bank
CR Customer/Trade receivable
(a) and (b)
Date 20-6
8.2
Credit transfer for payment by a customer Amounts paid directly into the bank by a trade receivable, who has the necessary bank code information.
(ii)
7.8
CHAPTER 8 Bank reconciliation statements
Details
Disc £
1 Jan Balance b/d
6 Jan R Reed
13 Jan B Brown
4
14 Jan Sales
28 Jan Sales
50
752
642
24 Jan C Denton & Co Ltd C/T
31 Jan Cash
Cash £
C
Bank £ 567
366
248
1,319 4
1 Feb Balance b/d
Cash Book
1,444 50
2,500
Date 20-6
Details
Disc £
1 Jan Balance b/d
2 Jan Bilton Office Supplies
11 Jan Rent
27 Jan Wages
20 Jan British Gas
S/O
31 Jan Bank
C
21 Jan Bank interest
31 Jan Balances c/d
Cash £
3
1,319 3
50
1,444
Bank £
20-6 31 Jan
Dr
20-6
Cash book
£ 4
20-6
Discounts Received £
20-6 31 Jan
Cash book
P GERRARD BANK RECONCILIATION STATEMENT AS AT 31 JANUARY 20-7 £
Balance at bank as per cash book Add: unpresented cheques
1,236
Bryant & Sons P Reid
450
cheque no. 001354
176.50
422
8.3
Cr £
(a) Dr
20-7 1 May 7 May 16 May 23 May 30 May
Balance b/d Cash C Brewster Cash Cash
1 Jun
Balance b/d
1,076.45
Cash Book (bank columns) £ 300 162 89 60 40
651
20-7 2 May 14 May 29 May 16 May 31 May 31 May
P Stone 867714 Alpha Ltd 867715 E Deakin 867716 Standing order: A-Z Insurance Bank charges Balance c/d
428 JANE DOYLE
(b)
BANK RECONCILIATION STATEMENT AS AT 31 MAY 20-7 Balance at bank as per cash book Add:
Cr £ 3
Less:
12
488.50
335.75
Balance at bank as per cash book
2,500
£
923.70
1,412.20
G Shotton Limited
28
Cr £ p 207.95 923.70 1,131.65
312.00
cheque no. 001355
Less: outstanding lodgement
200
422
Discounts Allowed
Cash Book (bank columns) £ p 20-7 Balance b/d 415.15 23 Jan Direct debit: Omni Finance BACS credit: T K Supplies 716.50 31 Jan Balance c/d 1,131.65 Balance b/d 923.70
(b)
Cr
(c) Dr
Dr 20-7 1 Jan 13 Jan 1 Feb
164
75
(a)
unpresented cheque
E Deakin cheque no. 867716 outstanding lodgement cash banked
Balance at bank as per bank statement
£
428 110
538 40
498
Cr
£ 28 50 110 25 10 428 651
8.5
(a)
(i)
(ii)
(iii)
8.7
Standing orders Credit
Regular payments of the same amount made directly from the bank on behalf of the company on the order of the company.
Dr
Date 2003
Direct debits Credit
Payments made from the bank for the customer collected by the payee on the order of the customer usually for changing amounts. Debit or Credit
Credit transfer Balance c/d
Cash Book – Bank £ 540 Balance b/d 534 Standing order Direct debit Bank charges 1,074 Balance b/d
2,459.35
5 Nov B J Patel
3,219.00 √
234.00 √
1,142.00 √ 560.00 √
26 Nov Cash banked
340.00
7,954.35 30 Nov Balance b/d 9 Nov J Black Ltd
C/T
534
2,027.23 246.98
2,274.21 1 Dec Balance b/d
(c)
Date 2003
1 Nov Balance b/d
23 Nov J A Smith Ltd
Cr £ 378 230 420 46 1,074
Cash Book
Bank £ p
5 Nov Dolls and Things
Receipts from customers paid directly into the bank of the payee. Payments to suppliers or wages into the bank of the payee.
Dr
Details
3 Nov Toys for You
Credit transfers
(b)
(a)
1 Nov
1 Nov
10 Nov
12 Nov
23 Nov
25 Nov
25 Nov
30 Nov
12 Nov
18 Nov
23 Nov
30 Nov
Details
Cheque number
Banks Ltd
11346
Books & Paints
Wages
Jones and Son
HGF Finance
Business rates
Bank charges
11349
3,781.95
11351
11352
Balance c/d
Proper Ins Co
276.89
11350
Toy Designs
134.37
11347
11348
Smith and Son
Bank £ p
92.50
139.43
256.00
Cr
√
√
√
√
√
1,245.98
2,027.23
7,954.35 S/O
547.90
S/O
145.65 45.89
Balance c/d
1,534.77
2,274.21
1,534.77
A SMITH AND CO
BANK RECONCILIATION STATEMENT AS AT 31 MARCH 2001 Balance at bank as per cash book
Add:
Less:
£
unpresented cheques
outstanding lodgement (uncleared bankings)
cheque query
Balance at bank as per bank statement
Tutorial note: brackets indicate an overdraft
£
(534)
(b)
469
270
265
(65)
JAMES JOLLY AND CO
BANK RECONCILIATION STATEMENT AS AT 30 NOVEMBER 2003 £
Balance at bank as per cash book Add:
535
(600)
unpresented cheques HGF Finance Toy Designs
Less:
11351
11352
outstanding lodgement cash banked
Balance at bank as per bank statement
13
£
1,534.77
256.00
1,245.98
1,501.98
3,036.75 340.00
2,696.75
CHAPTER 9 Introduction to final s
9.2
TRIAL BALANCE (a) Salaries
√
(b) Purchases
√
(d) Sales returns
√
(f) Vehicle
√
(c) Trade receivables
(e) Discount received
9.5
Debit
(g) Capital
Credit
INCOME
FINAL S
STATEMENT
Debit √
Credit
√
√ √
√
9.7
Debit
Credit
√
√
BALANCE SHEET AS AT 31 DECEMBER 20-4 £ £
Current Assets Inventory Trade receivables
Less Current Liabilities Trade payables Bank overdraft
Net Current Assets or Working Capital NET ASSETS
FINANCED BY Capital Opening capital Add Profit for the year
Less Drawings
13,735
32,335
5,820
√
(ii)
(b)
9.9
9,820 5,500 15,320
(a)
Dr 2002 31 Mar 31 Mar
Dr
2001
Details Balance b/d Monthly total
2001 1 Dec 31 Dec
Details Balance b/d Monthly total
Dr
2001
14
Details
2001 1 Dec 31 Dec Dr
14,375 29,695
Capital £ 2002 12,500 31 Mar 48,341 31 Mar 60,841
1 Apr
Two from: – increased by profit – more capital introduced – reduced by losses – reduced by drawings
Dr
18,600
Details Drawings Balance c/d
Details
£ 56,231 350 56,581
23,980 3,600 4,500 450
Profit for the year
£
25,250 17,756 43,006 13,311 29,695
£
Less expenses: Wages Carriage outwards Motor expenses Bank charges
12,140
17,960
INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 2002
Gross profit Add Discount received
√ √
R MASTERS
(i)
BALANCE SHEET
CLARE LEWIS INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20-4 £ £ Revenue 144,810 Opening inventory 16,010 Purchases 96,318 112,328 Less Closing inventory 13,735 Cost of sales 98,593 Gross profit 46,217 Less expenses: Salaries 18,465 Heating and lighting 1,820 Rent and rates 5,647 Sundry expenses 845 Vehicle expenses 1,684 28,461 Profit for the year 17,756
Non-current Assets Vehicles Office equipment
(a)
Sales £
p
2001 1 Dec 31 Dec
Returns Inwards £ p 1,269.43 236.91
2001
£ p 10,276.41 2,769.56
2001
Purchases
Returns Outwards £
p
2001 1 Dec 31 Dec
32,530 24,051
Details Balance b/d Profit for the year Balance b/d
Details Balance b/d Monthly total
Cr £ 36,790 24,051 60,841
48,341
Cr
£ p 16,493.27 4,560.30
Details
£
Details
£
Details Balance b/d Monthly total
Cr p
Cr p
Cr
£ p 1,039.41 127.50
AMARYLLIS TRADING
(b)
INCOME STATEMENT FOR THE THREE MONTHS ENDED 31 DECEMBER 2001 £
Revenue Less Returns inwards Less Cost of sales: Opening inventory Add Purchases Less Returns out
13,045.97 1,166.91
Add Carriage in
Less Closing inventory Gross profit (c)
9.10
(i) (ii) (iii)
Cost of sales Goods available for sale Net revenue
Date
Today
£
2,560.87 11,879.06 871.26 15,311.19 2,640.96
Subject
Balance sheet queries
1.
Reason:
4. 12,670.23 6,877.00
Date
Details
31 Dec
Inventory
20-8
Capital/Financed by/Represented by
It is cash or goods taken out of the business by the owner, therefore it reduces the capital invested in the business.
Income statement
Inventory valuation at 31 December 20-8 transferred to income statement
Financial ing Student
Reference GL
GL
Dr £
22,600
Cr
£
22,600
(b)
Non-current assets
Date
Details
31 Dec
Income statement
20-8
An asset purchased for use in the business
– not for resale
Telephone expenses
Transfer to income statement of expenditure for the year
– is a tangible asset
Reference GL
GL
Dr £
890
Cr
£
890
(c)
Inventory of dolls for resale Current assets
Date
Details
31 Dec
Drawings
20-8
An asset remaining in the business for the short-term
– less than one year
– the business is expected to sell them shortly
Section:
(a)
– will help generate profits
Reason:
– an amount owed by the business
CHAPTER 10 The general journal and correction of errors
10.2
– will depreciate with use
Section:
Short-term liability
Drawings for the year Reason:
– used over a long period/more than one year
2.
Current liabilities
Tutorial note: the ing treatment for a bill which has not been paid at the balance sheet date – called an accrual of expenses – is covered in detail in Chapter 12
Cost of new delivery van
Section:
Section:
– which needs to be paid within the next 12 months
MEMORANDUM
Mary Arbuthnot, proprietor of Mary’s Doll Shop
Telephone bill due to be paid in one month’s time Reason:
£12,670.23 £15,311.19 £19,547.23
To
From
3.
£ 21,053.57 1,506.34 19,547.23
Motoring expenses
Transfer of private motoring to drawings
continued
15
Reference GL
GL
Dr £
200
Cr
£
200
(d)
(c)
Date
Details
31 Dec
Drawings
20-8
Purchases
Goods taken for own use
by the owner
Reference GL
GL
Dr £
175
Cr
Date
£
Date
31 Dec
Details Bad debts written off
N Marshall
of N Marshall written off as a
175
Vehicle expenses
Correction of error – vehicle no ............
(a) Date
Reference GL
SL
Dr £
125
Cr
(d)
£
Date
125
J Rigby Sales
Sales invoice no ............. omitted from
Date
H Price Limited
H Prince
Correction of mispost – cheque no .....:
GL
£
10,000
Reference
SL
GL
Dr £
150
(e)
Cr
£
Date
150
£
GL
55
Postages
GL
55
GL
GL
on ...................
Reference
Dr
Postages
Correction of reversal of entries
Cr £
10,000
Cr
£
55 55
110
110
Dr
Cr
compensating error Details Purchases
Purchases returns
Correction of under-cast on purchases
Reference GL
GL
£
100
£
100
and purchases returns on .......(date).......
(f)
mispost/error of commission Details
Details
Bank
the s.
(b)
GL
Dr
reversal of entries
Bank
error of omission Details
Reference
invoice no ...............
bad debt - see memo dated ...................
10.4
Details Delivery van
(e) 20-8
error of principle
Reference PL
PL
Dr £
125
Date
Cr
£
error of original entry Details L Johnson
125
16
GL
89
L Johnson
SL
received on ....(date)....
£
98
GL
Correction of error – cheque for £89
Dr
SL
Bank Bank
to H Price Limited
Reference
187
Cr
£
98 89
187
10.6
(a)
(b)
Two from: trial balance – – bank reconciliation statement control s (see Chapter 11) –
(c)
An error of principle has occurred.
JOURNAL
Dr £
(1)
Sales
270
(2)
Returns inwards
500
Returns inwards
300
Suspense
400
Suspense Suspense
Suspense
(3) (4)
Yes
Error
Discount received J Jones
350
A Jones
The sales has been totalled incorrectly.
Cr
3
An invoice has been completely omitted from the books.
£
A cheque has been debited in the cash book as £150 but credited in the customer’s as £105.
270 500
10.10
300
(a)
Dr
Date 2004
30 Apr
400
Details Balance per T/B
Suspense £
450
450
Date 2004
30 Apr 30 Apr
No
3 3
3
Details Sales Rent paid
Cr £
200 250 450
350
Tutorial note: The mispost between J Jones and A Jones needs to be corrected in the sales ledger,
10.8
(a) and (b)
but has no effect on suspense .
H G PATEL: TRIAL BALANCE AS AT 30 APRIL 2003
Wages istration costs Capital Property Motor vehicles Motor expenses Purchases Revenue (Sales) Returns outwards Carriage inwards Carriage outwards Discount received Drawings Suspense TOTAL
Dr £ 23,890 6,000
65,000 5,000 1,650 38,900 367 450
6,900 15,676 163,833
Tutorial notes: •
Cr £
•
Error (2) is an error of original entry which affects both the debit and credit side of the trial balance by the same amount, and will not be revealed by the trial balance. Such an error is not entered in the suspense .
Error (3) has been entered in the suspense , above, as the net amount of £250 (ie £650 – £400); as an alternative, it could have been entered as –
60,000
–
(b) 98,000 3,698 (c)
163,833
17
credit £650 (to enter the correct amount in rent paid )
Error of commission (or mispost): •
•
2,135
debit £400 (to take out the old amount in rent paid )
example – payment to A Brown entered to B Brown’s
explanation – although the entry has been misposted to the wrong person’s , the trial balance will still balance because the entry has been made on the correct side of the .
Sales ledger control (see Chapter 11)
10.11
Jonathon Smith Corrected Profit for the year ended 30 November 2004 1.
Profit calculated by Jonathon
Sales undercast
2.
Discount allowed (2 x £140)
4.
Non-current asset
6.
Closing inventory (reduction in cost of sales)
3. 5.
Wages
Error of commission – no effect on profit Corrected profit
CHAPTER 11 Control s
11.3
(a)
Dr 20-8 1 Feb 3 Feb
Balance b/d Sales
1 Mar
Balance b/d
Dr 20-8 1 Feb Dr 20-8 1 Feb 3 Feb
Balance b/d
Balance b/d Sales
Dr 20-8 1 Feb 17 Feb
Balance b/d Sales
1 Mar
Balance b/d
Dr 20-8 1 Feb 17 Feb
Balance b/d Sales
1 Mar
Balance b/d
add
20-8
£
1 Feb
26,790
28 Feb
450
less
280
less
Balances b/d Credit sales
£ p
2,012.43
1,288.76
3,301.19
34,060
338.59
1 Mar
B Brick (Builders) Limited £ p 20-8 59.28 28 Feb Bad debts written off
Cr £ p 59.28
Mereford Manufacturing Company £ p 20-8 293.49 24 Feb Sales returns 127.48 28 Feb Set-off: purchases ledger 420.97
Cr £ p 56.29 364.68 420.97
Redgrove Restorations £ p 20-8 724.86 7 Feb Sales returns 394.78 28 Feb Balance c/d 1,119.64 954.26
Wyvern Warehouse Limited £ p 20-8 108.40 15 Feb Bank 427.91 15 Feb Discount allowed 28 Feb Balance c/d 536.31
(c)
Cr £ p 805.74 20.66 338.59 1,164.99
Balances b/d
Sales returns
28 Feb
Cash discount allowed
28 Feb
Cr £ p 165.38 954.26 1,119.64
Dr
2001 1 Mar 31 Mar
Set-off: purchases ledger Bad debts written off Balances c/d
221.67
911.43
23.37
364.68
59.28
1,720.76
3,301.19
Reconciliation of sales ledger control with trade receivable balances
Balance b/d Returns Set-off: sales ledger Discounts Cash paid Balance c/d Balance b/d
Cr £ p 105.69 2.71 427.91 536.31
28 Feb
Cheques received from trade receivables
1,720.76
1 February 20-8 £ p 826.40 59.28 293.49 724.86 108.40 2,012.43
Arrow Valley Retailers B Brick (Builders) Limited Mereford Manufacturing Company Redgrove Restorations Wyvern Warehouse Limited Sales ledger control
11.5
Cr
£ p
28 Feb
28 Feb
100
Arrow Valley Retailers £ p 20-8 826.40 20 Feb Bank 338.59 20 Feb Discount allowed 28 Feb Balance c/d 1,164.99
20-8
28 Feb
9,500
SALES LEDGER
427.91
Sales Ledger Control
2,500
add add
(b) Dr
Purchase Ledger Control £ 465 4,679 475 3,674 236,498 24,742 270,533
749
2001 1 Mar 31 Mar
Balance b/d Purchases Cash refunds Balance c/d
Balance b/d
28 February 20-8 £ p 338.59 – – 954.26 427.91 1,720.76
Cr
£ 23,437 245,897 450 749 270,533
24,742
Tutorial note: The cash purchases figure of £25,679 is not shown in the control because it does not involve the s of trade payables – it is a cash purchase (ie debit purchases; credit bank/cash)
18
11.6
Dr
20-5 1 Jan 31 Jan 31 Jan
Balance b/d Sales Returned cheque
1 Feb
Balance b/d
Sales Ledger Control £ 44,359 27,632 275
72,266
20-5 31 Jan 31 Jan 31 Jan 31 Jan 31 Jan
Bank Discount allowed Sales returns Set-off: purchases ledger Balance c/d
44,884
CHAPTER 12 Adjustments to final s
Cr
£ 23,045 1,126 2,964 247 44,884 72,266
12.1
12.2
Tutorial note: The mispost of £685 between J Hampton and Hampton Limited needs to be corrected in the sales ledger, but has no effect on the control . 11.7
(a)
Dr
2003
1 Nov 30 Nov
1 Dec Dr
2003
30 Nov 30 Nov
30 Nov 30 Nov
(b)
(c)
•
•
Details
Balance b/d Sales
Balance b/d
Details
Returns outwards Bank (payments to suppliers) Set-off: sales ledger Balance c/d
Sales Ledger Control £
5,476 26,500 31,976
2003 Details
30 30 30 30
Nov Nov Nov Nov
Returns inwards Bank (receipts from customers) Set-off: purchases ledger Balance c/d
12,086
Purchases Ledger Control £
450
16,300 400 5,410 22,560
2003 Details
1 Nov Balance b/d 30 Nov Purchases
1 Dec Balance b/d
£
£
•
12.7
2,960 19,600
The balances of the individual s of trade receivables in the sales ledger are totalled.
Less expenses: Insurances Vehicle expenses Wages and salaries 86,060 + 3,180 Discount allowed Rates and insurance 6,070 – 450 General expenses Depreciation: vehicles 12,000 x 20% furniture and fittings 25,000 x 10%
The balances of the individual s of trade payables in the purchases ledger are totalled.
19
70,000 280,000 350,000 60,000
9,700 3,100 1,820 36,050 13,750
HAZEL HARRIS INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20-4 £
Less Closing inventory Cost of sales Gross profit Add Discount received
5,410
A control may indicate that there is an error within a ledger section but it will not pinpoint where the error has occurred.
SOUTHTOWN SUPPLIES
INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20-9 £
Revenue Opening inventory Purchases
22,560
Some types of errors (such as a mispost/error of commission) will not be revealed by the control . Thus the s will be thought to be correct when they are not.
Expense in income statement of £1,800; balance sheet shows computer rental prepaid (current asset) of £150.
Expense in income statement of £2,852; balance sheet shows rates prepaid (current asset) of £713.
Profit for the year
Cr
•
(c)
(b)
Less Closing inventory Cost of sales Gross profit Less expenses: Rent and rates 10,250 – 550 Electricity Telephone Salaries 35,600 + 450 Vehicle expenses
590 18,900 400 12,086 31,976
These totals should agree with the balances of sales ledger control and purchases ledger control respectively.
Expense in income statement of £56,760; balance sheet shows wages and salaries accrued (current liability) of £1,120.
Revenue Opening inventory Purchases
Cr
•
(a)
Profit for the year
63,000 465,000 528,000 88,000
8,480 2,680 89,240 10,610 5,620 15,860 2,400 2,500
£ 420,000
290,000 130,000
64,420 65,580
£ 614,000
440,000 174,000 8,140 182,140
137,390 44,750
Non-current Assets Freehold land Vehicles Furniture and fittings Current Assets Inventory Trade receivables Prepayment of expenses
BALANCE SHEET AS AT 31 DECEMBER 20-4 £ £ Cost Prov for dep'n 100,000 – 12,000 4,800 25,000 5,000 137,000 9,800
Less Current Liabilities Trade payables Accrual of expenses Bank
41,850 3,180 2,000
Net Current Assets or Working Capital
47,030
Less Current Liabilities Trade payables Bank Accrual of expenses
12.10
Dr
Date
BETH DAVIS
Profit for the year
(a)
2007
55,217 1,864 4,963 2,246 395 868 2,400
28,176 3,641 163 310 32,290
13,459
31 May
31 May 1 Jun
67,953 27,421
20
Details Cash/bank
Balance c/d Balance b/d
£
12,000 4,800 7,200
18,831 26,031 20,806 27,421 48,227 22,196 26,031
Less Drawings
INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20-8 £ £ 95,374
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%
£
FINANCED BY Capital Add Profit for the year
125,000 44,750 169,750 24,000 145,750
Less Drawings
10,290 3,084 85
Net Current Assets or Working Capital NET ASSETS
93,550 220,750
75,000 145,750
FINANCED BY Capital Opening capital Add Profit for the year
£
Non-current Assets Shop fittings at cost Less provision for depreciation 2,400 + 2,400 Net book value Current Assets Inventory Trade receivables Cash Prepayment of expenses
88,000 52,130 450 140,580
Less non-current Liabilities Bank loan NET ASSETS
12.9
BALANCE SHEET AS AT 31 DECEMBER 20-8
£ Net book value 100,000 7,200 20,000 127,200
Telephone £
2,400
130
2,530 210
Date Details
2007
31 May Income statement 31 May Balance c/d
1 Jun Balance b/d
Cr £
2,320
210
2,530 130
(b)
CHAPTER 13 Business organisations
13.2 MEMORANDUM
•
•
The final s of a sole trader comprise: –
–
income statement balance sheet
The income statement shows:
income minus expenses equals profit (or loss)
To:
The Owner, Beta Batteries
•
The balance sheet shows:
Date:
Today
•
Assets are items owned by the business; liabilities are amounts owed by the business; capital is the amount of the 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”.
From:
Subject:
Student ant
of J Booth 13.3
I note that a customer of Beta Batteries, J Booth, has been declared bankrupt whilst owing you £350. You are of the opinion that none of the debt will be recovered.
(b)
The ing treatment is that the amount of £350 should be treated as a bad debt written off. To do this you will need to:
assets minus liabilities equals capital
Where no partnership agreement exists, then the following ing rules from the Partnership Act 1890 must be followed: •
profits and losses are to be shared equally between the partners
•
partners are not entitled to receive interest on their capital
•
– debit bad debts written off
– credit J Booth’s in your sales ledger
•
If you use a sales ledger control you should also credit this memorandum with the amount.
•
For the year end s, you will need to transfer the amount of the bad debt to income statement as an expense:
no partner is entitled to a salary
interest is not to be charged on partners’ drawings
when a partner contributes more capital than agreed, he or she is entitled to receive interest at five per cent per annum on the excess
Note: the question asks for any three provisions.
– debit income statement
13.5
– credit bad debts written off
The effect of writing off this bad debt will be to reduce your profit for the year by £350 and, at the same time, the trade receivables’ figure in your balance sheet will be reduced by the amount, so reducing the net assets of the business.
Points to cover include: *
Definition of a limited company –
separate legal entity
–
managed by directors
–
•
Types of companies –
public limited company
–
company limited by guarantee
–
•
private limited company
Advantages of forming a limited company –
limited liability
–
ability to raise finance
–
–
–
21
owned by shareholders
separate legal entity hip
other factors
(d)
CHAPTER 14 ing concepts and inventory valuation
14.1
•
•
•
Going concern concept
•
14.2
Accruals concept
14.5
Examples: The accrual of an expense in income statement which has been used in the ing period but not yet paid for. The prepayment of an expense for the next ing period. The recording of opening and closing inventories. The use of trade receivables' and trade payables' s to record amounts owing to the business, or owed by the business. Materiality concept
This means that some items in s have such a low monetary (money) value that it is not worthwhile recording them separately. Examples include:
14.8
small expense items which may not justify their own separate expense and are, instead, grouped together in a sundry expenses
end-of-year quantities of office stationery are often not valued for the purpose of final s because the amount is not material and does not justify the time and effort involved
low-cost non-current assets are often charged as an expense in income statement because, while strictly these should be treated as non-current assets and depreciated each year, in practice they are treated as income statement expenses as the amounts involved are not material – such as a calculator, a stapler
Materiality depends very much on the size of the business – what is material and what is not becomes a matter of judgement. Business entity concept
This refers to the fact that final s record and report on the activities of a particular business. For example, the personal assets and liabilities of those who play a part in owning or running the business are not included on the business balance sheet.
(a)
The concept of prudence means
–
–
–
(b)
–
–
–
(c)
not anticipating profit until it is reasonably certain that it will be realised
–
provision for doubtful debts (see Chapter 15)
(a)
The kettle should be valued at £16.
(b)
Inventory should be valued at the lower of cost or net realisable value whichever is the lower.
Workings: £31 – £15 = £16 net realisable value (which is lower than the cost of £18) This is an example of using the prudence concept.
Gross Profit
Profit for the year
Current Assets
Current Liabilities
Capital
increase £4,000
decrease £4,000
1.
Accruals
2.
Consistency
no change
decrease £15,000
no change
no change
decrease £15,000
3.
Prudence or Consistency
decrease £18,000
decrease £18,000
decrease £18,000
no change
decrease £18,000
4.
Business entity
no change
increase £13,000
no change
no change
no change
14.10
providing for all known liabilities
(a)
no change
decrease £4,000
no change
jacket, £40 (note: replacement cost is not applicable here) shirt, £25 suit, £80
not giving an over-optimistic presentation of the business
tros, £25 – £10 = £15
not overstating the value of assets
electric tro press, £80
valuation of inventory, at the lower of cost and net realisable value
(b)
depreciation of non-current assets, to measure the amount of the fall in value of non-current assets over time
• •
bad debts written off, to reduce the trade receivables’ figure to give a realistic view of the amount that the business can expect to receive
provision for doubtful debts (see Chapter 15), to reduce the trade receivables’ figure
The concept of consistency means that, when a business adopts particular ing policies, it should continue to use such policies consistently
bad debts written off
depreciation of non-current assets
Concept
Examples (question asks for one example):
–
–
By applying the consistency concept, direct comparison between the final s of different years can be made.
This means that expenses and income for goods and services are matched to the same time period.
–
valuation of inventory
–
Example: As a going concern, non-current assets are valued at cost, less accumulated depreciation to date; inventory is valued at cost (unless net realisable value is lower).
–
–
–
This presumes that the business to which the final s relate will continue to trade in the foreseeable future. The income statement and balance sheet are prepared on the basis that there is no intention to reduce significantly the size of the business or to liquidate the business. If the business was not a going concern, assets would have very different values, and the balance sheet would be affected considerably.
–
Examples (question asks for one example)
•
22
The prudence concept says that final s should always, where there is any doubt, report a conservative figure for profit or the valuation of assets.
In inventory valuation it is applied by using the lower of cost and net realisable value. (Note that net realisable value is the selling price of the goods, less further costs to get the inventory into a saleable condition.) A lower closing inventory figure means that profits are not overstated – thus the amount drawn by the owner(s) will be reduced, so helping to ensure the continued financial viability of the business.
(b)
CHAPTER 15 Further aspects of final s
15.2
Dr 20-7 31 Dec
31 Dec
Dr 20-7 31 Dec
31 Dec 20-8 1 Jan
Dr 20-7 31 Dec
20-8 1 Jan
15.4
Balance b/d (accrual of income) Income statement
Balance b/d (accrual of income) Income statement
Balance b/d (accrual of income)
Income statement
Balance b/d (accrual of income)
Advertising Income £ 20-7 150 31 Dec Bank/Cash (receipts for year) 2,820 31 Dec Balance c/d (accrual of income) 2,970 250
20-8
Rent Income £ 20-7 19,260 31 Dec Balance b/d (prepayment of income) 31 Dec Bank/Cash (receipts for year) 31 Dec Balance c/d (accrual of income) 19,260 120
20-8
Cr £ 1,250
20-0
1,250
•
(c)
Provision for Doubtful Debts £ 20-9 1,000 31 Dec Income statement
Balance c/d
20-0 1 Jan
Cr £ 1,000
Balance b/d
1,000
Income statement (expenses)
debit bad debts written off £420
debit provision for doubtful debts £1,000
Explanation: profit for the year is reduced by £1,420
Cr £ 2,720
•
250
Balance sheet
Trade receivables £39,000
Workings: £40,420 – £420 bad debts = £40,000 – £1,000 provision for doubtful debts = £39,000 net trade receivables
2,970
Explanation: current assets are reduced by £420 + £1,000 = £1,420
15.6
Year
Cr £ 850
Income statement
Bad debts written off
18,290 120
19,260
£
20-5
1,800
20-7
1,400
20-6
2,400
Expense
Increase in provision for doubtful debts £
Income
Bad debts recovered
2,585
245
£
150
Decrease in provision for doubtful debts £
110
Trade receivables (after bad debts written off)
Balance sheet
Less prov for doubtful debts
£
£
Webster Limited T Smith Khan and Company
Bad Debts Written Off £ 20-9 110 31 Dec Income statement 210 100 420
Cr £ 420 420
23
£
2,585
100,815
108,800
2,720
106,080
113,200
2,830
20-5
(£105,200 – £1,800) x 2.5% = £2,585 creation of provision
20-7
(£110,200 – £1,400) x 2.5% = £2,720 – £2,830 = £110 decrease in provision
20-6
Net trade receivables
103,400
Workings for doubtful debts provision:
(a)
Dr 20-9 31 Dec 31 Dec 31 Dec
Commission Income £ 20-7 100 31 Dec Bank/Cash (receipts for year) 1,150 1,250
Dr 20-9 31 Dec
(£115,600 – £2,400) x 2.5% = £2,830 – £2,585 = £245 increase in provision
110,370
15.8
(a)
Straight-line method £ 3,000
Year 1
Year 2
(b)
20-8 1 Jan 1 Oct 1 Oct
20-9 1 Jan
3,000
Depreciation is not a method of providing a fund of cash which can be used to replace the asset at the end of its life Profits are lower after depreciation has been deducted – this may discourage drawings from the business
Balance b/d Disposals (part-exchange allowance) Bank (balance paid by cheque)
27,000
Disposals Balance c/d
£ 7,200 3,000 10,200 £
£ 12,000 15,000
Disposals Balance c/d
20-9
1 Jan
Balance b/d Income statement Balance b/d
Vehicles Income statement (profit on sale)
(d) Non-current assets Vehicles
£ 12,000 700
20-8 1 Oct
1 Oct
12,700
£ Cost
15,000
£ Prov for dep’n 3,000
Net book value
21,875
£ 7,200 3,000 10,200 £
Workings
£
Trade-in value
8,000
Profit on disposal
2,000
Non-current Assets Machinery at cost Less prov for depreciation Net book value
6,000
GORG HAMMAN
BALANCE SHEET AS AT 31 DECEMBER 2003
Current Liabilities Trade payable – instalment due on machine
£ 5,500
£
176,000 123,500 52,500
(£170,000 – £24,000 + £30,000) (£105,000 – £18,000 + £36,500)
(11,000)
Tutorial notes: • depreciation for 2003 is calculated at 25% straight-line method (being the rate applied to the old machine) • therefore depreciation on remaining machinery is £170,000 – £24,000 = £146,000 x 25% = £36,500
7,200 12,700
£ Net book value 12,000
3,125
Profit on disposal of old machine = £2,000
(b)
Cr
Cr
BALANCE SHEET EXTRACT AS AT 31 DECEMBER 20-8
25,000
Net book value at date of trade-in
3,000
Vehicles (part-exchange allowance) Prov for depreciation
£
Vehicle at cost
£24,000 – £18,000 depreciation = £6,000 net book value
£
Disposals – Vehicles
Dr
(a)
27,000
20-9
20-8 1 Jan 31 Dec
15.13
Cr
Provision for Depreciation – Vehicles
(c) 20-8 1 Oct 31 Dec
9,500
20-8 1 Oct 31 Dec
£ 15,000
Balance b/d
Dr
20-9
£ 12,000 5,500
BALANCE SHEET EXTRACT AS AT 31 DECEMBER 20-9
Non-current Assets
Tutorial note: Do not deduct the trade in allowance from the cost price of the new vehicle – the cost price is £25,000.
It is an ing adjustment
Vehicles
£20,000 – £12,500 – £4,000 = loss of £3,500
Less provision for depreciation
•
(b) 20-8 1 Oct 31 Dec
1,440 (60%) or 2,400 (to disposal)
Depreciation is a non-cash expense
•
(a) (b)
•
•
15.11 (a) Dr
15.12
Reducing balance method £ 3,600
24
15.16
16.4
THOMAS SALMON
INCOME STATEMENT FOR THE YEAR ENDED 30 NOVEMBER 2004 Gross profit
£
Discount received
119
Rent receivable Wages
Bad debts
Rent and rates
Other expenses
Discount allowed
Income in provision for doubtful debts Depreciation of fixed assets
Loss on sale of van
720
69,611 26,320 340
4,630
21,435 286
*230
**
***
***100
7,270
(b)
(a)
£27,000 provision for depreciation at start of year – £6,000 depreciation on van sold = £21,000, which is deducted from £30,000 provision for depreciation at end of year = £9,000 depreciation for year (as shown in income statement)
Capital expenditure
cost of van
air conditioning
fitted shelving
total
(b)
Revenue expenditure
tax disc
16.5
£ 2,000 1,900 100
11,650 550
350
165
450
total
•
Depreciation, using the straight-line method, at present is £15,000 (see above)
•
Therefore reducing balance depreciation is £3,000 less this year than straight-line method, so profit will increase from £8,100 (see above) to £11,100.
Reducing balance depreciation will be 20% (£150,000 – £90,000) = 20% x £60,000 = £12,000
JOHN HENSON INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20-8
Less expenses: Vehicle running expenses 1,480 + 230 Rent and rates Office expenses 2,220 – 120 Wages and salaries Depreciation: office equipment vehicle
12,550
insurance
tank of fuel
• Rent £2,500 – £220 prepaid
Workings:
Less Closing inventory Cost of sales Gross profit Add income: Discounts received
£
220 40
875
117,800 8,100
• Wages £74,750 + £650 owing
Revenue Opening inventory Purchases
cost of extended warranty
152,500 125,900
New profit: £11,100 •
CHAPTER 16 Preparing sole trader final s 16.1
£ 278,400
• Depreciation £150,000 x 10%
62,341
£1,120 – £890 = £230
Net book value (£8,000 – £6,000) Sale price Loss on sale
ABEL BROWN
INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2001 £ Revenue Less Cost of sales: Opening inventory 12,700 Purchases 153,900 166,600 Less Closing inventory 14,100 Gross profit Less expenses: Wages 75,400 Rent 2,280 Other expenses 25,120 Depreciation 15,000 Profit for the year Workings:
**9,000
Profit for the year *
£
68,772
Add income:
Less expenses:
(a)
25
Profit for the year
£
6,250 71,600 77,850 8,500
1,710 5,650 2,100 18,950 1,000 3,000
£ 122,000
69,350 52,650
285 52,935
32,410 20,525
BALANCE SHEET AS AT 31 DECEMBER 20-8 Non-current Assets Office equipment Vehicle
£
Net book value
12,000
3,000
9,000
10,000
22,000
9,000
Net revenue
18,000
Opening inventory
Purchases 280,797 – 2,170 goods for own use Less Closing inventory Cost of sales
Less expenses:
725
Wages 128,528 + 1,383
Motor expenses 47,870 – 18,500 Rates
Insurances 7,780 – 286
4,910 5,140
Bad debts written off General expenses
Provision for depreciation:
9,430
property
27,430
equipment
motor vehicles
FINANCED BY Capital
Opening capital
Add Profit for the year Less Drawings
39,771
586,624
278,627 318,398
40,135
278,263
308,361
129,911
29,370 7,810
7,494
1,368
33,713 2,900
1,140
13,448
Profit for the year
20,000
£
587,461
837
Gross profit
14,570
230
£
Less Returns inwards
120
Bank
NET ASSETS
Revenue
5,225
Prepayment of expenses
Net Current Assets or Working Capital
4,000
INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 2006
8,500
Trade receivables
Accrual of expenses
1,000
KEN TUCKY
(a)
£
Prov for dep'n
Current Assets
Trade payables
£
Cost
Inventory
Less Current Liabilities
16.6
227,154
81,207
Depreciation calculations
20,525
40,525
•
Property: £145,000 x 2% = £2,900
•
Motor vehicles £42,000 + £18,500 acquisition = £60,500 – £26,880 depreciation to date = £33,620 x 40% = £13,448
•
13,095
27,430 (b)
Additional information 4 •
This is a prepayment of expenses.
•
The amount will be shown as a current asset in the balance sheet.
• •
•
26
Equipment: £11,400 x 10% = £1,140
The amount is deducted from the expense to be shown in income statement, ie £7,780 expense – £286 prepayment = £7,494 to income statement. The £286 will be included in the cost for insurances charged to next year’s income statement.
The ing concept is accruals (or matching) – expenses and revenues for goods and services are matched to the same time period, here the year ended 31 March 2006.
(b)
Additional information 5 •
• • •
(c)
• •
•
•
16.8
(a)
Workings:
The owner has taken some of the goods in which the business trades for his own use.
The amount, here £2,170, is deducted from purchases and added to the owner’s drawings (which will be deducted from capital in the balance sheet).
The ing concept is prudence.
SIOBHAN HUGGETT
Cost of sales
Reduction in provision for doubtful debts
Wages and general expenses
Business rates
Bad debts written off
Provision for depreciation: fixtures and fittings
vehicles
Loss for the year
16.9
122,500
170,600
Add income:
Less expenses:
293,100
131,200
Gross profit
(b)
Example of capital expenditure: purchase of fixtures
(c)
Capital expenditure is expenditure incurred on the purchase, alteration or improvement of fixed assets.
Example of revenue expenditure: wages and general expenses
WULLIE McDUFF
(a)
INCOME STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER 2005
Gross profit
£
Add income:
Bad debts recovered
40
Less expenses:
117,800
Wages
13,330
Rent and rates
750
General expenses
Bad debts written off
10,800
Loss on sale of vehicle
Provision for depreciation: property
174,520
vehicles
3,880
27
Loss for the year
£
807,850
100
Reduction in provision for doubtful debts
170,640
31,840
Provision for depreciation of vehicles: £160,000 – £80,400 depreciation to date = £79,600 x 40% = £31,840
Capital expenditure is shown on the balance sheet (subject to the ing concept of materiality), while revenue expenditure is an expense in the income statement. It is important to classify these items of expenditure correctly in the ing system so that the final s report reliably on the financial state of the business – profit is stated accurately and the balance sheet shows the assets owned by the business.
£
123,400 8,700
Provision for depreciation of fixtures and fittings: £85,000 + £23,000 acquisition = £108,000 x 10% = £10,800
Revenue expenditure is expenditure incurred on running expenses.
INCOME STATEMENT FOR THE YEAR ENDED 30 APRIL 2004
Less Closing inventory
Business rates: £13,510 – £180 prepayment = £13,330
•
If a provision is not made, then profits will be overstated by the amount of doubtful debts.
Purchases
Wages and general expenses: £116,200 + £1,600 accrual = £117,800
•
Creation of a provision for doubtful debts is shown as an expense in income statement, and deducted from trade receivables in the balance sheet.
7,800
Provision for doubtful debts: £9,000 trade receivables x 3% provision = £270, which is deducted from £310 existing provision = £40 reduction in provision for doubtful debts
Closing inventory: valued at the lower of cost, £8,700, and net realisable value, £11,500
•
A provision for doubtful debts should be created so that the balance sheet figure of net trade receivables is a reliable estimate of the amount that will be received.
Revenue
• •
The ing concept is business entity which keeps separate from the business the personal assets and liabilities of the owner.
Opening inventory
Purchases: £149,400 – £3,000 goods for own use – £23,000 fixtures = £123,400
•
The reason for reducing purchases is to ensure that only those purchases used in the business are recorded, which are then matched to the sales derived from them.
£
•
65
808,015 748,432 12,140
37,898
760
200
2,400
7,500
809,330
1,315
Workings:
•
•
•
•
•
•
(b)
CHAPTER 17 Financial statements of limited companies
Provision for doubtful debts: £35,000 trade receivables x 2.5% provision = £875, which is deducted from £940 existing provision = £65 reduction in provision for doubtfut debts.
17.1
Rent and rates: £12,460 – £320 prepayment = £12,140
(a)
General expenses: £36,980 + £918 accrual = £37,898
•
Loss on sale of vehicle: £20,000 cost – £15,000 depreciation to date = £5,000 net book value at date of sale – £4,800 sale proceeds = £200 loss on sale. Provision for depreciation of property: £120,000 x 2% = £2,400
Provision for depreciation of vehicles: £60,000 – £30,000 depreciation to date = £30,000 x 25% = £7,500
The private limited company is the most common form of limited company and is defined as ‘any company that is not a public company’ (Companies Act 2006). Many private limited companies are small companies, often in family ownership and it would seem appropriate for Wullie McDuff to consider this form of business organisation.
(b)
•
(c)
•
(d)
Advantages include: •
•
• •
limited liability – the shareholders of the company can only lose the amount of their investment (together with any money unpaid on their shares); the personal assets of the shareholders are not available to the company’s trade payables
17.2
separate legal entity – a limited company is separate from the owners
ability to raise finance – the smaller company can raise funds from venture capital companies, relatives and friends; debentures can be issued to raise long-term finance from lenders and investors
•
17.4
documentation – there is more documentation – eg the preparation of formal annual s – for a company to produce than for a sole trader business; the costs of istering a company are higher than for a sole trader
•
Market value is the price at which issued shares are traded, ie bought and sold.
Capital reserves are created as a result of a non-trading profit; examples include revaluation reserve, share . Revenue reserves are retained profits from the income statement; examples include retained earnings, general reserve.
A bonus issue is the capitalisation of reserves – either capital or revenue – in the form of free shares issued to existing shareholders in proportion to their holdings; no cash flows into the company.
A rights issue is the raising of cash by offering shares to existing shareholders, in proportion to their holdings, at a favourable price.
corporation tax is shown in the income statement, and any amount not yet paid is shown as a current liability on the balance sheet
(a)
directors' remuneration is shown as an expense in the income statement dividends paid are shown in the statement of changes in equity
revaluation reserve is shown as a capital reserve as a part of the equity section of the balance sheet
goodwill is shown as an intangible asset in the non-current assets section of the balance sheet; it is amortised in the same way as tangible non-current assets are depreciated
MASON MOTORS LTD INCOME STATEMENT (EXTRACT) FOR THE YEAR ENDED 31 DECEMBER 20-1 Profit from operations Finance costs
Profit before tax
Conclusion
•
•
Nominal value is the face value of a share which is entered in the s, eg 5p, 10p, 25p, 50p or £1.
(c)
(f)
hip – all ordinary shareholders have voting rights, so Wullie may lose some control of the business
•
Preference shares usually carry a fixed rate of dividend which is paid in preference to that of ordinary shareholders. In the event of the company ceasing to trade, the preference shareholders will also receive repayment of capital before the ordinary shareholders.
debenture interest is shown as an expense in the income statement
(b)
(e)
a limited company may have a higher standing and status in the business community, allowing it to benefit from economies of scale, and making it of sufficient size to employ specialists
•
Ordinary shares are the most commonly issued class of share. They take a share of the profits which remain after all other expenses of the business. The main risk of ordinary shares is that part or all of the value of the shares will be lost if the company loses money or becomes insolvent.
(a)
(d)
Disadvantages include
•
•
Tax
Profit for the year
Wullie must consider the advantages and disadvantages of changing his business into a private limited company. If he is seeking to expand the business and raise finance, it would be sensible to consider this option. At the same time he would gain the benefit of limited liability.
28
£
75,000
(5,500) 69,500
(20,050) 49,450
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 20-1
(b)
Retained earnings
Balance at 1 January 20-1
49,450
Dividends paid
(10,000)
Balance at 31 December 20-1
119,450
Balance at 1 June 20-2
Profit for the year Dividends paid
Transfer to general reserve
Balance at 31 May 20-3
(b)
(20,000)
Debt
Equity
£20,000,000
£55,000,000*
£50,000,000* £25,000,000
–
– –
–
–
–
–
–
–
(2,000,000) 4,600,000
Conclusion
It seems to be preferable for Srian to finance its expansion scheme with an issue of ordinary shares. This has a much lower gearing ratio than the issue of debentures – the company may have difficulty in the future meeting the extra annual interest cost of £1,800,000.
the new shareholders will have voting rights
the power of the existing shareholders will be diluted because there will be more shares in issue
the company’s gearing ratio will be improved
a different type of financing based on loans and interest, rather than shares and dividends
the interest charge will rise by £1,800,000 from £1,200,000 to £3,000,000
interest must be paid whether or not profits are made
a failure to pay interest could lead the company into insolvency
no voting rights, so no dilution of shareholders’ power
debentures must be repaid at an agreed date in future
interest rate is fixed, whatever may happen to the level of interest rates
debenture holders likely to require security for their loan in the form of a mortgage over company assets; this may restrict the use the company can make of the assets
= 2:1 or 200%
This is an extremely high gearing ratio, well above the ‘normal’ maximum of 1:1 or 100% acceptable to investors. It may be that Srian plc will have difficulty in meeting the annual interest costs of this option.
(2,800,000)
Issue of debentures –
0.36:1 or 36%
* 6% debentures £20,000,000 + £30,000,000
9,400,000
not essential to pay dividends every year, although a failure to do so might cause difficulties with future share issues
=
If debentures are issued, the gearing ratio becomes:
Issue of ordinary shares –
= 0.8:1 or 80%
This is a much improved gearing ratio.
6,000,000
–
£25,000,000
* ordinary shares £25,000,000 + £20,000,000 and share £10,000,000
3,400,000
ordinary shares are not normally repayable, so the company will have the finance for the foreseeable future
£20,000,000
If ordinary shares are issued to raise the money for expansion, the gearing ratio (including share ) becomes:
£
–
=
This is already a high gearing ratio which investors will not wish to see going above 1:1 or 100%.
SRIAN PLC STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 MAY 20-3
Retained earnings
the company’s gearing ratio will be worsened
Without having information on the company’s revenue reserves (retained earnings and general reserve), the gearing ratio is currently:
General reserve is created from profit which has been kept in the company. It belongs to the shareholders, but is represented by assets in the balance sheet and is not a bank balance available to rebuild the garage forecourt.
(a)
if repayment not made at due date, debenture holders can realise assets to obtain repayment
Gearing ratio
149,450
Transfer to general reserve
17.7
–
100,000
Profit for the year
(c)
–
29
17.9
(a)
STOULBY LIMITED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2006 Retained earnings
£
Balance at 1 January 2006
Inventories
1,060,000
Transfer to general reserve
877,000
TOTAL EQUITY AT 31 DECEMBER 2006 £
Issued share capital
4,000,000 ordinary shares of 50p each
Share
General reserve
£
877,000
TOTAL EQUITY
(d)
(e) 17.10
(37,000)
Net Assets
840,000
700,000 ordinary shares of 50p each, fully paid Share
Revenue Reserves Retained earnings
1,297,000
General reserve
TOTAL EQUITY
* Cash and cash equivalents:
Revenue reserves are profits from trading activities which have been retained in the company to help build the company for the future
balance at start share issue
Retained earnings or general reserve
dividend paid
Revenue reserves can be used to fund dividend payments or to provide bonus shares to shareholders
closing balance
(a) DAVID MARK LIMITED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 20-2
Balances at 1 January 20-2
Profit for the year
Dividend paid
Transfer to general reserve
Issue of shares
Balances at 31 December 20-2
250,000
Share £ –
–
–
–
–
100,000
350,000
–
General reserve £
£
–
**(35,000)
(35,000)
–
–
150,000
45,000
50,000
120,000
* £400,000 – £150,000 profit for the year
Total
*250,000
–
50,000
Retained earnings £
(c)
75,000 –
350,000
Capital Reserve
3,797,000
Issued share capital £
240,000
EQUITY
* general reserve: £300,000 + £120,000 transfer (c)
Trade and other payables
Issued Share Capital
*420,000
Retained earnings
277,000
Net Current Assets
500,000
Revenue Reserves
*132,000
Current liabilities
2,000,000
Capital Reserve
60,000
Cash and cash equivalents
(120,000)
£
600,000
85,000
Trade and other receivables
(63,000)
Balance at 31 December 2006
£
Current assets
650,000
Dividend paid
DAVID MARK LIMITED
SUMMARISED BALANCE SHEET AS AT 31 DECEMBER 20-2
Non-current assets
410,000
Profit for the year
(b)
(b)
150,000
(45,000) 320,000
** 500,000 shares x 7p
575,000
150,000 –
840,000
30
50,000 320,000
120,000
440,000
840,000
£
17,000
150,000
(35,000) 132,000
•
Limited company, or •
Private Limited Company
(d)
•
The term ‘Ltd” means that the shareholders of David Mark Limited have limited liability.
•
Thus the risk taken by shareholders is limited.
•
This means that they could lose their investment but cannot be asked to contribute further in the case of liquidation (unless the shares are not fully paid).
CHAPTER 18 Ratio analysis
18.3
Exton gross profit margin 13.4% gross profit mark-up 15.5% overheads in relation to revenue 12.0% net profit margin (profit in relation to revenue) 1.4% rate of inventory turnover 33 days or 10.9 times per year net current asset (current) ratio 1.3:1 liquid capital (acid test) ratio 0.05:1 trade receivable days 1 day* return on capital employed 11%
(a) (b) (c) (d) (e)
(f) (g) (h) (i)
profit
Frimley 44.0% 78.7% 39.8% 4.2% 95 days or 3.8 times per year 2.4:1 1.3:1 60 days 8.1%
(d)
Frimley
18.4
(a)
Return on capital employed (ROCE) expresses the profit of a business in relation to the amount of capital in the business by the owner. gearing
Debt (loan capital + preference shares, if any) Equity (ordinary shares + reserves)
Gearing is concerned with the long-term financial stability of a business. It measures how much of the business is financed by debt (including preference shares) against capital – gearing is often referred to as the debt/equity ratio. The higher the gearing, the less secure will be the ordinary share capital of the business and, therefore, the future of the business. This is because debt is costly in of interest payments.
low overheads/revenue and net profit margin; high inventory turnover; quick trade receivable days, low net current asset and liquid capital ratios; few trade receivables
higher overheads/revenue and net profit margin and low inventory turnover; slow trade receivable days; good net current asset and liquid capital ratios; high figures for non-current assets and trade receivables
18.6
gross profit margin Gross profit Revenue
This ratio expresses, as a percentage, the gross profit in relation to revenue.
(c)
(d)
net current assets
Current assets – Current liabilities
Net current assets or working capital, are needed by all businesses in order to finance day-to-day trading activities. Sufficient net current assets enable a business to hold adequate inventories, allow a measure of credit to its customers (trade receivables) and to pay its suppliers (trade payables) as payments fall due.
(e)
liquid capital
Liquid capital is calculated in the same way as net current assets, except that inventories are omitted. This is because inventories are the most illiquid current asset. Liquid capital provides a direct comparison between the short-term assets of trade receivables and cash and short-term liabilities.
cash
Trade receivables x 365 days Revenues
Trade payables Purchases
x 365 days
trade receivable days
This is the actual amount of money held in the bank or as cash.
trade payable days
20-1
20-2
£43,000 x 365 days £680,000
£32,550 x 365 days £660,000
20-1
20-2
= 23.08 days
£28,500 x 365 days £520,000 = 20 days
= 18 days
£38,500 x 365 days £540,000 = 26.02 days
20-1 Trade payables are paid more quickly than trade receivables are paying, which will cause cash management problems. 20-2 Trade payables are paid more slowly than trade receivables are paying, which aids cash management.
(Current assets – Inventories) – Current liabilities
(c)
In general , investors and lenders would not wish to see debt exceeding equity; thus a gearing ratio of greater than 1:1 is undesirable.
x 100 1
This ratio expresses, as a percentage, the gross profit in relation to cost of sales; often used by businesses to establish selling price. (b)
(a) (b)
x 100 1
gross profit mark-up Gross profit Cost of sales
Profit for the year x 100 Capital employed* 1
sole traders: the amount of the owner’s capital in the business
Exton is the supermarket; Frimley is the engineering company Exton
return on capital employed
* limited companies: ordinary share capital + reserves + preference share capital + loan capital
* revenue figure used for this calculation; this is unrealistic because most supermarket sales will be for cash rather than on credit
Reasons:
This is a calculated figure which shows the surplus of income over expenditure for the year. It takes note of adjustments for accruals and prepayments and non-cash items such as depreciation and provision for doubtful debts.
31
Note: The figure for trade receivables has fallen during the period, while the figure for trade payables has increased. The reasons for the changes need to be investigated to include: – has revenue reduced, or is collection from trade receivables more efficient? – does the company have the money to pay trade payables, or have generous credit been offered by a supplier?
18.7
(a)
(b)
•
Net current assets (current) ratio
=
•
Net profit margin (profit in relation to revenue)
=
•
Liquid capital (acid test) ratio
=
•
Rate of inventory turnover
=
•
Return on capital employed
=
or
Proposal 2
Current assets Current liabilities
£30,000 **£540,000
(Current assets – inventories) Current liabilities Average inventories x 365 days Cost of sales
Profit for the year Capital employed
Tutorial note: bank overdraft is a current liability and is not included in the figure of capital employed.
= number of times per year
(c)
x 100 1
To: From: Date: Subject:
Green Ltd is the supermarket, while Hawke Ltd is the furniture store.
Green Ltd has a low net profit margin and a high inventory turnover. This is a characteristic of the way in which supermarkets operate – low profit margins, but a high level of revenue. Liquidity ratios are lower than the norms as supermarkets usually have few trade receivables.
• •
•
•
•
• 18.10
• •
•
If expenses could be reduced, the net profit margin would improve, and also return on capital employed.
•
A review of buying prices and selling prices may reveal opportunities for increasing profits and return on capital employed.
Advertising could increase sales, but only if the extra revenue generated covers the cost of advertising.
•
Any surplus non-current assets could be sold to improve liquidity ratios.
(b)
Ratio calculation
Return on capital employed
Proposal 1 £30,000 *£600,000
x 100 1
=
Profit for the year Capital employed
Ordinary shareholder Student ant Today Proposals to raise finance
This proposal to issue more ordinary shares means that ownership of the company will be diluted.
Unless the amount paid out by the company in dividends is increased, then your dividend per share will fall. Return on capital employed will be reduced from 7.89% (£30,000 ÷ £380,000) to 5%.
The 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 and £140,000 retained earnings. the company may decide to make a bonus issue of shares in the future.
Proposal 2
Inventory levels could be reduced, so improving the net current asset ratio.
Formula
*
•
If inventory turnover could be increased above 20 times per year, this would generate more cash and improve the liquidity ratios of the business (provided that selling prices do not have to be cut to encourage sales).
(a)
Report
Proposal 1
Hawke Ltd has a higher net profit margin with a lower inventory turnover. This indicates a business that sells higher value items which are not purchased on a regular basis. The liquidity ratios are close to the norms indicating a business with higher inventories and trade receivables than a supermarket. (c)
= 5.56%
** £380,000 equity (ordinary shares + capital and revenue reserves) £160,000 long-term bank loan
Profit for the year x 100 Revenue 1
Cost of sales Average inventories
x 100 1
• •
x 100 1
• •
= 5%
•
£300,000 ordinary shares (£200,000 + £100,000) £160,000 share (£140,000 + £120,000) £140,000 retained earnings
32
The proposal is to fund the expansion entirely from external borrowing – your ownership of the company will not be diluted.
Your dividend per share should remain the same and, if profits are increased after paying interest on the loans, will increase.
The 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.
18.11
(a)
FALCON LIMITED BALANCE SHEET AS AT 31 MARCH 2007
Non-Current Assets
(b) £
£
Net book value 200,000
Property
Fixtures and fittings
217,500
Inventories
14,560
Cash and cash equivalents
31,058
Trade receivables
51,074
Trade payables
(c)
(7,842)
Tax liabilities
(7,900)
(15,742)
Net Current Assets
252,832
Debentures (2011-2013)
= 12.45%
Issued Share Capital
75,000 ordinary shares of £1 each
18.12
75,000
Capital Reserves
10,000
120,000
Revenue Reserve
Retained earnings
TOTAL EQUITY
130,000
•
£28,000 *£224,832
•
The level of debt has remained at £28,000.
•
224,832
•
33
profit is a calculated figure which shows the surplus of income over expenditure for the year.
Example of how a business can make a good profit during a year when the bank balance reduces or the bank overdraft increases (the question asks for two examples):
•
share £5,000 + £5,000 on rights issue = £10,000
A lower gearing ratio reduces the level of risk to the company and enables it to borrow further funds in the future if required.
(b)
•
•
revaluation reserve £200,000 revaluation – £80,000 net book value = £120,000
The impact of the rights issue and the revaluation of the property has been to reduce considerably the gearing ratio from 37.42% to 12.45%. Even before the adjustments, the company was relatively low-geared; the ratio is much lower after the adjustments.
•
•
bank £1,058 + £30,000 (£25,000 + £5,000 ) rights issue = £31,058
Revaluation of the property has added £120,000 (£200,000 – £80,000) to total equity.
(a)
•
19,832
Tutorial notes:
•
=
The rights issue has added £30,000 (£25,000 + £5,000 ) to total equity.
•
•
Debt Equity
•
224,832
EQUITY
Share
After adjustments
•
(28,000)
NET ASSETS
= 37.42%
•
35,332
Non-Current Liabilities
Before adjustments = £28,000 *£74,832
or
* total equity from balance sheet
5,456
Current Liabilities
Debt (loan capital + preference shares, if any) Equity (ordinary shares + reserves)
* £50,000 + £19,832 + £5,000
17,500
Current Assets
Revaluation reserve
Gearing ratio =
cash is the actual amount of money held in the bank or as cash
purchase of non-current assets – cash decreases; no effect on profit (but there is likely to be an amount for provision for depreciation in the income statement repayment of a loan – cash decreases; no effect on profit
payment of drawings/dividends – cash decreases; no effect on profit
an increase in trade receivables – cash decreases; no effect on profit a decrease in trade payables – cash decreases; no effect on profit an increase in inventory – cash decreases; profit increases
19.3
CHAPTER 19 Budgeting and budgetary control
19.1
(a)
Benefits of budgetary control •
• •
• •
•
•
(b)
Cash budget for four months ending 31 October 2002
Sales
co-ordination – when a budget is being set, any anticipated problems should be resolved
decision-making – by planning ahead through budgets, a business can make decisions on how much output can be achieved
Net inflow/outflow
sales (revenue) budget
•
labour budget
•
trade payable budget
•
(b)
(i)
trade receivable budget cash budget
(c)
•
• •
•
12.0
15.6
16.8
14.4
20.4
25.2
26.8
24.0
8.0
8.0
8.0
4.0
5.2
5.6
3.2
(10.8)
costs and benefits – benefits must exceed the cost
accuracy – of information used
(ii)
demotivation – of staff may occur if they have not been involved in planning the budget and/or where budgets are set at too high a level
5.2
18.0
14.0
4.0
5.6
12.0
26.0
22.0
16.0
(10.8)
(11.6)
(6.8)
(0.8)
4.8
(11.6)
(6.8)
8.0
1.2
•
At 31 October 2002, the bank balance is budgeted to be £1,200.
•
The company sells beach buckets and spades, so the seasonal effect is over quickly.
•
Thus, over the four-month period there is expected to be a change from an overdraft of £7,200 at the start, through a maximum overdraft of £11,600 in August, to £1,200 money in the bank at the end of October. Expected amounts due from trade receivables in November are: £ 12,000 4,800 16,800
•
It is likely that the company will go into overdraft again quite quickly, from November onwards.
•
The company needs to make arrangements for an overdraft facility for July, August and September, with a limit of approximately £12,000.
•
disfunctional management – ensure that the budgets co-ordinate
4.8
4.0
1 month £20,000 x 60% 2 months £24,000 x 20%
Relevant factors when implementing budgetary control
•
£000
(7.2)
•
The most likely three budgets for a small business such as Classic Furniture would be cash, sales and production
£000
(3.6)
Closing balance
Oct
£000
24.0
Opening balance
Sept
£000
16.0
Overheads
motivation – a budget can be part of the techniques for motivating managers and other staff to achieve the objectives of the business
production budget
– 1 month
Purchases
control – action can be taken to modify the operation of the business
•
– cash
– 2 months
monitoring – management is able to monitor and compare the actual results against the budget
purchases budget
Aug
July
communication – because a budget is agreed by the business, all the relevant managers and staff will be working towards the same end
•
•
Sunshine Ltd
planning – by formalising objectives through a budget, a business can ensure that its plans are achievable
Any three budgets
•
(a)
Other measures to improve the company’s cash position include: – offering discounts to encourage increased sales
– allowing one month’s credit only, so receiving payment from sales quicker
set too easy – ensure that budgets are set at realistic levels to enable the business to use its resources to best advantage
– encouraging cash sales
– reducing purchases as the summer season draws to a close
34
– reducing overheads
19.5
(a)
July £
Income
Cash from trade receivables Expenditure
Payments to trade payables
Operating expenses
Purchase of non-current assets
Repayment of loan
August £
September
£
October £
November £
December
24,000
28,500
32,500
38,500
*47,760
10,000
11,000
14,000
18,000
24,500
12,500
12,000
12,000
8,500
12,000
12,000
30,000
36,500
64,010
Net cash flow
(2,000)
(7,500)
2,500
2,500
2,000
(16,250)
Closing balance
(1,020)
(1,520)
(17,770)
Opening balance
980
(1,020)
(8,520)
cash from December sales: £60,000 x 20% x 98%
cash from November sales: £50,000 x 60%
cash from October sales: £30,000 x 20%
(b)
(8,520)
(6,020) =
=
=
(6,020)
(3,520)
(3,520)
(d)
(1,520)
19.7
£11,760
•
in December, the company plans to buy new non-current assets at a cost of £19,510 in December, the company plans to make a repayment on the loan of £20,000
See Chaper 20. •
Automatic updating – as amendments are made, the entire budget is changed easily.
What-if calculations – the effect of possible changes can be considered, eg a reduction in the period of credit allowed to customers.
(a) JIM SMITH
£47,760
Jan Receipts
Memorandum
May
Jun
1,250
3,000
4,000
4,000
4,500
–
4,500
4,500
3,500
3,500
3,500
6,750
5,100
5,100
4,150
4,150
4,200
10,000
Trade payables Expenses
Total payments for month
Net cash flow
Add bank balance (overdraft) at beginning of month
Bank balance (overdraft) at end of month
35
Apr
Total receipts for month Van
purchase of non-current assets
Mar
10,000
Payments
the application of the realisation concept – timing of receipts and payments
Feb
£
Capital introduced Trade receivables
The Directors of Hawk Limited Student ant Today Making profits whilst having a bank overdraft
repayment of loans
•
the sales of £60,000 forecast to be made in December are higher than each of October and November; the cash received from 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
CASH BUDGET FOR THE SIX MONTHS ENDING 30 JUNE 20...
a company can make a profit but have a bank overdraft for a number of reasons, including:
•
20% of cash from sales is received in the month of sale; then 60% is paid in the next month, with 20% two months after sale
£6,000
Reasons
•
•
£30,000
= £18,750 total net cash outflow
To: From: Date: Subject:
the purchase of non-current assets affects cash but has no effect on profit
•
£980 (opening balance 1 July) + £17,770 overdraft (closing balance 31 December)
(c)
repayment of loans affects cash but has no effect on profits
•
20,000
26,000
•
•
19,510
31,500
receipts from trade receivables and payments to trade payables are likely to occur some weeks after the sales and purchases have been recorded in the income statement
Hawk Limited
12,000
22,000
•
•
£
20,000
12,000
Explanation
–
6,000
750
£
1,250
600
£
3,000
600
£
4,000
650
4,000
650
4,500
700
(3,850)
(2,100)
(600)
(2,700)
(2,850)
(3,000)
3,250
(600)
(2,700)
(2,850)
(3,000)
(2,700)
3,250
(150)
£
3,250
–
(150)
£
300
Notes:
• no depreciation – a non-cash expense – is shown in the cash budget
• customers pay one month after sale, ie trade receivables from January settle in February
• suppliers are paid one month after purchase, ie trade payables from January are paid in February
(b) The cash budget shows the maximum bank overdraft to be £3,000 in May.
Jim Smith could avoid the need for a bank overdraft in one or more of the following ways (the question asks for two ways): • by commencing his business with a higher initial capital, eg £13,000
• by buying the van on hire purchase or leasing instead of outright purchase
• by reducing his purchases to £3,000 for each of January and February
• by asking his suppliers for two months’ credit for the initial purchases of £4,500 made in January
• by asking his customers to pay more quickly
CHAPTER 20 The impact of computer technology in ing 20.6
Two from each of:
(a)
(b) (c)
-
single entry system which automatically makes entries in all relevant s
-
all arithmetic in entries is performed automatically
-
-
-
-
-
-
-
s are normally already set up in the system
provided that the original figure entered is correct, all entries will be correct all calculations are automatic and therefore accurate
error of omission (entries which have been left out in error) error of original entry (the wrong figure entered in error)
error of principle (entry in the wrong type of )
mispost (entry in the wrong person’s )
36
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