+-LCCI Level 1 - How to Pass Book-Keeping (Recommeded Book) -+

How to PassBook-keeping

FIRST LEVELTeacher’s Guide

Keith F BirdMSc BSc (Econ) ACIS

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First published 1999

© LCCI CET 1999

British Library Cataloguing-in-Publication DataBird, Keith F

How to Pass Book-keeping, First Level – 2nd ed.Teacher’s guide1. Book-keeping – Study and teachingI.Title657.2’0071

ISBN 1 86247 060 X

All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic,mechanical, photocopying, recording, or otherwise without the prior writtenpermission of the Publisher. This book may not be lent, resold, hired out, orotherwise disposed of by way of trade in any form of binding or cover, otherthan that in which it is published, without the prior consent of the Publisher.

10 9 8 7 6 5 4 3 2 1

Typeset by the London Chamber of Commerce and Industry Examinations BoardPrinted and bound in Hong Kong by Peninsula Publishers

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Contents

PageAbout the author viiAcknowledgements viiIntroduction viiiCross-references to How to Pass Book-keeping,First Level (student’s book) x

Lesson1 The accounting equation

Transactions through ‘double entry’ 12 Purchases, sales, and returns 113 Expenses: profit or loss 194 Balancing accounts: the trial balance 235 Trading and Profit & Loss Accounts 276 The balance sheet 327 Final accounts: more features 368 The division of the ledger 449 Bank facilities

Cash Book: 2 columns 4910 Cash Book: 3 columns – cash discount 6011 Purchases and Sales Day Books 7012 Returns Day Books 7813 Accruals and prepayments – expenses 8814 Accruals and prepayments – income 9915 Depreciation of fixed assets 10516 Bad debts and provision for doubtful debts 12017 Bank reconciliation statements 13218 Petty Cash Book – imprest system 14119 Capital and revenue expenditure 15120 The journal 15821 Errors in the accounts 1 16822 Errors in the accounts 2 17423 Final accounts and adjustments further considered

Stock valuation 17824 Club and society accounts 18825 The presentation of answers 198

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Appendix 1: Exercises, some worked solutions, and support material 201

Appendix 2: Summarized answers to selected exercises 312Appendix 3: Glossary 321Notes 326

Contents

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About the author

Keith Bird has had over 35 years’ experience lecturing in business studies in further andhigher education and has taught professional courses at all levels. He is the author of thestudent’s book How to Pass Book-keeping, First Level, published by the London Chamber ofCommerce and Industry Examinations Board (LCCIEB). He has also written several studymanuals that have been published for professional courses.

Keith Bird’s association with the LCCIEB extends over 25 years and, for much of that time,he has served as a Chief Examiner in First Level Book-keeping and Second Level Book-keeping and Accounts.

Acknowledgements

In the preparation of this book, my thanks are due to Derek Skidmore MSc, FCCA,ACMA, co-author of How to Pass Book-keeping and Accounts, Second Level, for his review ofthe draft of the book and for his helpful suggestions. My thanks are also due to the staff ofthe LCCIEB Publishing Department for preparing this text for publication.

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Introduction

The How to Pass Book-keeping, First Level:Teacher’s Guide is closely geared to the LCCIEBFirst Level Book-keeping Extended Syllabus. It is intended for a teaching course thatextends over 60 hours.There are 24 lessons concerning book-keeping, each of 21/4 hours’duration. The remaining teaching time should be used for Lesson 25, which covers theimportant topic of presenting examination answers, together with revision and pre-examination preparation.

The book is addressed to the teacher. It indicates the importance of particular topics andsubject points and provides hints about how to present material. The Teacher’s Guide isintended to complement the student’s book How to Pass Book-keeping, First Level. At thesame time, with a few exceptions, the explanations, examples, and exercises are ‘free standing’,providing the teacher with a store of additional teaching resource. The Teacher’s Guideshould be used in combination with the student’s book and, for this purpose,cross-references between the two books are provided on page x. Individual cross-referencesare also given at certain points within the text.

The approach adopted in the Teacher’s Guide is that of keeping in mind the question ‘Why?’At each stage, the stress should be on developing the student’s understanding of the needfor, and effect of, the various book-keeping entries, as well as of the subject as a whole.Onlyby this means can inappropriate examination answers be prevented and a sound basis beprovided for applying knowledge in the business world and/or for further accountingstudies.

As the book progresses, the material becomes more difficult.The early stages of the bookassume that the student has only a limited knowledge of business and accounts. Gradually,more elements, features, and terms are introduced that sometimes require the modificationof methods for recording transactions already learnt. For example, at first, transactions arerecorded in the ledger only. With the introduction of day books, the system of recordingtransactions changes. The time spent on the ‘ledger only’ entries is not, however, wastedbecause it enables the student to appreciate the relationship between the ledger and the daybooks. Inevitably, some students will come to the course with some knowledge or awareness of aspects of book-keeping and, understandably, they might question why a particular matter is not taken account of at a certain stage.This situation might apply in thecase of the depreciation of fixed assets, which is not dealt with until Lesson 15. The progressive nature of the course is discussed at the beginning of Lesson 2. At that stage,the teacher might find it helpful to explain to the class that different features are to beincluded as the course develops.

The text includes numerous examples, together with short reinforcement exercises.Appendix 1 contains exercises for Lessons 1–24 and support material. Certain of the exercises are immediately followed by worked solutions; they are marked with an asterisk(*) both in the Appendix and in the main part of the book.The exercises are suitable forphotocopying as required.Appendix 2 contains summarized answers, where appropriate, toquestions for which solutions are not provided. These summarized answers include the

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Introduction

ix

results of certain calculations, key account entries, and other significant figures such as grossprofit, net profit, asset totals, and trial balance totals. Other answers or parts of answers, toodetailed for inclusion, such as account or journal entries, may be established by referenceto the text of the book as well as by reference to the fully worked solutions in Appendix 1.

It is advisable to make full use of the Glossary.

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Cross-references to How to Pass Book-keeping,First Level (student’s book)

How to Pass Book-keeping,Teacher’s Guide First LevelPage Lesson Chapter Page

1 1 The accounting equation 1 1 Transactions through ‘double entry’ 2 9

10 2 Purchases, sales, and returns 3 1517 3 Expenses: profit or loss 4 2221 4 Balancing accounts: the trial balance 5 3025 5 Trading and Profit & Loss Accounts 6 3830 6 The balance sheet 7 4933 7 Final accounts: more features 8 5443 8 The division of the ledger 9 66

Vertical layout of the balance sheet 8 6049 9 Bank facilities 10 73

Cash Book: 2 columns 11 7956 10 Cash Book: 3 columns – cash discount 12 8565 11 Purchases and Sales Day Books 13 9673 12 Returns Day Books 14 10483 13 Accruals and prepayments – expenses 15 12094 14 Accruals and prepayments – income 15 12099 15 Depreciation of fixed assets 16 133

113 16 Bad debts and provision for doubtful debts 17 152

124 17 Bank reconciliation statements 18 164132 18 Petty Cash Book – imprest system 19 180142 19 Capital and revenue expenditure 20 189148 20 The journal 21 201157 21 Errors in the accounts 1

(types of error) 22 210163 22 Errors in the accounts 2

(adjusting for errors; the effects of errors) 22 210

167 23 Final accounts and adjustments further considered 23 231Stock valuation 23 237

177 24 Club and society accounts 24 246187 25 The presentation of answers Appendices

1, 2, and 3 272–84

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Lesson 1: The accounting equationTransactions through ‘double entry’

The underlying purpose of this lesson is to develop recognition of the need for, and purpose of, recording business transactions and their effects. Understanding the two-foldaspect of any transaction (benefit and detriment, and plus and minus) is essential for a graspof double-entry book-keeping.

In the earlier stages of the lesson – especially in meeting the aims of Steps 1 to 3 – muchcan be done by using the question-and-answer method with the class, including a brief discussion of the students’ responses. The varied backgrounds and experiences of classmembers should be drawn on whenever possible. Always relate the discussion to a particular aim, listing points on the whiteboard or overhead projector as appropriate.

1

Topic summary

● The need for accounting records● The information that needs to be recorded● The means of obtaining resources, ie assets: ownership v. external sources of funds● The business as an entity● The dual effect of a business transaction● Double-entry recording of transactions

Extended Syllabus references

1.1 Explanation and use of the terms debtor, creditor, asset, liability, capital

1.2 The accounting equation: assets = capital + liabilities and its expression in thebalance sheet

1.3 The effect upon the accounting equation of basic business transactions (includingthe single-side transaction, eg use of bank balance to buy fixed assets)

1.4 The effect upon the accounting equation of the dual-type transaction, ie wherethe effect upon one side of the equation is matched by a combination of 2 (orpossibly more) effects on the other side

2.1 Purpose of the use of debit and credit for the recording of transactions

2.2 The preparation of T-type accounts

2.3 Specifying a transaction/entry within an account, ie date together with, normally,the name of the ‘other’ account/day book involved in that particular transaction/entry

2.4 Completion of debit and credit entries recording individual transactions

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Step 1

Following a brief introductory ‘chat’ with the class, ask the students to form pairs and todiscuss and write down answers to the question:‘Why does a business need to keep recordsof account?’

At this stage, the students are likely to give broadly based answers, such as:

● to run (more) effectively and efficiently;● to know what money is coming in and going out;● to know what the business is earning and spending;● to control the business: to make adjustments as necessary;● to make decisions about the future;● to provide information for making decisions about the future;● to deal with the tax authorities.

Step 2

From the answers to the questions in Step 1, identify areas of information that will berequired; for example:

Cash: availability and movements PurchasesAmounts owed by the business SalesAmounts owed to the business ExpensesThe possessions - ‘assets’ ProfitAmount of money invested in the business Capital

Step 3

While the students remain in pairs,

1 Ask them to imagine that they are establishing a business, such as a shop or factory.Ask them to write down the resources that they would need.

The accounting equation

2

Aim: to develop an appreciation of the need for business records of account

Aim: to recognize the key areas of information that need to be recorded

Aim: to recognize the resources needed and, broadly, the means of obtaining them:proprietor versus external sources

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2 As the students suggest the resources, list these on the whiteboard in two categories,those that are:

(a) measurable in money terms, eg cash, premises, machines, and motor vehicles; and(b) less measurable, eg skills, contacts, and experience.

Show that category (a) is recorded in the accounts as assets. Category (b) is less easilyrecorded, but may be, for example, as skills as part of wage payments. It will be dealtwith at a later stage.

Explain how the assets might be obtained. Show that, in establishing a business, a proprietormight:

(a) treat his or her own motor vehicle to be for use within the business;(b) put his or her money into the business, so that assets can be bought;(c) borrow money, ie obtain a loan.

Emphasize that (a) + (b) = capital, ie the proprietor’s stake; and that (c) = liability.

Step 4

1 Explain to the students that a business is an entity that is distinct from its owner. As aresult, the accounts are to be kept for the business and they are separate from the owner’saccounts.You may illustrate the concept like this:

2 Explain, with reference to Step 3, that the money a proprietor invests to set up and runa business is usually supplemented by borrowed money. The means of financing a business may be expressed as ‘the accounting equation’:

Assets = capital + liability (eg a loan)eg Assets £15,000 = capital £12,000 + liability £3,000

Alternatively, the equation may be expressed as:

Assets less liabilities = capitaleg Assets £15,000 less £3,000 = £12,000


3

Aim: to understand the business as an entity and to appreciate the ‘accounting equation’

Businessaccounts

Personalaccounts

invests in

withdraws from

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3 Ask the students to work through the following exercise, inserting the missing figure ineach of the columns.

Assets Capital Liabilities£ £ £

(1) 2,430 1,920(2) 3,060 1,040(3) 2,500 780(4) 6,530 0(5) 5,830 4,120

Step 5

1 Show that the financial position of a business at any point in time – the accountingequation – can be expressed in the form of a balance sheet, eg:

F LimBalance sheet at 1 March Year 3

£ £Office furniture 800 Capital 7,000Motor vehicle 5,300 Loan from J Black 1,000Cash at bank 1,900

8,000 8,000

2 Explain the term ‘business transaction’.

Show, using the following example, the effect of transactions, stage by stage, upon a balance sheet. It is important not to confuse the students with transaction moves thatare too rapid. Ensure they fully understand the effect of each transaction before youmove onto the next.

The transactions (which are defined in brackets) of F Lim in Year 3 are as follows:

(a) On 2 March, a typewriter (classed as office equipment) is bought by drawing acheque on the bank for £150.(Purchase of an asset, with payment by cheque.)

(b) On 4 March, goods are bought from T Smith on credit for £500.(Purchase of an asset on credit.)

(c) On 9 March, Lim sells some of the goods that had cost £200 for the same amount,receiving a cheque in exchange.(Sale of asset, with immediate payment.)


4

Aim: to understand the effect of business transactions; their double aspect

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(d) On 12 March, Lim sells some goods that had cost £200 to K Woolf ‘on credit’for the same amount.(Sale of asset on credit.)

(e) On 16 March, Lim sends a cheque for £300 towards the amount owing to T Smith.(Payment of an amount owing.)

(f) On 21 March, Lim receives a cheque for £200 from his debtor, K Woolf.(Receipt of money from a debtor.)

3 Use the following example to show the effect of transaction (a) on F Lim’s balance sheet:


£ £Office furniture 800 Capital 7,000Office equipment (+ 150) 150 Loan from J Black 1,000Motor vehicle 5,300Cash at bank (-150) 1,750

8,000 8,000

This example shows that only the assets have changed.

4 Use the following example to show the effect of transaction (b) on the balance sheet:


£ £Office furniture 800 Capital 7,000Office equipment 150 Loan from J Black 1,000Motor vehicle 5,300 Creditor – T Smith 500Goods 500Cash at bank 1,750

8,500 8,500

This balance sheet shows that both the assets and liabilities have increased.

5 Use the following example to show the effect on the balance sheet after transaction (c):


£ £Office furniture 800 Capital 7,000Office equipment 150 Loan from J Black 1,000Motor vehicle 5,300 Creditor – T Smith 500Goods (- 200) 300Cash at bank (+ 200) 1,950

8,500 8,500

Here, there has been a switch between two assets.


5

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6 Use the following to show the effect after transaction (d):


£ £Office furniture 800 Capital 7,000Office equipment 150 Loan from J Black 1,000Motor vehicle 5,300 Creditor – T Smith 500Goods (-200) 100Debtor – K Woolf (+ 200) 200Cash at bank 1,950

8,500 8,500

From this balance sheet, a change of assets can be seen.

7 Use the following to show the effect after transaction (e):


£ £Office furniture 800 Capital 7,000Office equipment 150 Loan from J Black 1,000Motor vehicle 5,300 Creditor – T Smith (-300) 200Goods 100Debtor – K Woolf 200Cash at bank (- 300) 1,650

8,200 8,200

From this balance sheet, a reduction in assets matched by a reduction in liabilities canbe seen.

8 Use the following to show the effect after transaction (f ):


£ £Office furniture 800 Capital 7,000Office equipment 150 Loan from J Black 1000Motor vehicle 5,300 Creditor – T Smith 200Goods 100Cash at bank (+ 200) 1,850

8,200 8,200

Here, there is a change of assets: an increase in bank and the removal of the debtor balance from the balance sheet.


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7

9 A list of terms and their definitions follows. Explain the terms to the students.

credit sales goods sold with payment to be received by an agreed future date

debtor a person or organization to whom goods have been sold on credit andfrom whom money is due

creditor a person or organization from whom goods have been bought on credit and to whom money is owed

on account payment towards an amount owing; part payment

It is vital that students understand the meaning of terms as they are used. For thefollowing lessons, reference should be made to the Glossary on pages 321–5.

10 Explain that a transaction may involve a combination of assets or liabilities. For example,a motor vehicle is bought for £6,000.The purchase is paid for by:

(a) drawing on the bank account; and(b) a loan from Birclays Finance Limited.

Consequently:

Assets Liabilities£ £

+ 6,000 Motor vehicle Birclays Finance Limited + 4,000- 2,000 Bank

4,000 4,000

11 Emphasize the equation:

assets = capital + liabilities

12 Give the students each a copy of exercises T/1.1, T/1.2, and T/1.3 in the Appendix(page 201) and ask them to work through them.

Step 6

1 Explain the necessity of keeping separate accounts for information and control needs.Updating the balance sheet each time a transaction occurs takes up too much time;keeping separate accounts is a quicker and clearer method of updating records.

Aim: to be able to record transactions through double entry

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2 Explain that the two-sided form of recording accounts (which has long been in use) isto be followed:

3 Set out the rules for double entry, which are as follows, on the overhead projector orwhiteboard:

Assets an increase debita decrease credit

Liabilities an increase credita decrease debit

Capital an increase credita decrease debit

Alternatively, you may show the following layout:

4 Emphasize that the purpose of debit and credit is to allow for the two-fold effect ofeach transaction.Always ensure that, for each transaction, students understand the logicof the entries. By making sure that the logic is clear, the account entries will have mean-ing, helping the students to avoid making mistakes.

5 Explain the form of entries for T-type accounts thoroughly. Illustrate the following layouton the whiteboard or overhead projector:

Dr CrDate Details £ Date Details £

The ‘details’ column should always show the name of the matching account (ie wherethe double entry is completed) eg:


8

Asset accountincreases decreases

+ -

Liability accountdecreases increases

- +

Capital accountdecreases increases

- +

Left-hand side Right-hand side = debit side = credit side (or Dr) (or Cr)

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Bank

Year 6 £1 Jul Capital 10,000

Capital

Year 6 £1 Jul Bank 10,000

6 Work through the exercise below with the students. For each transaction:

(a) emphasize the transaction effect;(b) stress how the double entry is achieved.

Exercise

(i) Gladys Lane sets up in business on 1 July Year 6 by placing £10,000 into a new business bank account.

(ii) On 4 July Year 6, she buys office equipment, paying £400 by cheque.(iii) On 7 July Year 6, she buys goods from Landau Limited for £360 on credit.(iv) On 26 July Year 6, Gladys Lane pays the amount owing to Landau Limited by

cheque.

Solution

Bank

Year 6 £ Year 6 £1 Jul Capital 10,000 4 Jul Office equipment 400

26 Jul Landau Ltd 360

Capital

Year 6 £1 Jul Bank 10,000

Office equipment

Year 6 £4 Jul Bank 400

Goods

Year 6 £7 Jul Landau Ltd 360

Landau Limited

Year 6 £ Year 6 £26 Jul Bank 360 7 Jul Goods 360


9

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7 Emphasize that entries in accounts should not be cramped together, but should beclearly spaced without being too far apart.

8 Remind the students that, in making the entries, they need to:

(a) record the date correctly; and(b) correctly enter the name of the related account in the ‘details’ column.

9 Stress that, in the examination, marks may be lost if account entries are poor.An exampleof an avoidable error is writing the word ‘Cheque’ instead of ‘Bank’ for the name of thematching account, when ‘Cheque’ is not the name of the account.

10 Ask the students to work through exercises T/1.4 and T/1.5 in the Appendix (page 202).


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Lesson 2: Purchases, sales, and returns

The approach adopted in the students’ book, How to Pass Book-keeping, First Level, is toexplain the reasons for particular book-keeping methods and to build up understanding ofthe subject progressively.This approach may mean using a simplified method on a certainmatter at one stage to avoid introducing too many points at once. Later, that simplifiedmethod might need to be modified as more features are covered. This approach appliesbecause this session deals with the entries concerning purchases and sales.

Step 1

1 Explain that the term ‘goods’ is used for goods bought as part of trade, for selling in due course. The buying and selling of office furniture, motor vehicles, etc, for use in the business, is not included under goods: they are shown separately.

11

Topic summary

● The various meanings of the term ‘purchases’● Account entries for purchases and sales transactions● The return of goods: allowances● Account entries for returns inwards and outwards


5.1 The various possible accounting meanings of the term purchases

5.2 The effects on (double-entry) accounts of purchases of goods:

5.2.1 for cash5.2.2 on credit

5.3 The effects on (double-entry) accounts of the sale of goods/services:

5.3.1 for cash5.3.2 on credit

5.4 The process of the return of goods previously bought or sold (or alternatively of an allowance being made in lieu of actual return of goods)

5.5 Use of the term Returns, both inwards and outwards; the alternative terms in use

5.6 The effects on (double-entry) accounts of the return of goods (or of an allowancebeing made for the defective supply of goods/services)

Aim: to recognize the various meanings of the term ‘purchases’

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2 Goods are now to be divided into:

● purchases; and● sales

with a separate account for each.This division gives more information and helps to keepcontrol of the business.

3 Describe the various meanings of the term ‘purchases’, that they are:

(a) goods bought to sell, ie as part of trading;(b) goods bought to use in the manufacture and/or retailing of other goods.

Stress that just the word ‘purchases’ or the words ‘bought goods’ are referring to a partof trading.

4 You may also give the students the alternative terms below.

(a) Purchases ‘for cash’ which are bought with immediate payment.The payment may be in cash or it may be by drawing on a bank account.

(b) Purchases ‘on credit’ which are bought with payment to be made at a later date.

Step 2

1 Purchase of goods for cashShow the students the following example to illustrate the account entries made for thepurchase of goods for cash.

ExampleIn the account entries given below, goods were bought on 15 March Year 3 for £295and paid for by cheque, which can be understood as immediate payment.

Purchases

Year 3 £15 Mar Bank 295

Bank

Year 3 £15 Mar Purchases 295

Purchases, sales, and returns

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Aim: to be able to record in double-entry form the purchase and the sale of goods forcash and on credit

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This involves:

● addition to purchases = debit● deduction from bank = credit

2 Purchase of goods on creditShow the students the following example to illustrate the account entries made for thepurchase of goods on credit.

ExampleIn the account entries that follow, goods were bought on credit, at 19 March Year 3,from L Johnson for £614.

Purchases

Year 3 £19 Mar L Johnson 614

L Johnson


A liability has arisen, so a credit entry is made in the account for Johnson, who is a ‘creditor’.

3 Work through the following exercise with the students.

Exercise

Year 73 Mar Purchased goods by cheque £915

12 Mar Purchased goods from T Watling on credit £73630 Mar Paid by cheque the amount due to T Watling

Enter these transactions, as shown below, carefully reviewing each double entry beforemoving on to the next one.

Purchases


12 Mar T Watling 736

Bank


30 Mar T Watling 736

(continued)


13

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T Watling

Year 7 £ Year 7 £30 Mar Bank 736 12 Mar Purchases 736

4 SalesAny sale of goods is entered in a separate Sales Account.The account includes both cashsales and credit sales. Remember to point out that the account only includes the sale ofgoods that the firm trades in.

5 Sales for cashShow the students the following example to illustrate the account entries made for salesfor cash.

ExampleAt 21 March Year 3, goods were sold for £312 cash.

Sales

Year 3 £21 Mar Cash 312

Cash

Year 3 £21 Mar Sales 312

Emphasize that the entry in the Sales Account corresponds to what, so far, has beenentered in the Goods Account, ie a credit entry.

NoteThe Cash Account is for recording the receipt and payment of bank notes or coins.Transfers between the Bank Account and the Cash Account are made periodically.

6 Sales on creditShow the students the following example to illustrate the account entries made for saleson credit.

ExampleAt 23 March Year 3, goods were sold to L Fell on credit for £260.

Sales

Year 3 £23 Mar L Fell 260



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7 To reinforce the students’ understanding, show the following summary of the entriesbelow for a credit sale (preferably on the overhead projector):

(a) When a credit sale is made, the book-keeper should:● debit the customer’s (debtor’s) account; and● credit the Sales Account.

(b) When payment is received from the debtor, the book-keeper should:● debit the Bank Account or Cash Account (depending on how the debtor pays,

whether by cheque or cash); and● credit the debtor’s account.

NotePoint out that the Purchases Account and the Sales Account have now replaced the GoodsAccount.

8 Ask the students to work through the exercise below.

Exercise

Year 76 Mar Sold goods for cash £327

15 Mar Sold goods to J Bean on credit £51231 Mar Received cheque from J Bean in payment of the amount due

The transactions should be entered by the students as shown below. Review the transactions one by one (see below), ensuring that the concept of double entry is fullyunderstood.

Sales

Year 7 £6 Mar Cash 327

15 Mar J Bean 512

Cash


J Bean

Year 7 £ Year 7 £15 Mar Sales 512 31 Mar Bank 512

Bank

Year 7 £31 Mar J Bean 512


15

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Step 3

1 Explain that purchased goods are sometimes returned to the supplier. Ask why thismight be so.

2 Explain that an allowance is made by the supplier, ie that the amount of the return isset against the purchase amount.

3 Show that the returns are recorded in a separate account, called the Returns OutwardsAccount, using this example:

At 24 March Year 3, goods are returned to L Johnson for which £70 is allowed.

Returns outwards

Year 3 £24 Mar L Johnson 70

L Johnson

Year 3 £ Year 3 £24 Mar Returns outwards 70 19 Mar Purchases 614

4 Explain that the £70 credit in the Returns Outwards Account offsets the £614 previously shown on the debit of purchases.Ask the students to explain the two entriesin Johnson’s account.

5 Explain that the opposite can occur: ie goods that have been sold may be returned bya customer, for which an allowance is given. For example, on 27 March Year 3, L Fellreturns the goods sold to him on 23 March.

This occurrence is the reverse of a sale, so it is termed ‘returns inwards’. Ask the studentsto show the two entries for the returns inwards.Their accounts should look like the onebelow.

Returns inwards

Year 3 £27 Mar L Fell 260

L Fell

Year 3 £ Year 3 £23 Mar Sales 260 27 Mar Returns inwards 260


16

Aim: to understand the nature of ‘returns’ and to be able to make the required book-keeping entries

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6 Hand out copies of, or show on the overhead projector, exercise T/2.1 in the Appendix(page 203).Ask the students to work through the exercise.

7 Review student answers, drawing attention to items (c) and (f ), in T/2.1, which involveassets for use in the business. Neither of these will be recorded in the PurchasesAccount.


Step 4

Below are a series of questions that you should ask the students, together with the answers.

1 Question (a)What is the difference in wording between the two returns examples?

Answers

● The example 24 March specifically states that an allowance is made and the amount.● The example 27 March merely states that the goods previously sold are returned.

If a question is worded as it is above, the students should assume that the amount of theoriginal sale is fully allowed.

2 Question (b)What is the reason for keeping separate returns accounts instead of making the entriesin the Purchases or Sales Accounts?

AnswerThe reason is to have separate totals for returns, otherwise the information would be ‘hidden’ in the Purchases or Sales Account.

3 Question (c)What might be the various reasons for the return of goods?

AnswersThe goods might be returned because:

● the wrong articles were sent;● they were damaged in transit;● they are not what was shown in the catalogue;● parts do not fit.


17

Aim: to strengthen understanding of lesson content

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4 Question (d)When might an allowance be given although the goods are not returned?

AnswersWhen the goods:

● are difficult to repack or transport; or● are costly to send back.

Stress that, provided an allowance is given, the book-keeping effect is the same as if thegoods are actually returned.

5 Check that the students know the alternative names for the accounts, that they may becalled:

● returns outwards or purchases returns;● returns inwards or sales returns.

6 Hand out copies of, or show on the overhead projector, exercises T/2.3 and T/2.4 inthe Appendix (pages 203 and 204).Ask the students to work through them.


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Lesson 3: Expenses: profit or loss

This lesson is diverse in its content. All the topics are ones that can feature as elements in examination questions. With careful explanation and the familiarity that follows frompractice, these subject areas need not be a cause of major difficulty.

Step 1

1 Suggest to the class a small business situation and ask what types of expense would beincurred, such as:

● employee wages;● rent of the premises; and ● advertising.

Point out that the aim of setting up a business is to make a profit, ie a surplus:

sales less expenses = profit

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Aim: to appreciate the nature and types of business expense and the book-keepingentries required

Topic summary

● The nature and types of ‘expense’● Combination-type transactions: account entries● Recording the withdrawal of profit by ‘drawings’● Profit as the difference between opening and closing capital


18.1 Profit (or loss) as the difference between opening and closing capital balances;allowing for any drawings or the introduction of additional capital

18.2 The meaning of the term drawings; the various forms of drawings

18.3 The book-keeping entries for drawings

18.4 The possible effect of drawings upon the amount of capital

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2 When you explain about recording expenses in the accounts, develop the concept of‘paying as you go’. Illustrate the concept by contrasting, for example, renting premisesand purchasing a building, which ties up money.

3 Liken expenses such as rent to very temporary assets; for instance, a purchased asset isdebited to the asset account; similarly, an expense account is debited.

4 Explain that it is necessary to have several expense accounts, eg insurance, wages,office cleaning, office expenses, heating and lighting. One account for each categoryof expenditure helps to provide more information and improve control.

The following example illustrates the basic account entries relating to an expense item:

ExampleAt 28 March Year 3, insurance on a motor vehicle, costing £110 for the next 6 months,is paid by cheque.

Insurance


Bank

Year 3 £28 Mar Insurance 110

This can be explained as:

Cr = reduction of an asset (bank)Dr = acquisition of a (temporary) asset, ie insurance ‘cover’ for a fixed period of time.

5 Copy and hand out or show exercises T/3.1 and T/3.2 in the Appendix (page 204) onthe overhead projector.Ask the students to work through them.

Step 2

1 In Lesson 1, Step 5, reference was made to the possibility of a transaction involving acombination of assets and/or a combination of liabilities. In a combination-type transaction, the effect on one account side will be matched by a combination of two (or possibly more) effects on the other side. Use the following example to illustrate a combination-type transaction.

Expenses: profit or loss

20

Aim: to be familiar with combination-type transactions and to be able to makeappropriate book-keeping entries

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ExampleAt 14 April Year 6, a motor vehicle was purchased for £6,800 from Lagonda Garages. Apayment of £2,000 was made by cheque and the balance on credit.

Assets Liabilities£ £+ 6,800 Increased by amount of Creditor – Lagonda Garages + 4,800

motor vehicle- 2,000 Bank balance is reduced

+ 4,800 + 4,800

The accounts will appear as follows:

Motor Vehicle

Year 6 £14 Apr Bank and Lagonda

Garages 6,800

Bank

Year 6 £14 Apr Motor vehicle 2,000

Lagonda Garages

Year 6 £14 Apr Motor vehicle 4,800

2 Copy and hand out or show exercise T/3.3 in the Appendix (page 205) on the overheadprojector.Ask the students to work through the exercise.

Step 3

1 If the owner takes money out of the business for private use this results in a reductionof capital. Explain that the owner may draw out money in anticipation of the profits forthe year, ie to pay for personal living expenses. If the owner’s withdrawals are more thanthe business’s profits, then capital is reduced.

2 Drawings are recorded in a separate account, further enabling the accounts to provideas much information as possible. Use the example overleaf to demonstrate this point.


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Aim: to appreciate the meaning of proprietor drawings and the account entries required

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ExampleAt 6 April Year 3, Joe Seng, the owner, withdrew £170 in cash for his own use.

Cash

Year 3 £6 Apr Drawings 170

Drawings

Year 3 £6 Apr Cash 170

3 Explain that, at the end of the year, the Drawings Account will be closed off to theCapital Account.

4 Point out that several drawings might be made over the course of the year and that thedrawings could take forms other than cash. For example, the owner may take some ofthe business’s goods for personal use.

Step 4

1 The profit of a business for a given year might be obtained as follows:

profit for the year = number of transactions less expensesx profit on each for the year

transaction

or as

profit = capital at end of the year less capital at start of the yearor increase of capital over the year

Alternatively, give the students the following formula:

start-of-year plus profit* = end-of-yearcapital (or loss) capital

*or profit after deduction of drawings



22

Aim: to recognize that profit or loss may be calculated through differences in capital

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Lesson 4: Balancing accounts: the trial balance

This lesson deals with the practical matter of the layout of accounts, including an alternative format. It is worthwhile giving time to this topic: marks may be lost in theexamination if accounts are presented poorly.

The lesson also discusses a straightforward method of checking that all double entries havebeen completed satisfactorily.This checking is done by the preparation of a trial balance.

Step 1

1 Show that the balance on an account is the amount by which one side is greater thanthe other:

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Aim: to be able to balance accounts and to recognize the significance of individual balances

Topic summary

● The balancing of accounts● Running balance account format● The preparation of a trial balance


3.1 The meaning of the term account balance

3.2 Balancing the T-type ledger account, including:

3.2.1 bringing the balance down for the start of the next accounting period3.2.2 dealing with the nil balance

3.3 The significance of any particular account balance, eg a credit balance on a creditor account, a debit balance on an expense account

3.4 The significance of the term running balance account

3.5 The preparation of accounts in running balance form

3.7 The procedure for other end-of-period balancing, and ruling off, of accounts

11.1 The purpose of the trial balance

11.2 The preparation of a trial balance from a list of account balances

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X expense account

Dr CrYear 3 £ Year 3 £

Entries totalling 680 Entries totalling 600

Here, there is a debit (Dr) balance of £80. The full balancing of this account at31 March Year 3 is as follows:

X expense account

Year 3 £ Year 3 £

31 Mar Balance c/d 80

680 680

1 Apr Balance b/d 80

The balance is first carried down (c/d) and then brought down (b/d), which shouldalways be done and not merely entered on one side.To fail to bring down the balanceis to break the double-entry rule.

2 Ask the students to write out and then balance the following creditor account:

K Jacques

Year 5 £ Year 5 £7 May Returns outwards 50 3 May Purchases 620

28 May Bank 570 21 May Purchases 415

3 Explain a ‘nil’ balance:

F Wiles

Year 6 £ Year 6 £4 July Sales 370 12 July Returns inwards 40

29 July Bank 330370 370

Or a variation on the nil balance:

T Stone

Year 6 £ Year 6 £9 Aug 470 26 Aug Bank 470

Point out that no totals are required in this instance; just two lines under the figures.

4 Hand out copies of, or show on the overhead projector, exercises T/4.1 and T/4.2 inthe Appendix (page 206).Ask the students to work through them.

Balancing accounts: the trial balance

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Entries 680 Entries 600

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Step 2

1 Emphasize that, so far, the format used for the accounts has been two-sided, ie:

Balances are calculated at the end of a fixed period – usually monthly for debtors andcreditors; annually in some other cases; and so on.This layout does not reveal the balanceeasily or quickly. However, the running-balance format, which is a three-column layout,shows the balance after each transaction is entered. It is used by banks in the (monthly)statements they issue to customers.

2 An example of an account in running-balance format is included in the Appendix (seeT/4.3, page 207). Point out that this example is not a specimen of the statements issuedby banks. It is an example of the bank account as kept by the customer of the bank.

3 Explain the format, emphasizing that as each transaction is entered the balance on theaccount is brought up to date. Stress that the notation, either ‘Dr’ or ‘Cr’, must be shownbeside the balance figure.

4 Ask the students to show T/4.3 as a two-sided layout, ie the format previously used inthis course.Then compare running-balance format with the two-sided layout.


Exercise

RequiredUsing the information in T/4.2 (page 206), prepare debtor and creditor accounts inrunning-balance format.

Step 3

1 Work through exercise T/4.4 in the Appendix (page 207) with the students, followingthe instructions below.

(a) Enter the transactions in appropriate accounts.


25

Aim: to appreciate and to be able to apply the running-balance format

Left-hand side Right-hand sidedebits credits

(Dr) (Cr)

Aim: to be able to prepare a trial balance

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(b) Check with the class that the total of the debit entries equals the total of the credit entries.The total should be £27,220.

(c) Next ask the students to enter in pencil, in the margin, the balance on each account– either debit or credit.

(d) Now list these balances; the total of the debit balances should agree with the total of the credit balances.A trial balance has been produced.

2 Explain that the trial balance is used to check that double entry has been done correctly.If the totals of the two sides of the trial balance are in agreement, then entries have beenmade accurately. It does not, however, prove that. For example, transactions could havebeen omitted entirely.This limitation will be considered further in Lesson 21 (see entry11.5 in the Extended Syllabus).

3 Hand out copies of, or show on the overhead projector, exercises T/4.5 and T/4.6 inthe Appendix (page 208).Ask the students to work through them.

4 Show the class the following account, which is an example of a candidate’s solution toan examination question:

F Leonard

Year 5 £ Year 5 £10 Apr Returns outwards 30 6 Apr Purchases 418

10 Apr Returns outwards 30

In this case, a candidate has entered the transaction twice – a common mistake. Oneentry cancels the other for returns outwards.The examiner can only conclude that the candidate does not know how to deal with returns outwards.As a result, no marks willbe given for either entry for 10 April.


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Lesson 5: Trading and Profit & Loss Accounts

This lesson reviews the structure of income, cost, and profit, and their relationship to oneanother. It also deals with the concluding stage of a period’s activities, which involves establishing either a profit or a loss. Establishing a profit or loss and showing how they arereached are achieved through ‘final accounts’, a broadly used book-keeping term that covers, in part, the Trading and Profit & Loss Account.

Step 1

1 Explain the different classes of profit, that they are:

● gross profit – the excess of sales income over cost of goods sold; and● net profit – gross profit less other costs.

27

Aim: to be able to prepare a Trading and Profit & Loss Account

Topic summary

● Structure of income, cost, and profit● The preparation of Trading and Profit & Loss Accounts


3.6 The transfer of a balance at period end to Trading Account or Profit & LossAccount, as appropriate

19.1 The Trading and Profit & Loss Accounts as part of the double-entry system

19.2 The basic structure of income, costs, and profit in a business

19.5 The calculation of costs of goods sold

19.7 The difference between trading income and other income

19.8 The difference between gross profit and net profit

19.12 The double entries for expense amounts between the Profit & Loss Accountand the individual expense accounts

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2 Draw the students attention to the structure of income, costs, and profit as it is shownin Figure 5.1. ‘Other income’ is the income arising from sources other than normaltrading activities, eg interest earned on money lent or rent receivable.The compositionof total income is as follows:

total income = income from sales + other income(‘trading income’)

3 Ask the students to work through 2 small exercises on the structure of costs, see T/5.1*in the Appendix (page 209).

Step 2

1 To show the students how to prepare a Trading and Profit & Loss Account, give themeach a copy of the trial balance of T Avis at 31 December Year 5 to work through.Thetrial balance is labelled T/5.2 in the Appendix (page 210).Work through the exampleof T Avis with the students as set out below.

Trading and Profit & Loss Accounts

28

Grossprofit

Net profit

Incomefromsales= salesrevenue

Runningexpenses

Cost ofgoodssold

Other income

Figure 5.1 The structure of income, costs, and profit

Aim: to be able to prepare a Trading and Profit & Loss Account

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2 The first stage of working through the trial balance involves preparing a TradingAccount. Preparing a Trading Account requires a calculation of the cost of goods sold,which is:

The closing stock has yet to be brought into the accounts.There is no opening stockin this instance because Year 5 was the first year of trading for T Avis.

3 The significant accounts at this stage are the Purchases and Sales Accounts.These wouldappear as follows:

Purchases

Year 5 £Sundries 5,160

Sales

Year 5 £Sundries 6,320

4 Stress the word ‘account’ in Trading and Profit & Loss Account: it is part of the double-entry system. For every entry made in the account, there must be a corresponding entryelsewhere in the account system.

5 Prepare the following Trading and Profit & Loss Account with the class, using the datain T/5.2 in the Appendix (page 210):

T AvisTrading and Profit & Loss Account

for the year ended 31 December Year 5

£ £Purchases 5,160 Sales 6,320Gross profit c/d 3,260 Stock at 31 December Year 5 2,100

8,420 8,420

Gross profit b/d 3,260

6 Show the double-entry effect in the Purchases and Sales Accounts:

Purchases

Year 5 £ Year 5 £Sundries 5,160 31 Dec Trading 5,160

Sales

Year 5 £ Year 5 £31 Dec Trading 6,320 Sundries 6,320


29

purchasesless closing stock

both stated atcost price

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7 The entry for stock (at 31 December Year 5) requires careful explanation. So far, only acredit entry has been made.To complete the double entry, a new account is opened:

Stock

Year 5 £31 Dec Trading 2,100

8 It has been stated that purchases less closing stock equals the cost of goods sold. Toreflect this fact, it is usual to deduct stock on the debit side in the Trading Accountinstead of entering the stock on the credit side.The effect on gross profit is the same.Therefore, the Trading Account, together with the Profit & Loss Account, becomes:



£ £Purchases 5,160 Sales 6,320less Stock, 31 December Year 5 2,100

Cost of goods sold 3,060Gross profit c/d 3,260

6,320 6,320

Rent payable 700 Gross profit b/d 3,260Office expenses 360 Rent receivable 450Lighting and heating 420Net profit 2,230

3,710 3,710

9 While compiling the above Profit & Loss Account, the expense and income accountsare closed off as follows:

Rent Payable

Year 5 £ Year 5 £Sundries 700 31 Dec Profit and loss 700

Office Expenses


Lighting and Heating


Rent Receivable

Year 5 £ Year 5 £31 Dec Profit and loss 450 Sundries 450


30

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The double entry for gross profit is the credit to the Profit & Loss Account. The double entry for net profit is a credit to the Capital Account: ie profit increases capital.

10 The Drawings Account is closed off to Capital Account.

Capital

Year 5 £ Year 5 £31 Dec Drawings 800 1 Jan Bank 4,00031 Dec Balance c/d 5,430 31 Dec Profit and loss:

net profit 2,230

6,230 6,230

Year 61 Jan Balance b/d 5,430

Drawings

Year 5 £ Year 5 £Sundries 800 31 Dec Capital 800

NoteMany examination answers show closing stock as a credit entry in the Trading Account,instead of as a deduction on the left-hand side.As a consequence of this error, studentslose a mark because they fail to show the cost of goods sold.

11 Copy and hand out or show exercises T/5.3 and T/5.4 in the Appendix (pages 211 and212) on the overhead projector.Ask the students to work through them. Both exercisesinvolve businesses in their first year of trading. Because the businesses are new, there isno opening stock, a topic that is dealt with in Lesson 7. Explain that the usual practiceis to value closing stock at its cost price.This method is considered further in Lesson 23.


31

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32

Lesson 6: The balance sheet

Two aspects of study concerning the balance sheet require attention. First, the students needto be able to appreciate the meaning of the contents of a balance sheet. Second, they shouldbe able to prepare one that is meaningful, ie easily understood by the reader.

Step 1

1 Refer to the trial balance of T Avis at 31 December Year 5 (see page 210). If it has not already been done, the accounts of those items that have already been closed off (eg transferred to Profit & Loss Account) should be ticked.Those left are Capital andDrawings, together with the Asset and Liability Accounts. These accounts and the closing stock are shown in the following balance sheet.

Topic summary

● The main elements of the balance sheet and its overall purpose● The distinction between fixed assets and current assets, and between longer-term

liabilities and amounts due within 1 year (current liabilities)● The effective grouping of assets and liabilities within the balance sheet


20.1 The function of the balance sheet and, in particular, the recognition that it standsoutside the double-entry system

20.2 The significance and use of the terms fixed assets and current assets

20.3 The difference between longer-term liabilities and amounts payable within 12 months(current liabilities); the naming of accounts which might appear under each ofthese headings

20.4 The preparation of a balance sheet in effective format

20.5 The appropriate grouping of items within the balance sheet:

20.5.1 fixed assets20.5.2 current assets20.5.3 capital (or proprietor’s interest)20.5.4 longer-term liabilities20.5.5 amounts payable within 12 months (current liabilities)

Aim: to appreciate the main elements of the balance sheet and its overall purpose

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2 Draw out the purpose of the balance sheet; that it is to show the financial position ofthe business at the date the books are made up.

3 Compare the balance sheet with the Trading and Profit & Loss Account, which is arecord of performance over a past fixed period (usually a year).

4 Explain that the two sides of the balance sheet should agree in total if the double-entryrule has been followed fully.

NoteThe accounts that have been entered in the balance sheet have not been closed off,ie the balances remain on the accounts.The balance sheet is only a list of balances, it is a‘statement’. It is not itself part of the double-entry system.

Step 2

1 Explain why it is necessary to group balance sheet items. Grouping the items:

● gives meaning to the balance sheet, showing that it is comprised of significant elementsand is not just an array of items;

● shows long-term versus short-term liabilities;● shows different timescales among assets, some of which can be quickly turned into

cash (‘liquidity’); others represent money tied up, possibly for many years.

2 In discussing this, refer to the balance sheet above. Using the question-and-answermethod, review the terms ‘fixed assets’ and ‘current assets’.Ask the students for examplesof each.

The balance sheet

33

T AvisBalance sheet at 31 December Year 5

Assets £ Capital £ £Fixtures and fittings 800 Placed in bank

account 4,000Motor vehicle 1,600 add Net profit 2,230Stock of goods 2,100 less Drawings 800 1,430Debtors 750 5,430Cash at bank 1,040 LiabilityCash in office 50 Creditors 910

6,340 6,340

Aim: to be able to group effectively the items on a balance sheet

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3 Stress that the recognized sequence of listing assets begins with the most permanent andends with those most easily turned into cash. Demonstrate the sequence as shownbelow.

Fixed Assets Current Assets

Land and buildings from Stock

Fixtures and fittings highly Debtors increasing

Machinery fixed Bank liquidity

Motor vehicles to less Cash

fixed

Other assets will be introduced in due course.

4 Explain that, with fixed assets, the more permanent the assets are likely to be, the more‘fixed’ they are considered to be, eg compare land and buildings with motor vehicles.The more ‘liquid’ an asset, the more easily it can be turned into cash: eg compare thebank balance with stock.

5 Review the normal sequence for capital and liabilities on the right-hand side of the balance sheet.The sequence appears as follows:

● capital;● longer-term liabilities: ie amounts payable in more than 1 year, such as a 2-year

loan (2 years to repayment from the date of the balance sheet);● amounts due within 1 year (or ‘current liabilities’), eg creditors, bank overdraft, or

short-term bank loan.

6 Present the balance sheet of T Avis, grouping and arranging the items in the way shownbelow.


Fixed Assets £ £ Capital £ £

Fixtures and fittings 800 Placed in bank account 4,000Motor vehicle 1,600 add Net profit 2,230

2,400 less Drawings 800 1,430

Current Assets 5,430Stock 2,100 Amount due within 1 yearDebtors 750 (current liabilities)Bank 1,040 Creditors 910Cash 50 3,940

6,340 6,340

The balance sheet

34

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7 Stress the importance of a good balance-sheet layout. The items need to be suitablygrouped and also in a suitable sequence within each group. Marks are lost when a balance sheet is presented poorly.

8 Hand out copies of, or show on the overhead projector, exercises T/6.1*, T/6.2*,T/6.3*, and T/6.4* in the Appendix (pages 212–15).Ask the students to work throughthem.

The balance sheet

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Lesson 7: Final accounts: more features

This lesson is concerned with some very practical and detailed matters that appear, fromthe answers elicited in examinations, to be given limited attention during the course ofstudy. Carriage, in particular, would seem to be neglected. The Stock Account is also amajor point of weakness. Candidates are usually able to record opening and closing stocksin the Trading Account – although not always in the most favourable position in the TradingAccount. However, candidates may have difficulty in correctly recording the Stock Accountitself.

36

Topic summary

● Period-end entries for returns inwards and outwards● The different forms of carriage and how they are recorded in final accounts● Opening and closing stock figures in the Stock Account and final accounts● The review and application of the end-of-year procedure


3.6 The transfer of a balance at period end to Trading Account and Profit & Loss Account, as appropriate

3.7 The procedure for other end-of-period balancing, and ruling off, of accounts

19.3 Showing returns inwards and returns outwards suitably deducted to reveal net sales and net purchases respectively

19.6 Showing the make-up of ‘cost of goods sold’

19.9 The function of the Stock Account and the double-entry relationship between the Trading Account and the Stock Account

19.10 End-of-period transfer of balances from the General Ledger to the Trading Account (Purchases Account, Sales Account, Returns Outwards Account,Returns Inwards Account)

19.11 The difference between carriage inwards and carrriage outwards and recording them in the Trading Account and Profit & Loss Account respectively

19.13 Showing income and expenses within the final accounts, with related items being suitably brought together

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Step 1

1 Remind the students that the Goods Account is divided into Purchases, Sales, ReturnsOutwards, and Returns Inwards Accounts. This type of division has not yet beenbrought fully into the Trading Account.

ExampleA trader in Year 3 has total returns outwards and returns inwards of £450 and £610respectively.The Returns Accounts might appear as follows:

With the debit transfer (to the Trading Account) entry in the Returns OutwardsAccount, the matching entry would be expected to appear to the credit of the TradingAccount. However, the entry does not appear as a credit, but as a deduction – from purchases – on the debit side. Conversely, returns inwards appears as a deduction – fromsales – on the credit side of the Trading Account. The aim of showing returns as deductions is to provide a neater and more informative picture of what has happened.This might be seen in a Trading Account as follows:

Point out that £9,760 is the sum of the net purchases and that £20,640 is the sum ofthe net sales.

Inform the students that the layout shown for returns in J Blunt’s Trading Account willalways be followed from now onwards.

Final accounts: more features

37

Aim: to be able to show period-end entries for returns inwards and outwards

Returns Outwards

Year 3 £ Year 3 £31 Dec Trading 450 Sundries 450

Returns Inwards

Year 3 £ Year 3 £Sundries 610 31 Dec Trading 610

J BluntTrading Account


£ £Purchases 10,300 Sales 21,400less Returns outwards 540 less Returns inwards 760

9,760 20,640

less Stock at 31 Dec Year 3 2,100

Cost of goods sold 7,660Gross profit 12,980

20,640 20,640

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Exercise

RequiredPrepare a Trading Account for F Waldron for the year ended 31 December Year 5 fromthe following details:

£Purchases 17,300Sales 37,850Returns inwards 1,320Returns outwards 870Stock at 31 Dec Year 5 3,200

Solution

Step 2

1 Explain carefully the nature of carriage; that carriage is an expense incurred in, orcharge made for, the delivery of goods.

2 Make the distinction clear between carriage inwards and carriage outwards:

(a) Carriage inwardsCarriage on goods coming into the firm, ie on purchases. Instead of paying an inclusive price for purchases that covers carriage, a separate charge is made.Therefore, carriage is added to the cost of purchases and is included in the Trading Account.


38

F WaldronTrading Account


£ £Purchases 17,300 Sales 37,850less Returns outwards 870 less Returns outwards 1,320

16,430 36,530

less Stock at 31 Dec Year 5 3,200Cost of goods sold 13,230Gross profit 23,300

36,530 36,530

Aim: to appreciate the different forms of carriage as an expense and how they are recorded in final accounts

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(b) Carriage outwardsCarriage on goods going out of the firm, ie on sales. It is regarded as a cost of distributing goods to customers and is entered as a separate item in the Profit & Loss Account.

The layout of purchases including adjustments (using different figures) is as follows:

The adjustments for purchases and sales may be summarized as follows:

Net sales = Sales less returns inwardsNet purchases = Purchase plus carriage inwards less returns outwards


Step 3

1 So far, these studies have been limited to the first year of trading, ie there has been noopening-stock figure. From the second year, there will be 2 stock figures: for example,the closing stock at 31 December Year 5 becomes the opening stock at 1 January Year 6.

2 Use the situation of T Avis as an example again (see T/7.2 in the Appendix, page 216).T Avis has prepared a trial balance at the end of his second year of trading.Work throughthe Trading and Profit & Loss Account, and the balance sheet, with the class.


39

£Purchases 12,800add Carriage inwards 430

13,230less Returns outwards 520

12,710less Closing stock 1,980

Cost of goods sold 10,730

Aim: to be able to record opening and closing stock figures in the Stock Account and final accounts

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3 Show the Stock Account for T Avis for his first and second years as follows:


40



£ £ £Stock at 1 Jan Year 6 2,100 Sales 13,050Purchases 9,260 less Returns inwards 480

12,570

add Carriage inwards 430

9,690

less Returns outwards 340 9,350

11,450

less Stock at 31 Dec Year 6 2,450Cost of goods sold 9,000Gross profit c/d 3,570

12,570 12,570

Rent payable 1,100 Gross profit b/d 3,570Office expenses 590 Rent receivable 450Lighting and heating 610Carriage outwards 380Net profit 1,340

4,020 4,020

Balance sheet at 31 December Year 6

£ £ £ £Fixed Assets CapitalFixtures and fittings 900 Balance at 1 Jan Year 6 5,430Motor vehicle 1,600 add Net profit 1,340

2,500 less drawings 1,100 240

Current Assets 5,670Stock 2,450Debtors 1,170 Amount due within 1 yearBank 1,230 Creditors 1,750Cash 70 4,920

7,420 7,420

Stock

£ Year 5 £Trading 2,100 31 Dec Balance c/d 2,100

Year 6 Year 61 Jan Balance b/d 2,100 31 Dec Trading 2,100

31Dec Trading 2,450 31 Dec Balance c/d 2,450


Year 531 Dec

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4 Explain that the Stock Account is used only to carry the figure for the balance of stockfrom one year to the next. No transactions are entered into this account. It is a ‘holding’ account only.

5 Draw attention to the entry at 31 December Year 5 (encircled).This entry is frequentlyentered at 1 January Year 6. The correct way to enter it is as 31 December Year 5 initially and then to carry it down, as shown above.

6 Ask the students to work through the following exercise:

Exercise

Stock at 31 Mar Year 6 £31,680Stock at 31 Mar Year 7 £34,270

RequiredShow the Stock Account for the period 31 March Year 6 to 1 April Year 7.

NoteThe stock at 1 April Year 6 is the same as the stock at 31 March Year 6.

SolutionStock

Year 6 £ Year 6 £31 Mar Trading 31,680 31 Mar Balance c/d 31,680

Year 71 Apr Balance b/d 31,680 31 Mar Trading 31,680

Year 731 Mar Trading 34,270 31 Mar Balance c/d 34,270

1 Apr Balance b/d 34,270


Step 4

1 Review the end-of-year procedure by showing Figure 7.1 (overleaf) on the overheadprojector. See also T/7.5 in the Appendix (page 218).

2 Draw the students’ attention to points (a) to (c) overleaf, which are highlighted by Figure 7.1.


41

Aim: to review and to be able to apply the end-of-year procedure

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(a) The accounts for which balances are recorded in the balance sheet have not been‘closed off ’.They retain their balances, ready for the next trading period or year.The balance sheet is merely a list of items and is not part of the double entry.

(b) Transferring a balance, eg for purchases or insurance, into the Trading Account orProfit & Loss Account is part of double entry. Each amount is being carried in the final accounts instead of in the ledger account. The various amounts are channelled through the final accounts to establish a net profit (or net loss).

(c) The net profit, to complete the double entry, is credited to the Capital Account (debit the Profit & Loss Account and credit the Capital Account) and so the processre-emerges in the ledger accounts.


42

PurchasesSalesReturns outwardsReturns inwardsOpening stockClosing stock

account balancestransferred to Trading Account

Gross profit toProfit & Loss Account

Expense accounts

Other incomeaccounts

accountbalancestransferred to

Profit & Loss Account

Net profit to Capital Account

Drawings Account Capital Account

Cash/bank accountsDebtor/creditor accountsAsset accounts

Balance sheet

Figure 7.1 The end-of-year procedure

(a)

(c)

(b)

(a)

(a)

(b)

(b)

Balanced, iebalances c/don each account

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3 The preparation of final accounts is an important element of the First Level Book-keeping Syllabus. It is therefore important that students become practised at systematically answering final accounts questions at an early stage. Encourage the students to adopt the following method when answering such examination questions:

(i) to read through the question to get an overall understanding, especially noting the‘required’ part of the question;

(ii) to go through the trial balance (or any alternative list of balances) and to place next to each item a code representing the final account in which it appears;

(iii) to tick each item or figure as it is recorded in the final account concerned.

4 Illustrate this method of answering final accounts by applying it to the trial balance ofT Avis at 31 December Year 6 (see below). Leave the codes out and ask the students toenter them alongside the items in the trial balance.

T AvisTrial balance at 31 December Year 6

Dr Cr£ £

Purchases 9,260 TSales 13,050 TCarriage inwards 430 TDebtors 1,170 BSCreditors 1,750 BSRent payable 1,100 P/L (exp)Office expenses 590 P/L (exp)Lighting and heating 610 P/L (exp)Rent receivable 450 P/L (inc)Returns inwards 480 TReturns outwards 340 TCarriage outwards 380 P/L (exp)Fixtures and fittings 900 BSMotor vehicle 1,600 BSCash at bank 1,230 BSCash in office 70 BSStock at 1 January Year 6 2,100 TDrawings 1,100 BSCapital 5,430 BS

21,020 21,020

Key: BS balance sheet P/L (exp) Profit & Loss Account (expenditure)T Trading Account P/L (inc) Profit & Loss Account (income)

NoteStock at 31 December Year 6 was valued at £2,450 T, BS.



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Lesson 8: The division of the ledger

The ledger is the set of accounts of business.These accounts may be kept in a book or seriesof books (as in a manual system) or on computer disc. Dividing the ledger and classifyingaccounts commonly give students difficulty. Careful explanation and plenty of practice canhelp students to achieve success in this topic.

Step 1

1 Outline the possible or likely divisions of the ledger. Encourage the students to identifythe possible advantages of a division, and the reasons for the division, by asking them

44

Topic summary

● The reasons for dividing the ledger and recognizing the usual divisions● The different types of ledger account● The possible subdivisions of the ledger● Producing a balance sheet with a vertical format


4.1 The function of the ledger

4.2 The various possible reasons for subdividing the ledger

4.3 How the ledger might be subdivided, eg Sales Ledger, Purchases Ledger, Cash Book, General Ledger

4.4 Alternative names for the different ledgers, eg Debtors Ledger, Creditors Ledger,Nominal Ledger

4.5 The possible use of a Private Ledger

4.6 The naming of (ie classification of ) the different types of ledger account and explaining the accounts within it

4.7 The distinction between personal, real, and nominal accounts

4.8 How the Sales Ledger might be subdivided

4.9 From a list of accounts, or from transaction details, the naming of the ledger(s) in which each would be recorded

Aim: to appreciate the reasons for dividing the ledger and to recognize the usual divisions

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questions. For example, you could ask the students what advantages there could be tohaving a separate ledger for customers (ie debtors).The possible divisions of the ledgermay be as shown below.

Accounts To be found in the following ledger

(a) customers’ personal accounts, Sales Ledgerie Debtor Accounts (or Debtor Ledger)

(b) suppliers’ personal accounts, Purchases Ledgerie Creditor Accounts (or Bought Ledger or Creditor Ledger)

(c) the receiving and paying Cash Book (developed in Lesson 9)out of money

(d) the remaining accounts General Ledger (or Nominal Ledger)(unless a Private Ledger exists)

(e) accounts requiring confidentiality, Private Ledgereg Capital Account

Draw the students’ attention to the alternative names for the ledgers that are given inbrackets.

Point out that not all firms have a Private Ledger.The purpose of a Private Ledger is tomaintain confidentiality, with access limited to only a few members of staff.

2 Explain that the reasons for dividing the ledger are that:

• smaller units are managed more easily;• the division provides useful information because parts of the ledger are specialized;• it helps to keep control of the various accounts.


Exercise

RequiredState into which ledger each of the following items should be posted:

(i) D Light – Customer Account(ii) Fixtures and Fittings Account(iii) F Masters – Supplier of Goods Account(iv) Wages Account.

Solution

(i) Sales Ledger (or Debtor Ledger)(ii) General Ledger (or Nominal Ledger)(iii) Purchases Ledger (or Bought or Creditor Ledger)(iv) General Ledger (or Nominal Ledger).

The division of the ledger

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Step 2

1 Point out that distinguishing between types of account is commonly referred to as the ‘classification of accounts’, which is the arrangement of accounts into distinct classes.

2 Hand out copies of, or show on the overhead projector, exercises T/8.1* and T/8.2* inthe Appendix (pages 220 and 221).Ask the students to work through them.

3 Draw the students’ attention to the difference between:

(a) the Sales Ledger the ledger containing debtor accounts

and

the Sales Account the account in the General Ledger which records the income receivable from the sale of goods, whether for cash or on credit

(b) the Nominal Ledger an alternative name for the General Ledger

and

the Nominal Account a name for the various income and expense accounts


46

Aim: to be able to distinguish between the different types of ledger account

ACCOUNTS

Personal

Capital

Creditors

Debtors

Drawings

Impersonal(of things rather than

of people)

Real Nominal

Asset accounts(including

cash and bank)

Income andexpenseaccounts

Figure 8.1 The classification of accounts

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Step 3

1 Review the possible sub-divisions of the ledger. Use the students’ experience to reviewthis topic by asking them questions. For example, you could ask the students why theSales Ledger might be divided according to sales territories/areas and what advantagesmight result from this. Suggest that those who are in employment try to find out howthe ledger is divided or subdivided within the organizations they work for.

A large Sales Ledger might be subdivided for any of the reasons stated in point 2 onpage 45.The ways in which the Sales Ledger can be divided are:

(a) alphabetically – by the customers’ names;(b) numerically – in which each customer is allotted a number;(c) geographically (or territorially) – by area or region, eg by sales territories;(d) on a product basis – by product categories;(e) by type of customer, eg trade customers, as distinct from private individuals, or

according to the level of credit allowed.

2 Hand out copies of, or show on the overhead projector, exercise T/8.3* in theAppendix (page 221).Ask the students to work through the exercise.

Step 4

1 Stress that a vertical format is not required for the First Level Book-keeping examination. Explain, however, that a vertical layout offers more scope for presentation,especially when more detail needs to be included concerning fixed assets. More spaceis provided by this layout, which can greatly help candidates.

2 The balance sheet of T Avis at 31 December Year 6 is presented overleaf in vertical format. See also T/8.4 in the Appendix (page 222).

3 Point out that it is usual to deduct ‘Amounts due within 1 year’ (current liabilities) fromcurrent assets to obtain ‘net current assets’.

NoteKnowledge of ‘working capital’ (net current assets) is not required by the First Level syllabus.Therefore, students who omit the words ‘net current assets’ will not be penalized.However, encourage the students to lay out their work well.


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Aim: to be able to produce a balance sheet with a vertical format

Aim: to recognize the various possible subdivisions of the ledger

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4 Hand out copies of, or show on the overhead projector, exercise T/8.5* in theAppendix (page 223). Ask the students to work through the exercise. Remind the students to apply the examination method outlined in Lesson 7 (page 43).

5 Explain that after the total amount of fixed assets and net current assets has been established, the ‘Amount due in more than 1 year’ is deducted.This way of positioningentries is preferred by the LCCIEB to the alternative of placing longer-term liabilitiesas an addition underneath capital.


48


£ £Fixed AssetsFixtures and fittings 900Motor vehicle 1,600

2,500Current AssetsStock 2,450Debtors 1,170Bank 1,230Cash 70

4,920less Amounts due within 1 year

Creditors 1,750Net current assets 3,170

5,670Financed by:

Capital – balance at 1 Jan Year 6 5,430add Net profit 1,340less Drawings 1,100 240

5,670

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Lesson 9: Bank facilities Cash Book: 2 columns

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Topic summary

● Basic matters concerning methods of payment and cash and bank records● The use of a 2-column Cash Book● The significance of a bank overdraft and its effect on the Bank Account● The book-keeping relationship between the Bank Current Account and the Bank

Deposit Account


7.1 The main types of bank account and their key features

7.2 The key aspects of the following methods of payment and receipt of money, and the differences between them:

7.2.1 cash7.2.2 cheque7.2.3 credit transfer7.2.4 standing order7.2.5 direct debit

7.3 Significance of the term bank overdraft: how an overdraft might arise

7.4 The differences between:

7.4.1 interest receivable (by the customer) on a bank account7.4.2 interest payable on a bank loan or overdraft7.4.3 bank charges as charged by a bank for operating an account

7.5 Naming of and use of the following abbreviations:

7.5.1 DD or D/D – direct debit7.5.2 CT or C/T – credit transfer7.5.3 STO or S/O – standing order7.5.4 Div – dividend

7.6 Significance of the following terms:

7.6.1 bank paying-in book7.6.2 banker’s order7.6.3 cheque book counterfoils/stubs7.6.4 counter credits7.6.5 drawer7.6.6 drawee7.6.7 remittance

(continued)

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A detailed knowledge of bank facilities is not required for the LCCIEB First Level Book-keeping examination.There is, however, a need to know:

• the nature of 2 types of bank account: the Current Account and the Deposit Account;• the main methods of payment through a bank, eg cheque or credit transfer;• the process of cheque clearance (in outline);• how the bank account affects the Cash Book.

Reconciliation between the bank statement and the Cash Book is dealt with in Lesson 17(page 132).

You can obtain literature from a bank, that describes the accounts that are available, andmethods of payment, together with specimen paying-in slips, for example.

Step 1

Many students will be aware of bank facilities and may have first-hand experience of holding a bank account. This knowledge can be drawn upon by asking the students questions at appropriate points in the lesson. For example, you could ask them about thetype of bank accounts they have, and if any features vary from those of the 2 basic types ofaccount.You could also ask what factors might delay the clearance of a cheque.

1 Bank accountsEnsure that students are aware of the 2 main types of bank account: the CurrentAccount and the Deposit Account. Review the key features of each:

Deposit Account normally for earning interest on the balance; withdrawals are infrequent

Bank facilities Cash Book: 2 columns

50

Extended Syllabus references (continued)

8.4 Transfers between the cash and bank accounts (contra entries)

8.6 The variations of entry arising on and from the sale of goods for cash, eg the immediate banking of cash as against the delayed banking of cash

8.7 The book-keeping entries required on the transfer of funds between the Bank Current Account and the Bank Deposit Account

8.17 The periodic balancing of the Cash Book, bringing the balance down for the start of the next period

Aim: to be able to apply knowledge of bank facilities to answering basic questions onmethods of payment and cash and bank records

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Current Account a ‘working account’ for regular banking and withdrawal of money;generally interest is earned on the balance only if the balance is kept above a certain minimum

2 ChequesThe students should be told the following about cheques:

• what their purpose is;• who the parties to a cheque are.

Illustrate this information about cheques by displaying Figure 9.1 on the overhead projector.

Figure 9.1 The interaction of the parties to a cheque

Note The delay in clearance will increase if P Sempster (the payee) delays paying the cheque into his account.

In the simplified form of cheque shown below:

● T Royle is the drawer, ie the party making payment;● Albion Bank,York east is the drawee, ie the party upon whom the cheque is drawn

and where T Royle has his bank account;● P Sempster is the payee, ie the party to whom the cheque is payable.


51

Albion Bank plc 7 May Year 4

York East branch

Pay P SempsterThree hundred and sixty poundsand thirty pence

T Royle

instructs Bank

Drawer

or to drawer himself

to pay to

Payee

£360-30

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Explaining what the different cheque numbers are will be useful in making cash-bookentries and, later on, in preparing bank-reconciliation statements (see the student’s bookHow to Pass Book-keeping, First Level, pages 74–5).

3 Paying-in slipTell students that the paying-in slip is used for paying cash or cheques into a bankaccount. It is often referred to in questions requiring the preparation of a Cash Book.

4 Cheque clearance Explain what cheque clearance is. A cheque is cleared when the drawee bank has indicated that it will pay the amount stated on the cheque. Emphasize that there is atime delay before the 2 accounts involved (drawer’s and drawee’s) are adjusted. Forexample, in the journey of a drawn cheque illustrated in Figure 9.2, a cheque is drawnby T Royle (an account holder at Albion Bank,York East branch) payable to P Semster(who holds an account at Derbyshire Bank, Chester branch) – also in the Appendix:T/9.1 (page 225).


52

Year 4 T Royle (drawer)

7 May cheque T Royle creditssent to bank account

P Sempster (payee)receives cheque P Sempster debits

bank account

8 May pays cheque intoaccount with

Derbyshire BankChester branch

9 May cheque sent to

10 May Derbyshire Bankclearance centre

sent (with othercheques) to

10 May Albion Bankclearance centre

11 May Albion Bank charged againstYork East branch account of T Royle

Figure 9.2 The journey of a ‘drawn’ cheque

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5 Other payment methodsThe 3 methods of which candidates need to be aware are:

(a) credit transfer used for:(i) single settlement, eg payment of one bill; or (ii) multiple settlement, eg one instruction to the bank to make a

number of payments to different accounts (of persons or organizations).

(b) standing order for regular payments:• of fixed amounts;• at stated dates;• to certain persons or firms.

(c) direct debit ‘credit transfer in reverse’: initiated by the creditor, although withthe written agreement of the debtor:• for either fixed or variable amounts;• when the time intervals between payments vary.

6 Counter creditsThis term literally means the recognition of credit at the bank counter. It relates to payments into a bank account. Counter credits may cover a number of cheques, etcamounting to the sum stated.

7 Explain the following terms:

• interest receivable (by the customer) on a bank account – normally only if the balance is above a certain minimum;

• interest payable on a bank loan or overdraft; and• bank commission (charges), which are charged by a bank for operating an account.

NoteExplain the terms:

bank loan an amount made available for an agreed period; interest is charged on the full amount of the loan regardless of how much is drawn.

bank overdraft an overdraft occurs when withdrawals exceed deposits; it may be with or without prior agreement with the bank; interest is charged fromday to day on the varying balance.

8 Give each student a copy of the multiple-choice questions (T/9.2 in the Appendix,page 226).Ask the students to work through them.


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Step 2

Answers to examination questions requiring the preparation of a Cash Book are oftenweak.The weakness may, in part, be due to candidates’ unfamiliarity with presenting theirwork in columnar form.

1 Explain that, in a 2-column Cash Book, related accounts, cash and bank, are merelypositioned beside each other. Practice in answering questions requiring columnar formshould solve any difficulty the students might have.

2 Show the students cash and bank accounts, as they have been introduced so far on theoverhead projector, eg:

3 Show the 2 accounts combined. Make sure you enter the items in correct date order.Carefully tick ( ) the original items as they are entered in the newly presented CashBook.


54

Aim: to be able to prepare a 2-column Cash Book

Cash

Year 2 £ Year 2 £1 Sep Balance b/d 43 5 Sep Cleaning 187 Sep Sales 116 11 Sep K Mills 37

26 Sep R Layburn 51 19 Sep Postage 1930 Sep Balance c/d 136

210 210

1 Oct Balance b/d 136

Bank

Year 2 £ Year 2 £1 Sep Balance b/d 726 4 Sep Rent 2408 Sep T Wells 315 16 Sep T Laite 176

12 Sep Office furniture 290 20 Sep Insurance 21525 Sep J Telby 85 28 Sep V Barnes 167

30 Sep Balance c/d 718

1,416 1,416

1 Oct Balance b/d 718

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CASH BOOK

Cash Bank Cash BankYear 2 £ £ Year 2 £ £

1 Sep Balances b/d 43 726 4 Sep Rent 2407 Sep Sales 116 5 Sep Cleaning 188 Sep T Wells 315 11 Sep K Mills 37

12 Sep Office furniture 290 16 Sep T Laite 17625 Sep J Telby 85 19 Sep Postage 1926 Sep R Layburn 51 20 Sep Insurance 215

28 Sep V Barnes 6730 Sep Balance c/d 136 718

210 1,416 210 1,416

1 Oct Balance b/d 136 718

Stress the importance of entering the items in date order.


5 Ask the students why it is necessary to keep a separate record in the Cash Book.Thereare two answers:

(a) A golden rule in accounting is to separate, if possible, the handling of, or dealingwith, money from other aspects. This action lessens the chance of an employeetaking advantage of the system.

(b) The volume of work in dealing with the receipt and payment of money might alsojustify a separate record.

6 Ask the students why it is necessary to keep cash and bank accounts together incolumnar format.The answer is that they are so closely related that transfer sometimestakes place between them.

7 Explain that the transfer of cash into the bank would result in:

● cash reduced – credit cash● bank increased – debit bank.

8 Illustrate how the transfer of cash into the bank would appear in the Cash Book:

CASH BOOK

Cash Bank Cash BankYear 4 £ £ Year 4 £ £12 Feb Cash C 270 12 Feb Bank C 270

The ‘C’ means contra, which is used where a double entry is complete within the CashBook.


55

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9 Cash might also be taken out of the bank. Show the Cash Book as it would appearwhen money is withdrawn from the bank account to increase office cash:

CASH BOOK

Cash Bank Cash BankYear 4 £ £ Year 4 £ £15 Mar Bank C 120 15 Mar Cash C 120


11 Check that the students are making the entries correctly in the answer to exerciseT/9.4. In particular check that:

(a) each transaction is dated;(b) transactions are entered in strict date order;(c) the appropriate wording is entered in the middle ‘details’ column, which always

contains the name of the corresponding account, ie where the double entry is completed.

12 Ask the students if they can spot any bad business practice being followed by W Towcester. The answer is that there is some bad business practice. W Towcester iskeeping too much cash in the office at one time, which is a security risk. On 6 April,£470 cash was received for sales, none of which was banked until 9 April.

13 Explain that for reasons of security, the general practice is to bank cash, if possible, onthe day of receipt. If cash is banked on the day that it is received, the account entriesshould be recorded as if a cheque had been banked immediately. For example, on 9 MayYear 6,W Towcester receives £590 in cash from sales and banks the cash the same day.The account entry for this transaction would be as follows:

CASH BOOK

Cash Bank Cash BankYear 6 £ £ Year £ £

9 May Sales 590

14 Point out that some book-keepers record the entry for cash sales that are banked, firstas a debit in the cash column and then separately bank the amount. If the entry has beenrecorded in this way, the initial entry must be followed by a complete set of contraentries such as credit cash/debit bank. For examination purposes, the method shown inW Towcester’s Cash Book above – direct entry in the debit bank column – is stronglyrecommended. This method prevents complications and confusion as to the doubleentry is less likely. A common fault in answers to examination questions on this topicis failing to make the complete contra, which loses marks.


56

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15 Explain that there is an alternative way of recording cash sales that are banked. Thisalternative is used when part of the cash received from sales is banked (on the same day)and the remainder is retained as office cash. For example, 5 June Year 6, £985 is receivedfrom cash, £900 of which was banked on the same day. This transaction would berecorded as follows:

Method ACASH BOOK

Cash Bank Cash BankYear 6 £ £ £ £

5 Jun Sales 85 900

If treated as 2 transactions, the entry would be recorded as follows:

Method BCASH BOOK


5 Jun Sales 985 5 Jun Bank C 9005 Jun Cash C 900

Method A is to be preferred. It is simpler and less prone to error.


Step 3

1 Explain that a bank overdraft might arise because:

• the bank has agreed that the account may be overdrawn, subject to a limit;• the customer (intentionally or otherwise) has drawn more out of the account than it

contains.

2 Tell the students that the effect of an overdraft is to create a ‘minus’ or negative balancefrom the customer’s viewpoint.The balance changes from debit to credit and from assetto liability (the amount owed to the bank).

3 Illustrate the significance of a bank overdraft and its effect by referring in the Appendix,page 229 to the Cash Book of F Swaine (see T.9.5/A). If a cheque for £9,000 had beendrawn from F Swaine’s account on 30 November Year 5, the Cash Book would appearas follows:


57

Aim: to be aware of the significance of a bank overdraft and its effect on the bank account

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4 Point out that:

● The credit balance for bank will appear in the balance sheet of F Swaine as a liability,ie under the heading of ‘Amounts due within 1 year’.

● Cash never has a credit balance. Negative cash is an impossibility.

Particularly stress the second point; this will help prevent students from wrongly showinga concluding credit balance for cash.

Step 4

Remind the students that the bank Current Account is very much a working account thatis used for regular banking and withdrawal of money.The Deposit Account, however, hasmoney paid into it or withdrawn from it infrequently.The Current Account is recorded inthe Cash Book; the Deposit Account is kept in the General Ledger because entries areinfrequent.Thus, if there were a transfer on 12 April Year 4 of £2,000 from the CurrentAccount into the Deposit Account, the entries would be recorded as follows:


58

F SwaineCASH BOOK


1 Nov Capital 12,000 3 Nov Bank C 11,5003 Nov Cash C 11,500 5 Nov Motor vehicle 4,2008 Nov Sales 860 10 Nov Wages 270

17 Nov Bank C 130 13 Nov Purchases 1,04020 Nov T Dart 315 15 Nov Carriage 4323 Nov Sales 210 700 17 Nov Cash C 13030 Nov Balance c/d 1,455 18 Nov Wages 290

28 Nov Drawings 15029 Nov F Glubb 46030 Nov S Royal 9,00030 Nov Balance c/d 87

12,340 14,830 12,340 14,830

1 Dec Balance b/d 87 1 Dec Balance b/d 1,455

Aim: to appreciate the book-keeping relationship between the bank Current Accountand the bank Deposit Account

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CASH BOOK

Cash BankYear 4 £ £12 Apr Bank

Deposit a/c 2,000

General LedgerBank Deposit Account

Year 4 £12 Apr Bank

(Current a/c) 2,000

If there were a withdrawal from the bank Deposit Account into the bank Current Accountthe entries would, of course, be the reverse of those shown above.


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60

Lesson 10: Cash Book: 3 columns – cash discount

One of the topics that causes students difficulty is discounts. ‘Cash discount’ is a rather misleading term: it is really an allowance given to encourage payment within a certain period of time. Understanding what cash discount means is the key to solving at least partof the students’ difficulty. A debtor is entitled to a cash discount only when the paymentcondition is met.

Topic summary

● The significance of cash discount● Account entries in respect of cash discount● Preparing the 3-column Cash Book, including entries for discounts, and posting

discount totals to the General Ledger


8.2 Use of the 3-column Cash Book (the bank columns recording the Bank CurrentAccount only)

8.3 The posting of individual transactions from the Cash Book to the ledger

8.5 The differences in book-keeping entries regarding the withdrawal of funds fromthe bank, as between:

8.5.1 that for use in the business – a contra entry8.5.2 that for private use – drawings

8.8 Cash discount as part of the terms of sale

8.9 The impact of cash discount upon the seller (discount allowed) and the buyer (discount received) respectively

8.10 The double-entry effect of discount allowed and discount received respectively

8.11 The purpose and use of discount columns in the Cash Book

8.18 The periodic posting of discount-column totals from the Cash Book to theDiscount Allowed and Discount Received Accounts in the General Ledger

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Step 1

1 Discuss the purpose of cash discount. Explain that its purpose is to induce prompt orearly payment by a customer who has been sold goods on credit. By receiving paymentearly, the seller is able to use the money to purchase and then sell more goods. Cash discount, as part of the seller’s ‘terms of sale’, also serves to attract the would-be purchaser.The terms of sale might state, for example, that:

● a period of credit of one month is allowed;● if payment is made within 10 days of buying the goods, a cash discount of 2% will

be allowed.

2 Explain that the term ‘cash discount’ is misleading; it is an allowance given to encouragethe purchaser to pay an account within a certain period of time. The allowance is calculated as a percentage (%) of the price of the goods. For example, if the price of thegoods is £250 and the cash discount for payment within 10 days is 2%, then:

£Amount of cash discount: 250 x 2/100 = £5Net amount to be paid 245

3 Stress that the buyer of goods (on credit) is not automatically entitled to a cash discount.It is conditional, although it may be part of the terms of sale, ie the buyer has to meetcertain conditions to receive the discount. For example, he or she must:

(a) pay by a certain date (10 days after the date of sale, in the example above)(b) pay in a duly acceptable form (eg in cash or with a cheque drawn on a reputable

bank).

It is the first of these two conditions with which students will be concerned. If, in theexample above, the purchaser pays the account 13 days after the date of purchase, thenhe or she foregoes any entitlement to cash discount and must pay the full list price,ie £250.

4 Copy and hand out, or display on the overhead projector, the simple examples below.Ask the students to work through them.

Example (a)On 3 June Year 6, X sells goods on credit to Y for £480. The terms of sale allow a period of credit of one month but, if payment is made within 7 days of purchase, a cashdiscount of 21/2% will be allowed. Y pays the account on 8 June Year 6. Y is entitled to the cash discount because he or she has paid the account within the conditional 7-day period.

Cash Book: 3 columns – cash discount

61

Aim: to appreciate the significance of cash discount

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62

Example (b) On 7 August Year 6, A sells goods on credit to B for £350.The terms of sale allow aperiod of credit of one month but, if payment is made within 14 days of purchase, acash discount of 21/2% will be allowed. B pays the account on 5 September Year 6.

B settles the account after a lapse of more than 14 days, foregoing entitlement to thecash discount. He or she has to pay the full list price of £350. However, B has takenadvantage of most of the period of credit, which expires on 7 September Year 6.

In Example (a), for X, the seller/creditor, the discount is described as ‘discount allowed’;for Y, the purchaser/debtor, the discount is described as ‘discount received’. This situation can be illustrated thus:

Firms, as both buyers and sellers of goods, can be both ‘allowers’ and ‘receivers’ of cashdiscount.

5 Make it clear to the students that the term ‘cash’ covers payments in actual cash, andthrough the banking system.

Step 2

1 Discount allowedRemind the students that discount allowed represents discount from the seller’s viewpoint. Illustrate discount allowed with the example below.

ExampleOn 1 July Year 3, L Green owes A Brown, a trader, £100. The terms of sale allows a 21/2% discount for payment within 14 days. L Green meets this condition and so pays

£100 less the £2.50 discount = £97.50

£Selling price 480less 21/2% cash discount 12Payment made 468

Sale of goods on credit debtor discount allowedPurchase of goods on credit creditor discount received

Aim: to be able to make account entries in respect of cash discount

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In account terms, the transaction would appear as follows:

Transaction effect Book-keeping action

(a) Cash + £97.50 Debit Cash AccountDebtor: L Green - £97.50 Credit L Green

(b) Discount allowed + £2.50 Debit discount allowedDebtor: L Green - £2.50 Credit L Green

Point out that Discount Allowed is an expense account of A Brown and is kept in the General Ledger. It also represents a ‘holding’ account, which holds the balance ofthe discount allowed until it is transferred to the Profit & Loss Account at the end of theperiod.

Illustrate the account on the overhead projector or board as follows:

CASH BOOK

Cash Bank Cash BankYear 3 £ £

9 Jul L Green 97.50

L Green

Year 3 £ Year 3 £1 Jul Balance b/d 100 9 Jul Cash 97.50

9 Jul Discount allowed 2.50

Discount Allowed

Year 3 £9 Jul L Green 2.50

Hand out copies of, or show on the overhead projector, the following exercise and askthe students to work through it.

Exercise

On 2 May Year 5, B Hall, a trader, sells goods worth £720 on credit to F Trill.The termsof sale allow a 21/2% cash discount for payment within one month. F Trill pays hisaccount by cheque on 30 May Year 5.

RequiredRecord these transactions in the books of B Hall.

SolutionCASH BOOK

Cash Bank Cash BankYear 5 £ £ £ £30 May F Trill 702


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F Trill

Year 5 £ Year 5 £2 May Sales 720 30 May Bank 702

30 May Discount allowed 18

Discount Allowed

Year 5 £30 May F Trill 18

2 Discount receivedRemind the students that discount received represents discount from the buyer’s viewpoint, ie by receiving cash discount the buyer pays less to settle the account.Illustrate discount received with the example below.

ExampleA Brown the trader (see page 62) is now a debtor who owes T Wells the sum of £500at 1 July Year 3.The terms of sale allow 2% cash discount for payment within 14 daysand A Brown meets this condition.Thus,A Brown pays only

£500 less the £10 discount = £490

In account terms, the transaction would appear as follows:

Transaction effect Book-keeping action

(a) Bank - £490 Credit bank accountCreditor: T Wells - £490 Debit T Wells

(b) Creditor: T Wells - £10 Debit T WellsDiscount received + £10 Credit discount received

Point out that discount received is an income (or ‘revenue’) account of A Brown and iskept in the General Ledger. It also serves as a ‘holding’ account, which holds the balance of the discount received until it is transferred to the Profit & Loss Account atthe end of the period.

Illustrate the account entries on the overhead projector or board as follows:


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Hand out copies of, or display on the overhead projector, the following exercise. Ask the students to work through it.

Exercise

On 3 June Year 5, B Hall buys goods worth £840 on credit from Laken Ltd.The termsof sale allow 3 3/4 % cash discount for payment within one month. B Hall pays theaccount by cheque on 29 June Year 5.

RequiredRecord this transaction in the books of B Hall.

Solution

The amount of cash discount = £840 × 33/4 /100 = £31.50Therefore the amount to be paid = £840 - £31.50 = £808.50

CASH BOOK

Cash Bank Cash BankYear 5 £ £29 Jun B Hall 808.50

Laken Ltd

Year 5 £ Year 5 £29 Jun Bank 808.50 29 Jun 84029 Jun Discount received 31.50

Discount Received

Year 5 £29 Jun Laken Ltd 31.50


65

CASH BOOK

Cash Bank Cash Bank£ £ Year 3 £ £

10 Jul T Wells 490

T Wells

Year 3 £ Year 3 £10 Jul Bank 490 1 Jul Balance b/d 50010 Jul Discount received 10

Discount Received

Year 3 £10 Jul T Wells 10

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Step 3

1 Explain the disadvantage of going to the General Ledger every time an entry is madefor cash discount. It makes less work to have discount columns in the Cash Book.Thediscount entry can then be made when entering either the receipt or payment ofmoney.

2 Show the Cash Book entries for A Brown that would be recorded in place of thoseshown on pages 63 and 65.

CASH BOOK

Disc DiscAll’d Cash Bank Rec’d Cash Bank

Year 3 £ £ £ Year 3 £ £ £9 Jul L Green 2.50 97.50 10 Jul T Wells 10 490

Point out that the entries in the personal (debtor/creditor) accounts are unchanged.Because these entries remain unchanged, discount amounts can be collected in the discount columns and the totals transferred periodically into the General Ledger asshown below.

3 Explain that when payment is made by cheque, it is common practice to include thenumber of each cheque in the Cash Book. If cheque numbers are included in a question, these numbers should be stated in the answer beside the name of the payee inbrackets. Cheque numbers appear only on the credit side of the Cash Book, ie in respectof cheques drawn by the firm for which the entries in the Cash Book are being recorded. It is sufficient for the students to show the last 3 numbers only, eg a paymentof £315 by cheque number 235212 to F Smith would appear as:

CASH BOOK

Dr CrDisc Cash Bank

Year 4 £ £ £17 Feb F Smith (212) 315


66

total of left-hand discount column to total of right-hand discount column to

Discount Allowed Account Discount Received Account(debit side) (credit side)

Aims: to be able to prepare a 3-column Cash Book, including entries for discounts; andto be able to post discount totals to the General Ledger

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4 Display exercise T/10.1 in the Appendix (page 230) on the overhead projector.Workthrough it with the class.This exercise illustrates the use of the 3-column Cash Book,as well as the immediate postings to ledger accounts and the end-of-the-month transfer of column totals to the respective discount accounts.

Solution to T/10.1


67

CASH BOOK

Disc DiscAll’d Cash Bank Rec’d Cash Bank

Year 5 £ £ £ Year 5 £ £ £1 May Bal’s b/d 93 1,040 13 May Stationery 56

11 May R Vine 7 343 18 May T Dole (214) 7 27324 May A Croft 11 42928 May Bank C 80 21 May Insurance (215) 190

28 May Cash (216) C 8030 May W Kone (217) 9 29131 May Bal’s c/d 117 978

18 173 1,812 16 173 1,812

1 Jun Bal’s b/d 117 978

SALES LEDGERA Croft

Year 5 £ Year 5 £1 May Balance b/d 440 24 May Bank 429


440 440

R Vine

Year 5 £ Year 5 £1 May Balance b/d 350 11 May Bank 343


350 350

PURCHASES LEDGERT Dole

Year 5 £ Year 5 £18 May Bank 273 1 May Balance b/d 28018 May Discount received 7

280 280

W Kone

Year 5 £ Year 5 £30 May Bank 291 1 May Balance b/d 30030 May Discount received 9

300 300

(continued)

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GENERAL LEDGERStationery

Year 5 £13 May Cash 56

Insurance

Year 5 £21 May Bank 190

Discount Allowed

Year 5 £31 May Sundries 18

Discount Received

Year 5 £31 May Sundries 16

5 Direct the students’ attention to the following points in the Cash Book and ledgersshown above, that:

● the total of each discount column is transferred – to the same side (Dr or Cr) in theledger;

● there is no balancing of discount columns;● prompt postings are made of other items, eg to personal accounts, stationery, or

insurance;● use of the word ‘sundries’ in each discount account.

NoteExplain that the word ‘sundries’ has a general application and has been used elsewherein this text. In this subject, it means a number of entries amounting to the sum stated.

6 Common errors made by candidatesDraw the attention of students to the following points as they work through the exercises listed on page 69.

(a) The reversal of entries: payments debited and income credited.(b) When recording money received from cash sales that is banked the same day

candidates may fail to do the full contra (see Lesson 9, page 49). They make theentry in Dr cash but then either debit or credit the bank column.

(c) Showing a credit balance of cash.This type of entry is the equivalent of a deficit ofcash, which is impossible. If a Cr cash balance emerges there is something wrongwith the entries.

(d) Sometimes discount columns have been omitted from the Cash Book when theentries should be included.

(e) Cash discount added to the amount of a cheque.


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(f ) The discount columns are balanced, ie a balance is found between the totals of the2 columns.

(g) When the candidates post entries to the discount accounts (in the General Ledger)they may make one of two errors; they:● post individual items, which is quite wrong and defeats the purpose of having the

discount columns;● post the column totals to the wrong side of each discount account.

7 Give the students each a copy of exercise T/10.2 in the Appendix (page 231) and askthem to work through it. However, before they start work on the exercise, point outthat sometimes a payment or receipt of money to or from a debtor or creditor isdescribed as being ‘in settlement of the amount due’ or ‘in settlement of a debt’.Theseterms indicate that a cash discount has been either received or allowed. For example acheque for £720 received in settlement of an amount of £750 means that a cash discount of £30 has been allowed, and this amount should be recorded in the discountallowed column of the Cash Book.

Hand out copies of exercises T/10.3 and T/10.4 in the Appendix (pages 232–3) to theclass and ask the students to work through them. Both these exercises are from pastLCCIEB First Level Book-keeping papers. They require information from differentsources to be brought together. For example, for T/10.3, information from the bankpaying-in book, cheque-book counterfoils, and record of movements of cash isrequired.Tell the students that they must keep the entries in strict date order. In T/10.3certain information picked up from the bank statement is to be entered after an initialbalancing.


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Lesson 11: Purchases and Sales Day Books

Day books is a topic that sometimes results in the loss of examination marks.The problemarises largely from failure of students to understand the function of the day books. So often,day books are prepared as if they are ledger accounts.

Entries in the day books require an authorized source such as an invoice or copy invoice.Trade discount also has to be considered.

70

Topic summary

● The invoice or copy invoice as the source document for credit purchases or sales● The preparation of a Sales Day Book for a given period and posting entries to

ledger accounts● The function of the Sales Day Book● The book-keeping significance of trade discount and how it contrasts with cash

discount● The preparation of a Purchases Day Book for a given period and posting entries to

ledger accounts


5.7 Use of the term source document: in particular, the part played in book-keeping bythe invoice and the credit note

5.8 The significance of trade discount

5.9 The calculation of trade discount, from list price to obtain net price

6.1 The function of Purchases, Sales, Returns Outwards, and Returns Inwards Day Books

6.2 The alternative names used for these various day books

6.3 The recording of individual transactions in the day books

6.4 Making individual postings from the day books to personal accounts

6.5 Making postings of period day-book totals to the Purchases, Sales, and Returns Accounts in the General Ledger

8.12 The differences between trade discount and cash discount and the different book-keeping effects

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Step 1

1 Explain that when goods are sold on credit, the seller will send an invoice to the buyer,setting out:

● the parties to the transaction● details of the goods sold● their prices● the ‘terms of sale’.

2 Show a specimen invoice (Figure 11.1) on the overhead projector.

Figure 11.1 A specimen invoice

Purchases and Sales Day Books

71

INVOICE

Tempster & Fall25 The SquareNorthbridge NT3 5WR 7 April Year 4

Invoice no 5622

To: R Maundy17 The LuttensWednesbury WD4 3ET

Quantity Description Unit price Total£ £

40 Moveable shelves 7 280.00

20 Lockable containers 12 240.00

10 Storage cabinets 20 200.00

720.00

less trade discount at 121/2% 90.00

630.00

Terms: 21/2% cash discount for payment within 30 days

Aim: to recognize the invoice or copy invoice as the source document for credit purchases or sales

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If possible, obtain actual invoices for the students to see.

3 Explain that the seller will pass a copy of the outgoing invoice to his or her book-keeper.The copy invoice will then be the basis of entry into the accounts, ie it will be the‘source document’.

Step 2

1 On the board or overhead projector, show the Sales Day Book of Tempster & Fall,below, and:

● explain that the sources of the entries are copy invoices;● show the postings to the ledger one by one;● show clearly how the double entry is achieved.

SALES DAY BOOK

Invoice no AmountYear 4 £

2 Apr A Trumble 5621 4337 Apr R Maundy 5622 630

20 Apr W Trent 5623 29026 Apr F Skane 5624 375

To Sales Account 1,728

Point out that invoice numbers might not be included in some examination questions,and so the ‘invoice no’ column would be left out.

2 The double entry for Tempster & Fall’s transactions is achieved as follows:

(a) the individual amounts are posted to the debtor accounts as soon as possible, ie theyare debit entries;

(b) the total of the credit sales for April Year 4 is transferred at the end of the month tothe credit of the Sales Account in the General Ledger.

SALES LEDGER

Dr A TrumbleYear 4 £

2 Apr Sales 433


72

Aim: to be able to prepare a Sales Day Book for a given period and to post entries to ledger accounts

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R Maundy

Year 4 £ 7 Apr Sales 630

W Trent


F Skane


GENERAL LEDGERSales Cr

Year 4 £ 30 Apr Sundries 1,728

Check that the total of the 4 debit entries is equal to the amount of the credit entry.

Step 3

1 Discuss the function of the Sales Day Book. Explain that it is used for:

● recording credit sales;● carrying transaction detail instead of the Sales Account.

Emphasize that, usually, only credit sales are entered in the day book: cash sales will continue to be entered directly into the Sales Account.1

2 Illustrate the procedure for credit sales by displaying Figure 11.2 on the overhead projector.

Figure 11.2 Credit sales procedure


73

Aim: to appreciate the functions of the Sales Day Book

Copy invoice (source document)

SALES DAY BOOK

daily posting monthly postingof total to

Customer accounts(DEBIT)

GENERAL LEDGER –Sales Account

(CREDIT)

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Stress that the entry in the day book is not part of double entry: it is a note only – aform of memorandum. The amounts of credit sales are held in the day book throughout each month. At the end of each month the total is transferred to the SalesAccount.Thus, during the month, the debit part of each credit sale has been enteredbut not the credit part. The double entry is complete when the monthly total is transferred.

3 Ask the students what the advantages are of having a Sales Day Book. The answersshould be that:

● fewer items need to be passed through the double-entry system;● accounting work can be divided among staff, with one person looking after the day

book and another the ledger.

4 The day book seems to have limited detail recorded for each transaction. Ask the students if it really helps the ledger that much.The answer is that it is true that day bookentries nowadays are much briefer than in the past. Much of the detail is shown on thecopy invoice, which can be referred to if necessary. The file of copy invoices can beregarded as supporting the day book. Present-day practice still means that the ledger ishelped by not having to carry a lot of detail.

5 Explain that in a computer-based account system, the information included in the manually based Sales Day Book would be recorded to enable many functions to be performed. Thus, the amount of monthly credit sales could be known quickly.Information may also be readily available on the amounts outstanding on individualcustomer accounts, on the regularity of payments by customers, etc.The print-out ofinvoices for despatch to customers and other documents could also be part of an integrated system.

6 Hand out copies of or display exercise T/11.1 in the Appendix (page 234) on theoverhead projector and ask the students to work through it.

Step 4

1 Explain the nature of trade discount and its effect on selling price. Trade discount is normally an allowance to traders for buying in bigger quantities.Any one trader mightoffer different levels of discount, eg 10%, 121/2%, or 15%, according to the quantity oramount (in £) of an order.

2 If possible, show examples of trade discount in catalogues or price lists issued by traders.Refer to the trade discount shown on the invoice illustrated on page 71. Show that theentry in the Sales Day Book for R Maundy is £630 (see page 72), ie the net figure on


74

Aim: to appreciate the book-keeping significance of trade discount and how it contrastswith cash discount

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the invoice after the trade discount is deducted. From this example, the students will see that trade discount is not recorded in the accounts. However, cash discount is recorded in the accounts: the buyer still has to meet the condition of paying the account by a certain date.

3 Hand out copies of or display the following exercise on the overhead projector and askthe students to work through it.

Exercise

On 5 January Year 7, K Johnson sells goods on credit to V Lympne, at a list price of£750 and quantity (trade) discount of 20%. A cash discount of 21/2% is allowed if theaccount is settled within 30 days of the invoice date.V Lympne pays the account bycheque on 31 January Year 7.

RequiredIn the books of K Johnson, show the relevant entries in:

(i) the Sales Day Book (ii) the ledger account of V Lympne.

Solution

In the books of K Johnson:

SALES DAY BOOK

Year 7 £ 5 Jan V Lympne 600

SALES LEDGERV Lympne

Year 7 £ Year 7 £ 5 Jan Sales 600 31 Jan Bank 585

31 Jan Discount allowed 15

600 600

NoteThe trade discount does not appear in any account and need not appear in the Sales DayBook, ie it is sufficient to show the net figure after the deduction of the trade discount.

4 Explain that cash discount does not, as some students think, appear in the Sales DayBook. It does, however, appear on the credit side of V Lympne’s account – becauseLympne has paid the account within the required 30 days.

5 Hand out copies of or display on the overhead projector exercise T/11.2 in theAppendix (page 234) and ask the students to work through it.


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Step 5

1 Explain that purchases on credit are treated on a similar basis to credit sales. First, theyare listed in a Purchases Day Book. Illustrate the procedure for credit purchases by displaying Figure 11.3 on the overhead projector.

Figure 11.3 Procedure for credit purchases

2 Show the following Purchases Day Book of R Maundy on the board or overhead projector:

PURCHASES DAY BOOK

Invoice no AmountYear 4 £

7 Apr Tempster & Fall 980 63014 Apr S Clegg 981 41620 Apr T Roman 982 52823 Apr B Porter 983 364

To Purchases Account 1,938

3 Show the students how to post the transactions recorded in the Purchases Day Book tothe ledger accounts:

PURCHASES LEDGERTempster & Fall

Year 4 £ 7 Apr Purchases 630

S Clegg



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Aim: to be able to prepare a Purchases Day Book for a given period and to post entriesto ledger accounts

Invoice

PURCHASES DAY BOOK

daily postingmonthly postingof total to

GENERAL LEDGER –Purchases Account

(DEBIT)

PURCHASES LEDGER –Supplier Accounts

(CREDIT)

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T Roman


B Porter


GENERAL LEDGERPurchases

Year 4 £ 30 Apr Sundries 1,938

Point out that the sale to R Maundy, in the Sales Day Book of Tempster & Fall,becomes a purchase in the Purchases Day Book of R Maundy.The amount is the same.

4 Inform the students that each entry in the Purchases Day Book is made from an invoicereceived from the seller. Compare this procedure with that for the copy invoice fromwhich entries are made in the seller’s day book.

5 Display exercise T/11.3 in the Appendix (page 235) on the overhead projector, or handout copies of it to the students.Ask the students to work through the exercise.

NoteAdvise the students that they need to be familiar with the alternative names for the 2 daybooks dealt with in this lesson to complete the exercise.The alternative names are givenbelow:

Sales Day Book or Sales JournalPurchases Day Book or Purchases Journal

6 Common errors made by candidates concerning day booksDraw the attention of the students to the following points.

(a) The day books are shown in account format, which demonstrates a basic misunderstanding of the function of the day book.

(b) The transactions that have been recorded in the day books are repeated, line byline, in the Purchases Account and/or Sales Account. Only period totals are supposed to be posted to the Purchases and Sales Accounts.

(c) The deduction of cash discount in the day books.

7 Display exercise T/11.4 in the Appendix (page 236) on the overhead projector or handout copies of it to the students. Ask them to work through the exercise.This exerciseshould help to reinforce the students’ knowledge about the 3-column Cash Book.


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Lesson 12: Returns Day Books

Returns, previously introduced in Lesson 2, page 11, should be treated with care by candidates. Candidates’ examination answers often show confusion between inward andoutward returns, as well as about the relevant price to apply to the returned goods.

78

Topic summary

● The credit note or copy credit note as the source document for returns entries ● The function of the Returns Inwards and Returns Outwards Day Books● The preparation of a Returns Inwards Day Book for a given period and posting

entries to the ledger accounts● The preparation of a Returns Outwards Day Book for a given period and posting

entries to the ledger accounts● The use of the term ‘book of prime entry’● The reinforcement of learning and practice in regard to the use of day books


5.7 Use of the term source document: in particular, the part played in book-keeping bythe invoice and the credit note

6.1 The function of Purchases, Sales, Returns Outwards, and Returns Inwards Day Books

6.2 The alternative names used for these various day books

6.3 The recording of individual transactions in the day books

6.4 Making individual postings from the day books to personal accounts

6.5 Making postings of period day-book totals to the Purchases, Sales, and Returns Accounts in the General Ledger

6.6 The reason for maintaining separate Returns Accounts instead of entering to thecredit or debit, respectively, of Purchases or Sales Account

8.1 The dual role of the Cash Book as a book of prime entry and an integral part ofthe double-entry record

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Step 1

1 Explain further the process of returns, both inwards and outwards, and various possiblereasons for the seller granting an allowance. The reasons might include, for example:

● the wrong goods were sent;● the goods were damaged before arrival;● the goods did not match those described in catalogues, etc;● some of the goods were faulty, for which a part allowance may be made.

Stress that the seller grants, and the buyer receives, an allowance against the relevantinvoice, whether or not the goods are actually returned.

2 Explain that when making the allowance, the seller will send a credit note to the buyer.A copy of the credit note will be passed to the seller’s book-keeper and this serves asthe basis of the account entries. An example of a credit note is shown in Figure 12.1,which you can show on the overhead projector.

Figure 12.1 An example of a credit note

Returns Day Books

79

Aim: to recognize the credit note or copy credit note as the source document for returnsentries

CREDIT NOTE

Tempster & Fall25 The SquareNorthbridge NT3 5WR 18 April Year 4

Credit note no 529

To: R Maundy17 The LuttensWednesbury WD4 3ET

Reference invoice no 5622 dated 7 April Year 4

Quantity Description Unit price Total£ £

10 Lockable containers 12 120.00

less trade discount at 121/2% 15.00

Damaged in transit 105.00

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Relate this credit note to the invoice shown on page 71 in Lesson 11: where trade discount was deducted on the invoice, this must be deducted at the same rate on thecredit note.

Step 2

1 Show that, when the seller has agreed to make an allowance against the return of goods,the procedure (in outline) is as illustrated in Figure 12.2.

Figure 12.2 The procedure on the return of goods

2 Explain that the functions of Returns Inwards and Returns Outwards Day Books are:

● to record credit returns;● to carry transaction detail instead of the ledger accounts.

Effectively, the entries in the day books represent a reversal of purchase and sales entries.

3 Point out that the Returns Day Books serve basically the same purpose as the 2 daybooks considered in Lesson 11.They serve to reduce the detail recorded in the ledgerand allow staff to specialize in the work they do. In addition, by having separate booksfor returns, more information is available than if set-off entries (ones that have the effectof reducing the amount of a previous entry) were made in either the Purchases DayBook or Sales Day Book. If the entries were made in the other day books, there wouldbe a danger of information on returns being hidden.

4 Ask the students why a firm needs to have detailed records of returns.

The answer is that the record is important for dealing with individual customers or suppliers. It is also important for a supplier knowing how to improve the supply ofgoods or for a purchaser knowing which firms are the better suppliers.

Returns Day Books

80

Aim: to appreciate the function of the Returns Inwards and Returns Outwards DayBooks

Seller issues

CREDIT NOTESent to COPY CREDIT NOTE

CUSTOMERRETURNS INWARDS

DAY BOOKRETURNS OUTWARDS (of seller)

DAY BOOK(of customer)

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Step 3

1 Show the Returns Inwards Day Book of Tempster & Fall, below, on the board or overhead projector.

RETURNS INWARDS DAY BOOK

Credit note no AmountYear 4 £11 Apr A Trumble 528 8718 Apr R Maundy 529 10526 Apr W Trent 530 42

To Returns Inwards Account 234

2 Record the following postings to ledger accounts, entry by entry:

SALES LEDGERA Trumble

Year 4 £ Year 4 £2 Apr Sales 433 11 Apr Returns inwards 87

R Maundy


W Trent


GENERAL LEDGERReturns Inwards

Year 4 £30 Apr Sundries 234

NoteThe 3 debit entries in the Sales Ledger Accounts were previously posted from the SalesDay Book of Tempster & Fall, shown in Lesson 11, page 72.

3 Point out that the double entry in the Tempster & Fall example is achieved by the debitof £234 in the Returns Inwards Account being matched by the total of the 3 creditentries in the customer accounts.

Returns Day Books

81

Aim: to be able to prepare a Returns Inwards Day Book for a given period and to postentries to the ledger accounts

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4 Figure 12.3 illustrates the part played by the Returns Inwards Day Book in the accountsystem. Show the figure on the overhead projector.

Figure 12.3 The returns inwards procedure

5 Explain that the double entry is made by means of:

(a) prompt postings to the customer accounts = credit;(b) end-of-month posting of the total to the Returns Inwards Account = debit.

6 Hand out copies of, or show on the overhead projector, exercise T/12.1 in theAppendix (page 237).Ask the students to work through the exercise.

Step 4

1 Show the Returns Outwards Day Book of R Maundy (below) on the board or overhead projector:

Returns Day Books

82

Seller issues

CREDIT NOTE

COPY CREDIT NOTE

entered in

RETURNS INWARDS MemorandumDAY BOOK only

dailypostings

end-of-monthposting of total

Returns Inwards GENERALAccount LEDGER

SALESLEDGER

Aim: to be able to prepare a Returns Outwards Day Book for a given period and to postto the ledger accounts

Customer(debtor)accounts

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RETURNS OUTWARDS DAY BOOK

Credit note no AmountYear 4 £

9 Apr J Jolly 2178 12718 Apr Tempster & Fall 529 10524 Apr N Nathan 1165 38

To Returns Outwards Account 270

2 Record the following postings to ledger accounts, entry by entry:

PURCHASES LEDGERJ Jolly

Year 4 £9 Apr Returns outwards 127

Tempster & Fall

Year 4 £ Year 4 £18 Apr Returns outwards 105 7 Apr Purchases 630

N Nathan

Year 4 £24 Apr Returns outwards 38

GENERAL LEDGERReturns Outwards

Year 4 £30 Apr Sundries 270

3 Point out that the 3 debit entries in the Purchases Ledger equal, in total, the amount ofthe end-of-month credit entry in the Returns Outwards Account.

NoteThe credit entry in Tempster & Fall’s account was previously posted from the PurchasesDay Book of R Maundy, shown in Lesson 11 (page 76). The accounts of Jolly andNathan would, in practice, have credit entries for purchases previously made.

4 Figure 12.4 (overleaf) illustrates the part played by the Returns Outwards Day Book inthe account system. Show the figure on the overhead projector.

5 Explain that the double entry is made by means of:

(a) prompt postings to supplier accounts = debit;(b) end-of-month posting of total to Returns Outwards Account = credit.

Returns Day Books

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6 Hand out copies of, or show on the overhead projector, exercise T/12.2 in theAppendix (page 237).Ask the students to work through it.

Figure 12.4 The returns outwards procedure

Step 5

Explain that the term ‘book of prime entry’ means the stage in the book-keeping systemwhere a transaction is recorded for the first time, before it is entered in the ledger.The termincludes the 4 day books already considered.The Cash Book can serve 2 roles.Thus, forcash sales or cash purchases, it is a book of prime entry but, as part of the ledger, it is alsoa component of the double-entry system.

Returns Day Books

84

Buyer receives

CREDIT NOTE

enteredin

RETURNS OUTWARDS MemorandumDAY BOOK only

daily end-of-monthpostings posting of total

Returns Outwards GENERALAccount LEDGER

PURCHASESLEDGER

Aim: to be familiar with the use of the term ‘book of prime entry’

Supplier(creditor)accounts

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Step 6

1 Display exercise T/12.3 in the Appendix (page 238) on the overhead projector andwork through it with the class. The exercise involves preparation of all 4 day books,together with the postings to the ledger accounts.

NoteWhen a question states ‘Returned goods to £26’, it can be assumed, unless stated otherwise, that the seller has agreed to make an allowance.

In the case of returned goods, when a trade discount has previously been allowed at thepurchases or sales stage, the amount of the discount (or a due proportion, when onlysome of the goods are returned) must be deducted at the ‘returns’ stage.This applies tothe transactions on 8, 15, 19, 27, and 30 October Year 6 in exercise T/12.3.

Solution to T/12.3PURCHASES DAY BOOK

Year 6 £3 Oct R Varney 420

17 Oct T Langton 29624 Oct R Varney 272

To Purchases Account 988

SALES DAY BOOK

Year 6 £5 Oct K Petts 357

11 Oct J Beaver 44821 Oct K Petts 544

To Sales Account 1,349

RETURNS OUTWARDS DAY BOOK

Year 6 £8 Oct R Varney 56

27 Oct T Langton 3730 Oct R Varney 34

To Returns Outwards Account 127

RETURNS INWARDS DAY BOOK

Year 6 £15 Oct K Petts 10219 Oct J Beaver 72

To Returns Inwards Account 174

(continued)

Returns Day Books

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Aim: to reinforce learning and practice in regard to the use of day books

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PURCHASES LEDGERR Varney

Year 6 £ Year 6 £8 Oct Returns outwards 56 3 Oct Purchases 420

30 Oct Returns outwards 34 24 Oct Purchases 272(Cr £602)

T Langton

Year 6 £ Year 6 £27 Oct Returns outwards 37 17 Oct Purchases 296

(Cr £259)

SALES LEDGERK Petts

Year 6 £ Year 6 £5 Oct Sales 357 15 Oct Returns inwards 102

21 Oct Sales 544(Dr £799)

J Beaver

Year 6 £ Year 6 £11 Oct Sales 448 19 Oct Returns inwards 72

(Dr £376)

GENERAL LEDGERPurchases

Year 6 £31 Oct Sundries 988

Sales

Year 6 £31 Oct Sundries 1,349

Returns Outwards


Returns Inwards


Check that the total creditor balances of £861 (£602 + £259) = purchases of£988 less returns outwards of £127, and that the total debtor balances of £1,175(£799 + £376) = sales of £1,349 less returns inwards of £174.

Returns Day Books

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2 Hand out copies of, or show on the overhead projector, exercise T/12.4 in theAppendix (page 239).Ask the students to work through it.This question is mainly a testof knowledge about discounts; the entries are straightforward.The points below mightbe helpful for the students.

(a) The trade discount should be deducted in each case from the list price and only theresulting net figure should be entered in the day book. Cash discount is calculatedon the net purchase or sales figure.1 It should be deducted from the net figure onlyif payment is made within the required period.

Required Payment Cashpayment date date discount

B Stevens 17 Jan 30 Jan NoF Robins 26 Jan 18 Jan YesJ New 27 Jan 22 Jan YesP Harper 5 FebK Burton 2 Feb

(b) Traders allow cash discount to encourage prompt or early payment.

3 Hand out copies of, or show on the overhead projector, exercise T/12.5 in theAppendix (page 240).Ask the students to work through it. In this question, a minimumlevel of purchase is necessary to qualify for a trade discount.

Common errors made by candidates in dealing with returnsDraw the following common errors to the attention of the students:

(a) confusion between returns inwards and returns outwards;(b) failure to deduct trade discount when this had been allowed in the original

purchase or sale transaction;(c) day books shown in account form;(d) transactions repeated, individually, in the General Ledger Account (ie in either the

Returns Outwards Account or the Returns Inwards Account).

NoteAdvise the students that they need to be aware of the alternative names for the 2 day booksdealt with in this lesson.The alternative names are:

Returns Inwards Day Book or Sales Returns Day BookReturns Outwards Day Book or Purchases Returns Day Book

Returns Day Books

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Lesson 13: Accruals and prepayments – expenses

Accruals and prepayments is a topic that book-keeping students often find difficult. It is animportant topic: first, because it may be the main subject of a question; second, because itcan also occur in other topics in an examination, particularly in the adjustments of finalaccounts. Therefore explain accrual and prepayments carefully, and make sure that the students have plenty of practice in answering questions on this topic.

Step 1

Expense accrual

1 Explain that the term ‘accrual’ refers to an amount that is owing.An expense accrual isan amount payable, in respect of an account period, that remains unpaid at the end of

Topic summary

● The meaning of expense accruals and the necessary entries or adjustments in an expense account for expense accrual

● The meaning of expense prepayment and the necessary entries or adjustments inan expense account for expense prepayment

● Adjustments for expense accruals and prepayments in final accounts


13.1 The nature of an accrual

13.2 End-of-period adjustments in expense accounts for accruals

13.3 The meaning of an expense prepayment

13.4 End-of-period adjustments in expense accounts for prepayments

13.5 Adjustments for end-of-period expense accruals and expense prepayments in theProfit & Loss Account and balance sheet

20.7 The appropriate inclusion of prepayments and accruals under ‘current assets’ and ‘amounts payable within 12 months’ respectively

Aim: to understand expense accruals and to be able to make the necessary entries or adjustments in an expense account

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that period.The students’ aim is to relate the expenses to the periods (usually years) inwhich the benefit is obtained from the expenditure, whether or not the expenseaccounts have been paid.This may require making adjustments in the expense accounts.

2 Illustrate accrual by showing the example below on the overhead projector or board.

ExampleJacqui Tillot commenced in business at 1 January Year 3. She pays £500 rent ‘in arrears’at the end of each quarter. At 31 December Year 3, the fourth quarter’s rent is stillunpaid. Her Rent Account appears as follows:

Rent

Year 3 £31 Mar Bank 50030 Jun Bank 50030 Sep Bank 500

3 Ask the students what is wrong with this example.

4 The problem with the example is that this Rent Account records the rent for only 3quarters; the rent for the fourth quarter will probably be paid early in Year 4. Left as itis, the account gives a misleading picture for Year 3 because Jacqui has benefited fromthe use of the premises for 4 quarters in that year. The true charge for the rent for Year 3 is:

4 quarters at £500 per quarter = £2,000

Jacqui Tillot’s Profit & Loss Account for Year 3 should show £2,000. The £500 inrespect of the fourth quarter should be treated as a liability. The account would thenappear as:

Rent

Year 3 £ Year 3 £31 Mar Bank 500 31 Dec Profit & loss 2,00030 Jun Bank 50030 Sep Bank 50031 Dec Balance c/d 500

2,000 2,000

Year 41 Jan Balance b/d 500

5 Show the correct Rent Account (above) on the overhead projector or board.

6 Explain that the £2,000 credit entry is matched by a debit of that amount to the Profit& Loss Account. The ‘correct’ charge for the year is thus made in the Profit & LossAccount. The £500 balance carried down at 31 December Year 3 is matched by thecredit brought down at 1 January Year 4.This credit balance represents a liability andappears as such in the balance sheet at 31 December Year 3.

Accruals and prepayments – expenses

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7 Show the students that early in Year 4, Jacqui Tillot’s Rent Account might appear as follows:

Rent

Year 4 £ Year 4 £18 Jan Bank 500 1 Jan Balance b/d 500

This illustrates that the overdue rent is paid on 18 January, which clears the account.

8 It is essential that the students grasp the meaning of these account entries. Review thekey entries, which show that:

● the transfer to the Profit & Loss Account is the due amount of rent for Year 3 – notwhat has actually been paid. The transfer ensures that the ‘true’ charge is made in the Profit & Loss Account;

● the credit balance (brought down) at 1 January Year 4 represents the amount owing atthat date, which would appear as a liability in the balance sheet at 31 December Year 3;

● the debt is cleared early in Year 4.

9 Ask the students to work through the following exercise.

Exercise

Douglas Miller commenced in business at 1 October Year 5. He paid monthly staffsalaries in arrears by cheque as follows:

Year 5 £31 Oct 1,20030 Nov 1,200

At 31 December Year 5, salaries for December amounting to £1,400 were unpaid.

Required Prepare the Salaries Account for the 3 months ending 31 December Year 5, duly balancedat that date.

SolutionSalaries

Year 5 £ Year 5 £31 Oct Bank 1,200 31 Dec Profit & loss 3,80030 Nov Bank 1,20031 Dec Balance c/d 1,400

3,800 3,800



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Step 2

Expense prepayment

1 Explain that the term ‘expense prepayment’ is a payment made in advance of theaccount period to which it refers.A prepayment is the opposite of an accrual. However,the transfer to the Profit & Loss Account in the expense account will still be credited.The difference is in the balance, which is brought down as a debit balance, ie as an asset.

2 Illustrate prepayment on the overhead projector or board with the following example.

ExampleJames Jewell commenced in business at 1 January Year 7. He paid his rent quarterly andin advance by cheque as follows:

Year 7 £2 Jan 450

28 Mar 45026 Jun 4751 Oct 475

28 Dec 475

RequiredShow the Rent Account for Year 7, duly balanced at 31 December Year 7.

SolutionRent

Year 7 £ Year 7 £2 Jan Bank 450 31 Dec Profit & loss 1,850

28 Mar Bank 450 31 Dec Balance c/d 47526 Jun Bank 4751 Oct Bank 475

28 Dec Bank 475

2,325 2,325


3 Review the example’s solution by drawing attention to the following points:

● the transfer to the Profit & Loss Account includes 2 quarters’ rent at £450 (£900) plus 2 quarters’ rent at £475 (£950), which results in a total transfer of £1,850;

● the balance (£475) brought down at 1 January Year 8 will appear as an asset in the balance sheet of James Jewell at 31 December Year 7.


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Aim: to understand expense prepayment and to be able to make the necessary entries inan expense account

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4 Explain that, so far, the examples given have had no opening balance since they illustrate the first year of trading. It is more usual to have an opening balance as well asa closing balance.

5 Emphasize the rule about prepayment and accrual:

if a prepayment, the opening balance = Debitif an accrual, the opening balance = Credit

Example From the following details, prepare John Sim’s Insurance Account for the year ended 31 December Year 6. Balance the account at the year end, showing the transfer to theProfit & Loss Account.

Year 61 Jan The balance on the account is £80, representing one quarter’s insurance paid

in advance23 Mar The amount of £190 is paid by cheque, which covers the insurance for the

half-year ended 30 September Year 629 Sep The amount of £210 is paid by cheque, which covers the insurance for the

half-year ended 31 March Year 7

SolutionInsurance

Year 6 £ Year 6 £1 Jan Balance b/d 80 31 Dec Profit & loss 375

23 Mar Bank 190 31 Dec Balance c/d 10529 Sep Bank 210

480 480Year 7

1 Jan Balance b/d 105

NoteThe transfer to the Profit & Loss Account is made up of:

£Jan–Mar 80Apr–Sep 190Oct–Dec 105

375

Explain that the remaining £105 has been paid in advance for the quarter ended31 March Year 7 and is carried down as an asset (debit) balance.


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93

6 Point out that expense accounts involving accrual, prepayment, or both (and includingan opening balance) are made up of 4 elements:

(i) the amount either accrued or prepaid at the beginning of the year;(ii) the amount paid during the year;(iii) the amount to be transferred to the Profit & Loss Account, ie the ‘true’ cost for

the year;(iv) the amount owing or prepaid at the end of the year.

These elements may be shown as a single example (see Figure 13.1).The example maybe described as a situation of initial accrual and closing prepayment. If 3 of the elementsare known, the fourth can be found by preparing an expense account based on therelevant structure.The diagrams can be adapted to each situation. Each situation will bedetermined by, first, the particular combination of opening and closing balances, suchas initial prepayment and closing accrual (see point 8 below); and, second, the respectiveamounts of the 4 elements as outlined in point 6 above.

Figure 13.1 A pictorial example of an expense account

7 Display the example on the overhead projector.The basic structure can be copied onto a transparency and used as the master diagram, and sample figures can be copied onto a number of other transparencies. Insert the figures progressively by placing the transparencies on top of one another.

8 Ask the students to construct simple diagrams (like the one above) that show the following situations, which should all relate to expense:

(a) initial accrual and closing accrual(b) initial prepayment and closing prepayment(c) initial prepayment and closing accrual(d) initial accrual and closing prepayment.

The students may find it helpful to practise constructing simple diagrams (in double-entry account form) that position the various items.

Amount paidduring year

Amount prepaid b/d

Transfer toProfit & Loss Account

Amount accrued b/d

Amount prepaid c/d

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Another form of prepayment

9 Explain that a prepayment could take the form of items purchased for use in the business, which are separate from ordinary ‘purchases’ that are for resale. Purchases foruse in the business might include stationery, packing materials, or cleaning materials.Any stock of such items at the end of an accounting period represents a form of prepayment.

Draw the students’ attention to the following points:

● allowance must be made for stock at the end of an accounting period in the figurecharged to the Profit & Loss Account;

● the value placed on the stock must be carried down as a balance on the expenseaccount.

10 Illustrate the two points above with the following example.

ExampleStationery bought in the year ended 31 December Year 3 cost £2,750. The stock of stationery held at 31 December Year 3 is worth £250

RequiredPrepare the Stationery Account for the year ended 31 December Year 3.

Solution

The amount used is £2,750 - £250 = £2,500.This total is charged to the Profit &Loss Account and the amount remaining (stock) is carried forward as an asset balance.

Stationery

Year 3 £ Year 3 £Jan–Dec Sundries 2,750 31 Dec Profit and loss 2,500

31 Dec Balance c/d 250

2,750 2,750


Stress that any such balance should not be included with the stock-in-trade, but shouldbe shown separately as part of the item ‘prepaid expenses’.

11 Copy and hand out or display the following exercise on the overhead projector. Ask the students to work through it.

Exercise

Cleaning materials bought in the year ended 31 December Year 4 cost £870.The stock of cleaning materials at 31 December Year 4 is worth £130. The cleaning materialsbought in the year ended 31 December Year 5 cost £920. The stock of cleaningmaterials at 31 December Year 5 is worth £150.


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RequiredShow the Cleaning Materials Account for the 2 years ended 31 December Year 5.

NoteThe stock at 31 December Year 4 (the closing stock) is also the stock at 1 January Year 5(the opening stock).

SolutionCleaning Materials

Year 4 £ Year 4 £Jan–Dec Sundries 870 31 Dec Profit & loss 740


870 870

Year 5 Year 51 Jan Balance b/d 130 31 Dec Profit & loss 900

Jan–Dec Sundries 920 31 Dec Balance c/d 150

1,050 1,050


NoteThe charge to the Profit & Loss Account is calculated as:

Year 4 Purchased stock at £870 less closing stock at £130 = £740Year 5 Opening stock at £130 plus purchased stock at £920 = £1,050

less closing stock at £150 = £900

12 Explain that the financial period or year of the firm does not always correspond withthat of the supplier of services. Adjustments to deal with this mismatch may be necessary at the end of the accounting period.

ExampleAt 1 January Year 5, the Insurance Account has a balance of £90 (Dr).The insurance premium was paid by cheque £330 on 28 April Year 5 for the (insurance) year to30 April Year 6.

RequiredShow the Insurance Account for the year ended 31 December Year 5, duly balanced atthat date.

NoteIt can be concluded that the debit balance at 1 January Year 5 relates to Insurance forthe 4 months ended 30 April Year 5. The charge for the remaining 8 months of thefinancial year is calculated as the due proportion of the annual premium: £330 × 8/12= £220. The remaining £110 is carried forward as a prepayment. The charge to theProfit & Loss Account for insurance for Year 5 is: £90 + £220 = £310.


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Insurance

Year 5 £ Year 5 £1 Jan Balance b/f 90 31 Dec Profit & loss 310

28 Apr Bank 330 31 Dec Balance c/d 110

420 420


13 Copy and hand out or display exercise T/13.1* in the Appendix (page 241) on the overhead projector.Work through it with the class. Exercise T/13.1 concerns 3 expenseaccounts: 2 accounts (rent and insurance) have opening prepayment balances, ie debits;the other (advertising) has an opening accrual balance, ie credit. You should first calculate the amount of the charge for Year 4 for each expense. In examination answers,if workings are shown clearly, marks can be awarded for what is correct.

It is clear that the monthly rent is £230 from January to September and £250 fromOctober to December.

Period of rent (Year 4)Prepayment balance 1 Jan Yr 4 = JanPayment 28 Feb = Feb, Mar

31 May = Apr, May, Jun31 Aug = Jul, Aug, Sep30 Sep = Oct

Thus the accrual of 2 months’ rent at 31 December Year 4 is 2 × £250 = £500.

With regard to insurance:

● the initial prepayment of £65 covers the period 1 January to 31 August;● the charge for the period 1 September to 31 December Year 4 is the due part of the

premium paid on 31 August Year 4, ie £180 × 4/12 = £60;● the other £120 is carried forward as a prepayment for Year 5.

Therefore the total insurance charge for Year 4 is £65 + £60 = £125.

The following are major weaknesses shown by candidates in answers to exercise T/13.1(an LCCIEB past examination question):

● failure to calculate correctly the charge to the Profit & Loss Account in the Rent Account;

● charging an incorrect proportion to the Profit & Loss Account from the insurancepremium paid on 31 August Year 4;

● being confused about applying double-entry rules, which is sometimes done inconsistently.

Draw the students’ attention to these weaknesses as appropriate.


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Step 3

1 Remind the students that, at the financial year end, some expenses will be paid inadvance of the forthcoming year, while other expenses will be in arrears, ie ‘accrued’.This often occurs because the firm’s financial year and the payment year for the expensedo not correspond. Adjustments may therefore be necessary when preparing finalaccounts.

2 This topic can be developed with reference to the final accounts of T Avis in Lesson 7(page 40).

3 The following adjustments are to be made in relation to the balances included in thetrial balance of T Avis at 31 December Year 6:

● rent payable prepaid – £100● lighting and heating accrued – £60.

4 Trading and Profit & Loss AccountThe effect of the adjustments is limited to the Profit & Loss Account, so only that needbe shown on the overhead projector.

T AvisProfit & Loss Account


£ £Rent payable (1,100 -100) 1,000 Gross profit 3,570Office expenses 590 Rent receivable 450Lighting and heating (610 + 60) 670Carriage outwards 380Net profit 1,380

4,020 4,020

The effect has been to increase the net profit of the adjustments:

£Net profit before adjustment 1,340add Rent payable prepaid 100

1,440less Lighting and heating accrued 60

Net profit after adjustment 1,380


97

Aim: to be able to make necessary adjustments for accruals and prepayments in finalaccounts

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5 Balance sheetTo illustrate the remaining effects of the adjustments mentioned in point 3 (page 97),show the following balance sheet on the board or overhead projector:


Fixed Assets £ £ £Fixtures and fittings 900Motor vehicle 1,600

2,500

Current AssetsStock 2,450Debtors 1,170Prepayment 100Cash at bank 1,230Cash in office 70

5,020

less Amounts due within 1 yearCreditors 1,750Accrual 60 1,810

3,210

5,710Financed by:Capital – balance at 1 Jan Yr 6 5,430add Net profit 1,380less Drawings 1,100 280

5,710NotePeriod-end prepayments should be shown under current assets, and positioned after‘debtors’ but before ‘bank’. If there is more than one prepayment, these do not have tobe listed individually. It is advisable, however, to record the separate amounts (in brackets)beside the total figures.Then candidates can be sure of obtaining marks for the parts thatare correct.

6 Point out that period-end accruals should be shown under ‘amounts due within 1 year’.If there is more than one accrual, the individual amounts should be shown.

7 Copy and hand out or display exercises T/13.2, T/13.3, T/13.4 in the Appendix (pages 243–5).Ask the students to work through them.


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Lesson 14: Accruals and prepayments – income

Many students experience difficulty with the concept of income accrual and prepayment.Careful explanation of this topic is essential and students should be encouraged to practiseworking through exercises.

Step 1

Income accrual

1 Explain that the topic of income accrual deals with income such as rent receivable or commission rather than sales revenue.Accrual means that income due for the financialyear has not been received by the end of the year. Outstanding sales revenue is allowedfor by being shown as debit balances on customer personal accounts.

99

Topic summary

● The meaning of income accrual and the entries necessary in an Income Account● The meaning of income prepayment and the entries necessary in an Income

Account● The preparation of an expense account that includes two areas of expense with

distinctive balances


13.7 The nature of income accrual

13.8 End-of-period adjustments in income accounts for income accrual

13.9 The meaning of income prepayment

13.10 End-of-period adjustments in income accounts for income prepayment

13.11 Adjustments for end-of-period income accrual and income prepayment in the Profit & Loss Account and balance sheet

13.12 The recording of 2 areas of expense within the one expense account, with distinctive balances, eg the Rent & Rates Account

20.7 The appropriate inclusion of prepayments and accruals under ‘current assets’ and‘amounts payable within 12 months’ respectively

Aim: to understand income accrual and to be able to make the necessary entries in anIncome Account

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2 Point out that as the income is earned in a given year, it should be included as incomefor that year, even though payment has not yet been received.

3 Tell the students that, in the Income Account, the accrual should be:

● included in the transfer to the Profit & Loss Account;● carried down as a debit balance (representing an amount to be received early in the

next period).

Explain to them also that, in the balance sheet, the accrual should be shown as a current asset.

4 Illustrate income accrual by displaying the following example on the overhead projector or board.

ExampleEdward Smith is a trader and, in addition to his normal business income from the saleof goods, he receives a commission on services he carries out. During the year ended 31 December Year 6, he received commission as follows:

Year 6 Relating to the quarter ended £30 Mar 31 March Year 6 5122 Jul 30 June Year 6 4704 Oct 30 September Year 6 630

The amount due, but not yet received, for the quarter ended 31 December Year 6 was£580.

The account for Year 6 should appear as follows:

Commission Receivable

Year 6 £ Year 6 £31 Dec Profit & loss 2,192 30 Mar Bank 512

2 Jul Bank 4704 Oct Bank 630


2,192 2,192


5 Explain that although accrued income should be included with the current assets in thebalance sheet, it is common practice in business to include it with debtors. In an examination answer, however, it is safer to show accrued income as a distinct item otherwise a mark may be lost.

6 Copy and hand out or show the following exercise on the overhead projector or board.Ask the students to work through it.

Accruals and prepayments – income

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Exercise

Hilary Truelove receives rent from subletting business premises. During the year ended31 December Year 5, she received the following payments:

Payment received by Year 5 cheque for quarter ending £

3 Apr 31 March Year 5 65029 Jun 30 June Year 5 65011 Oct 30 September Year 5 675

The amount due for the quarter ended 31 December Year 5 was received on 14 JanuaryYear 6.

RequiredShow the Rent Receivable Account for the year ended 31 December Year 5, completewith year-end balancing and with as many entries as possible for Year 6.

SolutionRent Receivable

Year 5 £ Year 5 £31 Dec Profit & loss 2,650 3 Apr Bank 650

29 Jun Bank 65011 Oct Bank 67531 Dec Balance c/d 675

2,650 2,650

Year 6 Year 61 Jan Balance b/d 675 14 Jan Bank 675

Step 2

Income prepayment

1 Point out that in the case of income prepayment the income has been received inadvance of the next financial year.

2 Tell the students that, in the Income Account at the end of the financial year, theadvance payment should be:

● deducted from the amount of income for the year;● carried down as a credit balance.


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Aim: to understand income prepayment and to be able to make the necessary entries inan Income Account

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Explain to them also that, in the balance sheet, the prepayment should be shown under‘amounts due within 1 year’.

3 Illustrate income prepayment by showing the following example on the overhead projector or board.

ExampleRent is received on sublet premises as follows:

Year 7 Payment for quarter ending £12 Jan 31 March Year 7 2506 Apr 30 June Year 7 2504 Jul 30 September Year 7 250

29 Sep 31 December Year 7 25021 Dec 31 March Year 8 250

The unadjusted income for Year 7 is 5 × £250 = £1,250.The adjusted or true income is 4 × £250 = £1,000.The fifth payment really relates to Year 8 and should be carried forward into that year.The account for Year 7 should appear as follows:

Rent Receivable

Year 7 £ Year 7 £31 Dec Profit & loss 1,000 12 Jan Bank 25031 Dec Balance c/d 250 6 Apr Bank 250

4 Jul Bank 25029 Sep Bank 25021 Dec Bank 250

1,250 1,250


4 Explain that the £250 received in advance should be shown in the balance sheet under‘amounts due within 1 year’ and described as ‘rent received in advance’.

5 Copy and hand out or show on the overhead projector exercises T/14.1 and T/14.2 inthe Appendix (pages 247–8).Ask the students to work through them.

Step 3

1 Explain that, as candidates, the students might be required to prepare an expenseaccount that includes two areas of expense, eg Rent & Rates Account.


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Aim: to be able to prepare an account that includes two areas of expense, with distinctivebalances

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2 Illustrate this type of acccount by showing the example below on the overhead projector or board.

ExampleAt 1 January Year 4, £780 of rates were prepaid and £2,700 of rent payable wasaccrued. During Year 4, the following payments were made:

£Rent 8,700Rates 3,120

At 31 December Year 4, £780 of rates were prepaid and £3,200 of rent was owing.

The following amounts were due to be paid for Year 4:

£Rent 9,200Rates 3,120

The combined Rent & Rates Account would appear as follows:

Rent & Rates

Year 4 £ Year 4 £1 Jan Balance b/d (rates) 780 1 Jan Balance b/d (rent) 2,700

Jan–Dec Bank (rent) 8,700 31 Dec Profit & lossBank (rates) 3,120 rent 9,200

rates 3,12031 Dec Balance c/d (rent) 3,200 31 Dec Balance c/d (rates) 780

15,800 15,800

Year 5 Year 51 Jan Balance b/d (rates) 780 1 Jan Balance b/d (rent) 3,200

3 Emphasize strongly that different categories of expense should be combined only if theexamination questions require it.

4 Copy and hand out or show exercise T/14.3* in the Appendix (page 249) on theoverhead projector. Ask the students to work through it. T/14.3* is a question requiring the preparation of a combined type of expense account.

5 Common errors made by candidates concerning income and expense accountsCandidates sometimes:

(a) lack a grasp of the rules of double entry, eg payments credited to the expense account and income debited to the Rent Receivable Account;

(b) adjust actual individual payments or income in some instances, instead of apportioning expense or income at the end of the period;


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(c) make entries inconsistently, often within the same account, eg payments are partly debited or partly credited within an Insurance Account; income is partly debited orpartly credited within the Rent Receivable Account;

(d) make adjustments according to the calendar year instead of according to the firm’s financial year;

(e) overbalance accounts – each time an entry is made (in extreme cases);(f ) interpret ‘show transfers to the Profit & Loss Account’ as meaning that a Profit &

Loss Account is required rather than the transfer of entries within each income or expense account.

6 Copy and hand out or show exercises T/14.4, T/14.5 and T/14.6 in the Appendix(pages 250–3) on the overhead projector.Ask the students to work through them. Pointout that they should look out for differences between the financial year and the calendaryear, particularly when working through T/14.5.


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105

Lesson 15: Depreciation of fixed assets

Topic summary

● The need to allow for fixed asset depreciation● The calculation of depreciation by the straight line method and the reducing

balance method ● The purpose, meaning, and significance of a ‘provision’● The account entries for fixed asset depreciation● Suitable entries in the Profit & Loss Account and balance sheet in respect of fixed

asset depreciation● The calculation of depreciation on fixed assets bought or sold during the course of

a financial year● The account entries for the disposal of a depreciated fixed asset


14.1 The nature of depreciation of fixed assets and the need for making provision inthe accounts (with the awareness that this is not the putting by of cash forreplacement)

14.2 The basis of the straight line (or fixed instalment) method of depreciation14.3 Calculation of the amount of annual depreciation and the effect on the book

value of a fixed asset, using the straight line method14.4 The accounting entries for straight line method depreciation, using a Provision

for Depreciation Account14.5 The basis of the reducing balance (or diminishing balance) method of depreciation14.6 Calculation of the amount of annual depreciation and the effect on the book

value of a fixed asset, using the reducing balance method14.7 The accounting entries for the reducing balance method of depreciation, using a

Provision for Depreciation Account14.8 A comparison, through basic calculation, between use of the straight line

method and use of the reducing balance method14.9 The accounting entries relating to the sale or scrapping of a depreciated fixed

asset, using an Asset Disposal Account14.10 The entries in the Profit & Loss Account and balance sheet relating to fixed

assets and their depreciation14.11 Significance of the terms aggregate depreciation and net book value and their use in

the balance sheet20.6 The effective presentation of fixed assets to show, if appropriate: cost, aggregate

depreciation, net book value

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Depreciation of fixed assets

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Depreciation of fixed assets, like accruals and prepayments, is a topic that might occur as aquestion in its own right or as an element in a question, particularly on final accounts.TheFirst Level Syllabus is concerned with two depreciation methods only:

(i) the straight line method (ii) the reducing balance method.

This lesson is important also in that it introduces the concept of the provision. Failure tounderstand a provision is often a major cause of failure in the examination.

Step 1

1 Explain why and how the value of fixed assets usually falls over a period of time; thattheir fall in value may be due to:

● being used (‘wear and tear’)● the availability of newer superior or more efficient assets, eg the newer assets might

run more cheaply or use less fuel.

2 Point out that if fixed assets never fall in value and could, at a later date, be sold for theprice they were purchased at, there would be no ‘usage cost’ of owning the fixed assets(although interest could not be earned on the money paid for the fixed asset, effectivelya cost).They do, however, generally fall in value, so that by failing to take account ofthis:

● profit would be overstated● fixed assets in the balance sheet would be overstated in value.

3 Explain that if fixed assets are hired, a charge for hiring would appear in the Profit &Loss Account. However, for assets that are owned, depreciation is charged, much like acharge for owning the assets.

4 Discuss the varying ways in which depreciation applies, eg leases on premises as opposedto ownership of motor vehicles.

5 Emphasize that depreciation, as recorded, is the estimate of the fall in value of fixedassets over a period of time. Illustrate this point with the following example.

Aim: to understand the need to allow for fixed asset depreciation

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107

Example

original cost of less estimated disposal = amount of asset or sale amount depreciation

£15,000 £1,500 = £13,500

6 Explain that the calculation for depreciation is necessarily an estimate because:

● of the problem of estimating the ‘working life’ of an asset, ie the number of years ofuse

● the amount that will be received on eventual sale of the asset, is being estimated,perhaps several years ahead

7 Point out that, often, simplified methods of measurement are used, therefore any resulting figure is necessarily an estimate. For example, a motor vehicle that is purchasedon 1 January Year 4 for £9,000, for use in a business, is estimated to have a working lifeof 4 years. At the end of that time it is believed that it will be sold for £1,000.The fallin value – the cost of ownership and use of the asset – is: £9,000 - £1,000 = £8,000.This will have to be ‘written down’ over the period of 4 years until it is sold.

Step 2

1 Point out that the LCCIEB First Level Book-keeping is concerned with only twomethods of calculating depreciation: the straight line and reducing balance methods.

2 The straight line methodThis is also known as the ‘fixed instalment method’.The calculation follows from whatwas stated in Step 1 about estimation, point 6 above. It involves:

● an estimate of the number of years of use (working life);● an estimate of the eventual sale (disposal) value;● the original cost less sale value = total amount to be written down;● total amount to be written down = annual depreciation charge.

number of years

Illustrate the straight line method by showing the examples below on the overhead projector or board.

Aim: to be able to calculate depreciation by the straight line method and the reducingbalance method

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Example (a)A machine, bought for £20,000, is estimated to have a working life of 6 years and tohave a sale value at the end of the 6 years of £2,000.The annual depreciation chargewould be:

Note The same result would be obtained by depreciating the total amount to be writtendown (£18,000) by 162/3% each year.

Example (b)Calculate the annual depreciation charge in each of the following cases:

(i) a motor vehicle, bought for £10,500, is estimated to have a working life of 5 yearsand to have a resale value at the end of that time of £1,500;

(ii) a machine bought for £32,000 is estimated to have a working life of 8 years and atthe end of that time to have a zero resale value.

Solution

(i) £10,500 - £1,500 = £1,800 per annum5

(ii) There is no resale value (sometimes termed ‘scrap value’) and so the original cost isthe total amount to be written down.

£32,000 = £4,000 per annum8

3 Reducing balance methodThis method is also known as the ‘diminishing balance method’. Explain that a fixedpercentage is written off the reduced balance each year. The reduced balance is the costof the asset less depreciation to date.

Illustrate this method by showing the example below on the overhead projector or board.

ExampleA machine is bought for £15,000 and depreciation is to be provided at 40%. The calculations for the first 4 years would be as follows:


108

£20,000 - £2,000 = £3,000

6

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Note that the amounts charged as depreciation fall quite strikingly. Depreciation in Year 1is nearly three times that of Year 3 and over 4.6 times that of Year 4.

4 Ask the students what advantage the reducing balance method has compared with thestraight line method. The answer should be that, in the early years, when repair billsshould be low, the depreciation charges are greatest. In later years, when repair bills arelikely to rise, depreciation charges are low. This has the effect of smoothing out chargesover the life of the asset. With the straight line method, depreciation charges arerelatively high in later years when repair bills increase.

5 Copy and hand out or show exercise T/15.1 in the Appendix (page 253) on the overhead projector.Ask the students to work through the exercise.

Step 3

1 Much of the problem experienced by candidates in answering questions involvingdepreciation result from a failure to understand the purpose and significance of a ‘provision’. Explain that a provision is an amount built up by charges in the Profit &Loss Account to provide for a fall in value of certain assets.A provision for depreciationis one example. Such a provision builds up when a charge is made year by year for theestimated depreciation.

2 Point out that any provision is not like a fund of cash: the charge(s) in the Profit & LossAccount creating or increasing a provision do not ensure that cash is conserved for theeventual replacement of the asset. However, creating a provision has the advantage of:

● helping to ensure that profits are not overstated, ie provision takes into account thecost of owning and using fixed assets;

● helping to ensure that the values of fixed assets are cautiously stated as the provisionis deducted in the balance sheet from the amount of the fixed asset.


109

Aim: to have a basic understanding of the purpose, meaning, and significance of a ‘provision’

£Cost of machine 15,000Year 1 depreciation (40%) 6,000

9,000Year 2 depreciation (40% of £9,000) 3,600



1,944

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A provision is usually shown in the balance sheet as a deduction from the amount ofthe relevant asset.

3 Describe how the net book value of an asset at a particular balance sheet date is not theamount for which it could be sold at that date, ie depreciation calculations are basedupon the business as a ‘going concern’. It is assumed that the business will continue tooperate for at least the period over which depreciation provisions are being built up. If,however, the future of a business is in considerable doubt, the net realizable value ofassets might fall below the net book value, so requiring extra depreciation to be chargedto the Profit & Loss Account.

Step 4

1 Tell the students that it is usual to show the depreciation of fixed assets as follows:

● the fixed asset account is kept at cost, without any adjustment for depreciation;● a separate provision for depreciation account is maintained that accumulates the

amount of depreciation year by year.

2 Emphasize that the LCCIEB requires this method to be used in examination answers.Far too many candidates make the mistake of recording depreciation in both the AssetAccount and the Provision Account. In doing so, they break the rules of double entry.

3 Illustrate the correct method of showing the depreciation of fixed assets by displayingthe example below on the overhead projector or board.

ExampleA machine, purchased by cheque for £80,000 on 1 January Year 1, is expected to havea working life of 4 years, after which it will be sold for £5,000. The financial year endson 31 December.

The straight line method is calculated as follows:

The reducing balance method is based in this instance on a 50% write down.

NoteAny questions requiring the use of this method will state the percentage rate of thewrite down to be applied.


110

Aim: to be able to make book-keeping entries relating to fixed asset depreciation

£80,000 - £5,000 = £75,000 = £18,750 per annum

4 4

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111

The calculation for the reducing balance method is as follows:

The accounts for each of the methods appears as follows:

Machine

Year 1 £1 Jan Bank 80,000

Straight line method

Provision for depreciation on machine

Year 1 £ Year 1 £31 Dec Balance c/d 18,750 31 Dec Profit & loss* 18,750

Year 2 Year 231 Dec Balance c/d 37,500 1 Jan Balance b/d 18,750

31 Dec Profit & loss* 18,750

37,500 37,500



56,250 56,250



* or Depreciation expense

£Cost of machine 80,000Year 1 depreciation 40,000

40,000Year 2 depreciation 20,000



5,000

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Reducing balance method

NoteIn reality, a firm would use only one method.The two are shown here for comparison.An examination question might require both methods to be shown. The provisionaccounts are left open in Year 4 to deal with the sale of the machine.This feature willbe dealt with in Step 7.

4 Draw the students’ attention to the key points illustrated by the example:

● the Asset Account has a debit balance (unchanged in amount and the same for the twodepreciation methods);

● provision for depreciation has a credit balance;● the provision for depreciation builds up (accumulates) the amounts of depreciation

year by year;● the difference between the asset balance and the provision balance is the ‘book value’

or ‘net book value’ of the asset.

5 Common error made by candidates concerning depreciationThe common error is to show the provision for depreciation with a debit balance,which is fundamentally wrong. Emphasize that a provision account always has a creditbalance.

6 Underline the fact that a provision exists because the charge to the Profit & LossAccount creating it (or increasing it) lessens the net profit and thus lessens the additionto the Capital Account. Instead of being part of Capital Account (Cr balance), theamount is shown as a provision (Cr balance).


112

Provision for depreciation on machine

Year 1 £ Year 1 £31 Dec Balance c/d 40,000 31 Dec Profit & loss* 40,000



60,000 60,000



70,000 70,000




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Step 5

1 Point out that the provision accounts, shown in Step 4 in the details column, state ‘Profit& loss’ or ‘Depreciation expense’.The use of a Depreciation Expense Account to carrythe debits of asset write down is standard practice.The account serves as a collectionpoint for depreciation charges and is especially useful when a business has a number ofdepreciation provision accounts. At the end of the year the total of the DepreciationExpense Account is transferred to the Profit & Loss Account and therefore only oneentry has to appear there.The use of a Depreciation Expense Account is therefore anindirect way of achieving the same result as a direct debit to the Profit & Loss Account.The LCCIEB will accept either entry. First Level candidates may find the further stagein the process (ie recording depreciation in a Depreciation Expense Account) somewhatconfusing.

2 The Profit & Loss AccountCreating or increasing a depreciation provision results in the double entry appearing asfollows:

● the Profit & Loss Account is debited (or the Depreciation Expense Account for later transfer to the Profit & Loss Account);

● the Provision for Depreciation Account is credited.

3 Balance sheetUsually leads to each fixed asset (or class of fixed asset) being shown at cost less totaldepreciation to date, resulting in the net book value.

4 Show the following typical layout of fixed assets in a balance sheet on the overheadprojector or board.

The total of the net book value, £137,900, is to be added in due course to the otherassets in the balance sheet.


113

Accumulated Net bookFixed Assets Cost depreciation value

£ £ £Premises 120,000 120,000Fixtures and fittings 9,500 4,200 5,300Motor vehicles 17,800 5,200 12,600

147,300 9,400 137,900

Aim: to be able to make suitable entries in the Profit & Loss Account and balance sheetin respect of fixed asset depreciation

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5 Copy and hand out or display the following exercise on the overhead projector.Ask thestudents to work through the exercise.

Exercise

On 1 April Year 5, L Johns purchased a machine for £30,000. He decided to depreciateit at the rate of 40% using the reducing balance method. He keeps a provision for depreciation account.

RequiredShow, as an extract, how the asset would appear in the balance sheet of L Johns at 31March Year 8.

SolutionL Johns

Balance sheet (extract) at 31 March Year 8

Accumulated Net book Fixed Assets Cost depreciation value

£ £ £Machine 30,000 23,520 6,480


Step 6

1 Explain that sometimes fixed assets are either bought or sold during the course of afinancial year and the instructions given in the examination question need to be followed with care.The question will state what to do when a fixed asset is purchasedpart of the way through a firm’s financial year. There are various ways in which candidates can answer the question, including:

(a) charging depreciation for the part of the year the asset is owned, eg if the financialyear ends on 31 December, then for a fixed-asset purchase on 1 May the charge forthe year to 31 December would be 8/12 of the annual amount of depreciation;

(b) charging a full year’s depreciation for assets purchased in the first half of the financial year and charging a half year’s depreciation for those purchased in the second half of the financial year;

(c) providing depreciation for the whole year on assets held at the end of the year.


114

Aim: to be able to calculate depreciation on fixed assets bought or sold during the courseof a financial year

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The following example illustrates the calculation of depreciation on fixed assetspurchased during the course of the financial year.

ExampleThe financial year of Sands & Co ends on 31 December. During Year 1, the followingfixed assets were purchased:

Date of purchase Cost

Fixed Assets £Motor vehicle 5 February Year 1 9,000Fixtures and fittings 11 September Year 1 6,000

The assets are depreciated using the following bases:

Motor vehicles 40% per annum, using the reducing balance methodFixtures and fittings 20% per annum, using the straight line method

The policy for assets purchased during the year is as follows:

● a full year’s depreciation is charged for assets purchased in the first half of the financialyear;

● a half year’s depreciation is charged for assets purchased in the second half of the financial year.

RequiredIn a statement, show the amount of the depreciation on each asset for each of the yearsended 31 December Year 1 and 31 December Year 2.

SolutionDepreciation Motor vehicles Fixtures and fittings

£ £Year 1 3,600 600Year 2 2,160 1,200

2 For asset sales during a financial year there are also different ways of dealing with depreciation, eg:

(a) ignoring part periods and calculating a full period’s depreciation only on those assets owned at the end of the period.Thus, assets sold during the period will have no provision for depreciation made for that last period; whereas assets bought during the period will have a full period’s depreciation provision;

(b) calculating the depreciation provision according to the proportion of time the asset was owned (probably calculated to the nearest whole month);

(c) making no provision for depreciation on assets sold in the first half of the financial year and half the annual provision for assets sold in the second half of the year.

3 Copy and hand out or show exercises T/15.4 and T/15.5 in the Appendix (page 255–6)on the overhead projector.Ask the students to work through the exercises.


115

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Step 7

1 Identify the 3 elements involved in the sale of a fixed asset, which are

● the original cost of the asset● the depreciation provided to date● the sale proceeds

Explain that there is often a ‘profit’ or a ‘loss’ arising out of the sale: the original calculations regarding the working life and sales value of the asset were only estimates.

2 Review the book-keeping entries regarding the disposal of an asset.The entries are:

● the original cost of the asset(i) Dr Disposals Account(ii) Cr Fixed Asset Account

● the depreciation provided to date(i) Dr Provision for Depreciation Account(ii) Cr Disposals Account

● the sale proceeds(i) Dr Bank/Cash Account(ii) Cr Disposals Account

● loss on sale(i) Dr Profit & Loss Account(ii) Cr Disposals Account

● profit on sale(i) Dr Disposals Account(ii) Cr Profit & Loss Account.

3 Illustrate the calculation and account entries for an asset sold at a profit by displayingthe example below on the overhead projector.The data are taken from the example inStep 4 on page 111.The straight line method has been used to calculate depreciation.

ExampleThe machine is sold on 31 December Year 3 for £27,200. At that date, the Provisionfor Depreciation Account has a credit balance of £56,250.


116

Aim: to be able to make book-keeping entries concerning the disposal of a depreciatedfixed asset

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The calculation for profit/loss appears as follows:

The book-keeping entries, excluding bank account, are:

Machine

Year 1 £ Year 1 £1 Jan Bank 80,000 31 Dec Balance c/d 80,000

Year 2 Year 21 Jan Balance b/d 80,000 31 Dec Balance c/d 80,000

Year 3 Year 31 Jan Balance b/d 80,000 31 Dec Disposal of machine 80,000

Provision for depreciation of machine

Year 3 £ Year 3 £31 Dec Disposal of

machine 56,250 1 Jan Balance b/d 37,50031 Dec Profit & loss* 18,750

56,250 56,250

Disposal of machine

Year 3 £ Year 3 £31 Dec Machine 80,000 31 Dec Prov for deprec’n –

machine 56,25031 Dec Profit & loss

(profit on sale) 3,450 31 Dec Bank 27,200

83,450 83,450

Profit & Loss Accountfor the year ended 31 December Year 3

£Profit on sale of machine 3,450


4 Illustrate the calculation and account entries for an asset sold at a loss by displaying theexample overleaf on the overhead projector.


117

£Cost of machine 80,000less Provision for

depreciation to 31 Dec Yr 3 56,250

23,750Sale price 27,200

Profit on sale 3,450

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ExampleUsing the same data and the same disposal date, this time the machine is sold for£22,100.

The calculation for profit/loss is as follows:

Disposal of Machine

Year 3 £ Year 3 £31 Dec Machine 80,000 31 Dec Prov for deprec’n –

machine 56,25031 Dec Bank 22,100

31 Dec Profit & loss (loss on sale) 1,650

80,000 80,000


£Loss on sale of machine 1,650

In the examples above, a full year’s depreciation has been charged in the year of disposal,ie Year 3.


118

£Cost of machine 80,000less provision for depreciation to

31 December Year 3 56,250

23,750Sale price 22,100

Loss on sale 1,650

Machine

Year 1 £ Year 1 £1 Jan Bank 80,000 31 Dec Balance c/d 80,000

Year 2 Year 21 Jan Balance b/d 80,000 31 Dec Balance c/d 80,000

Year 3 Year 31 Jan Balance b/d 80,000 31 Dec Disposal of machine 80,000

Provision for depreciation of machine

Year 3 £ Year 3 £31 Dec Disposal of machine 56,250 1 Jan Balance b/d 37,500


56,250 56,250

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5 Point out that the so-called profit or loss on disposal is only a depreciation adjustment.In practice, it is usual for profit or loss to be added to depreciation, which in the firstinstance of the disposal, would be:

£18,750 less £3,450 = £15,300 for the year

If the policy is to charge no depreciation in the year of disposal, then (again in the firstinstance) the calculation would be:

6 Explain that loss is really another word for depreciation.

7 Common errors made by candidates regarding depreciationDraw the students’ attention to the errors they should avoid, such as:

(a) recording depreciation to the credit of both the Provision Account and the Asset Account, breaking the rules of double entry;

(b) using the Provision Account as merely a calculating stage: ie entering the amountto the credit of the Provision Account, and then transferring it to the Asset Account(Dr provision, Cr asset);

(c) debiting depreciation to the Provision Account;(d) failing to accumulate the depreciation from year to year;(e) failing to follow the instruction regarding the due proportion of annual

depreciation where the asset is purchased during the year;(f) wording account entries poorly.



119

£Cost 80,000less Accumulated depreciation 37,500

Net book value 42,500Sale of the machine 27,200

Loss/depreciation 15,300

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Lesson 16: Bad debts and provision for doubtful debts

120

Topic summary

● The meaning of ‘bad debts’ and the effect of writing off a debt● Recording the writing off of customer debts● The function of the provision for doubtful debts and the creation of such a provision● The increase or decrease of the provision for doubtful debts and making book-keeping

entries accordingly● The effect on debtors of a doubtful debts provision (i) within a balance sheet or

(ii) as a balance sheet extract● Making specific provision for the non-recovery of certain debts as well as a general

provision for doubtful debts● Recording the recovery of debts previously written off


15.1 The process of debts becoming irrecoverable and being written off, in whole orin part

15.2 The accounting entries for writing off individual debtor balances, in whole orin part, using a Bad Debts Account

15.3 The end-of-period transfer of total debts written off from the Bad DebtsAccount to the Profit & Loss Account

15.4 The reasons for the creating of, and subsequent adjusting of, a provision fordoubtful debts

15.5 Given certain data, the creating of a provision for doubtful debts and the adjusting of it, as necessary, for subsequent accounting periods

15.6 The entries in the Profit & Loss Account and balance sheet relating to the provision for doubtful debts

15.7 Making specific provision for certain bad debts as well as general provision fordoubtful debts

15.8 The accounting entries relating to the recovery of debts previously written off

15.8.1 if recovered within the same financial period in which the debt waswritten off; and/or

15.8.2 if recovered after the year of writing off

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Bad debts and provision for doubtful debts

121

Writing off amounts due from debtors (‘bad debts’), in whole or in part, is not usually agreat problem for LCCIEB book-keeping students. They can have more difficulty with creating and/or adjusting a provision for doubtful debts, which arises largely from the failure to grasp the concept of the provision. Careful explanation and illustration is thereforerequired.

The recovery of debts that have been written off is often neglected in book-keeping studiesand yet it is a relatively straightforward exercise.

Step 1

1 Explain that a bad debt is an amount that a firm is unable, for a number of reasons, tocollect from a customer; it is a debt beyond any hope of recovery. The amount is written off in the firm’s accounts as being ‘irrecoverable’. Sometimes, however, a debtorwill pay part of the amount owing and the balance of the debt will be written off.

2 Tell the students that the aim in writing off bad debts is to ensure that the figure shownin the balance sheet for debtors represents the total of collectable debts, ie that the figure for debtors is not overstated.

3 Point out that writing debts off involves charging the amount written off in the Profit& Loss Account.The effect of charging this amount is to reduce the net profit for theyear in question.As the net profit is reduced, so the addition to capital is lessened, whichis matched by the reduction in the total of the current assets.

4 Outline the fact that the frequency with which debts are written off may vary. Forexample, they may be written off:

● at intervals throughout the year● yearly (e.g. as part of a year-end review)● as the need arises.

Step 2

1 Explain that the role of the Bad Debts Account is to be a collection point for amountswritten off, which are later transferred in total to the Profit & Loss Account.

Aim: to appreciate the meaning of ‘bad debts’ and the effect of writing off a debt

Aim: to be able to record the writing off of customer debts

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2 Illustrate the role of the Bad Debts Account by displaying the example below on theoverhead projector or board.

ExampleT Jackson and J Grand are debtors whose balances are outstanding. In the annual reviewof debtors on 31 December Year 7, the following accounts are shown in the SalesLedger:

T Jackson

Year 7 £ Year 7 £1 Jan Balance 530 13 Apr Bank 90

J Grand


T Jackson has managed to pay part of the amount due, but it is now clear that he willbe unable to pay the balance due.The decision is made to write off this balance and thewhole amount due from J Grand.


£Bad debts 855


122

T Jackson

Year 7 £ Year 7 £1 Jan Balance 530 13 Apr Bank 90

31 Dec Bad debts 440

530 530

J Grand

Year 7 £ Year 7 £11 Mar Sales 415 31 Dec Bad debts 415

Bad Debts

Year 7 £ Year 7 £31 Dec T Jackson 440 31 Dec Profit & loss 85531 Dec J Grand 415

855 855

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3 Set out the rule below for bad debt entries on the overhead projector or board:

(a) Dr Bad Debts AccountCr Individual debtor accounts (or ‘debtors’ if only a total figure is stated in the

question)(b) Dr Profit & Loss Account

Cr Bad Debts Account

4 Copy and hand out or show the exercise below on the overhead projector or board.Askthe students to work through the exercise.

Exercise

During the year ended 31 December Year 4,W Glossop had written off debts due fromcustomers that amounted to £1,306. On 31 December Year 4, he received a cheque for£73 from J Hinge in part payment of the amount of £295 that was due.W Glossopbelieved that it was now unlikely that any further payment would be received from thisdebtor and that the balance of the debt should be written off.

RequiredShow the following accounts for the year ended 31 December Year 4:

(i) J Hinge(ii) Bad Debts(iii) Profit & Loss – as an extract.

Solution

Profit & Loss Account (extract)for the year ended 31 December Year 4

£Bad debts 1,528


123

J Hinge

Year 4 £ Year 4 £1 Jan Balance 295 31 Dec Bank 73

31 Dec Bad debts 222

295 295

Bad debts

Year 4 £ Year 4 £Jan–Dec Sundries 1,306 31 Dec Profit & loss 1,52831 Dec J Hinge 222

1,528 1,528

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Step 3

1 Explain the practice of firms allowing for a certain number of debts becoming ‘bad’, i.e.irrecoverable. It is never certain which debtors will be unable to pay, but experiencemakes it possible to calculate the total amount of debts that will need to be written offapproximately, eg 2% of total debtor balances. A provision for doubtful debts is then created and maintained. Draw attention to the term ‘doubtful’.The calculation is reallya broad estimate and is not the result of a close analysis of the position of individualdebtors.

2 Distinguish the provision for doubtful debts from writing off bad debts.The procedurefor creating a provision for doubtful debts is as follows:

(a) a gross debtors’ figure is calculated by totalling the balances on individual debtor accounts;

(b) individual debtor balances may have to be written off;(c) the provision for doubtful debts is calculated on the total of remaining debtor

balances.

3 Illustrate this procedure with the following on the overhead projector or board.

The account entries appear as follows:


£Provision for doubtful debts 1,122

Provision for Doubtful Debts

Year 5 £31 Dec Profit & loss 1,122


124

Aim: to be able to understand the function of the provision for doubtful debts and to beable to create such a provision

£Gross debtors (at 31 Dec Yr 5) 38,360less Bad debts written off 960

37,400less Provision for doubtful debts at 3% 1,122

36,278

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4 Explain that, like any provision, a provision for doubtful debts remains in the books untilit is changed.The provision is likely, in practice, to be reviewed annually because:

● if the provision is kept at a certain percentage of debtors, the amount of the provisionhas to be adjusted as the total of debtors changes;

● it may be considered desirable from time to time to change the percentage rate.

5 Copy and hand out or display the following exercise on the overhead projector.Ask thestudents to work through the exercise.

Exercise

At 31 December Year 3, Ellen Tamworth has debtors totalling £25,130. During Year 3,she has written off £540 of debts. She decides to write off a further £330 of debts. In addition, she creates a provision for doubtful debts of 4% of the remaining debtors.

RequiredShow the following accounts for the year ended 31 December Year 3:

(i) Bad Debts(ii) Provision for Doubtful Debts(iii) Profit & Loss – as an extract.

Solution

Working:

£25,130 - £330 = £24,8004% of £24,800 = £992


Year 3 £31 Dec Profit & loss 992


£Bad debts 870Provision for doubtful debts 992

NotePoint out that the £540 was written off ‘during Year 3’ and is therefore removed before 31 December Year 3.Thus, only £330 has to be deducted from debtors.


125

Bad debts

Year 3 £ Year 3 £Jan–Dec Debtors 540 31 Dec Profit & loss 87031 Dec Debtors 330

870 870

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Step 4

1 Make it clear that the provision, once created, carries on as it is in the book until it iseither increased or reduced.

2 Increase in the provisionContinuing with the last example, it is supposed that, at 31 December Year 4, theamount of debtors after writing off bad debts is £29,400.The 4% rate is unchanged.The calculation is:

The book-keeping entries are:


£Increase in provision

for doubtful debts 184

Stress that only the increase in the provision is debited to the Profit & Loss Account.

3 Decrease in the provisionIt is supposed that, at 31 December Year 5, the amount of debtors after writing off baddebts is £26,800.The 4% rate is unchanged.


126

Aim: to be able to increase or decrease the provision for doubtful debts and make book-keeping entries accordingly

£4% of £29,400 1,176less Amount of existing provision 992

Increase in provision 184


Year 3 £ Year 3 £31 Dec Balance c/d 992 31 Dec Profit & loss 992

Year 4 Year 431 Dec Balance c/d 1,176 1 Jan Balance b/d 992

31 Dec Profit & loss 184

1,176 1,176


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The calculation is:

The book-keeping entries are:


£Reduction in provision fordoubtful debts 104

Step 5

1 Explain that the provision, although having a credit balance, is always deducted fromdebtors in the balance sheet.

2 Relate this deduction to the deduction of a provision for depreciation from the relevant fixed asset.The principle of obtaining a figure net of the provision is the same.


127

£4% of £26,800 1,072less Amount of existing provision 1,176

Decrease in the provision 104


Year 3 £ Year 3 £31 Dec Balance c/d 992 31 Dec Profit & loss 992

Year 4 Year 431 Dec Balance c/d 1,176 1 Jan Balance b/d 992

31 Dec Profit & loss 184

1,176 1,176

Year 5 Year 531 Dec Profit & loss 104 1 Jan Balance b/d 1,17631 Dec Balance c/d 1,072

1,176 1,176


Aim: to be able to show the effect on debtors of a doubtful debts provision (i) within abalance sheet or (ii) as a balance sheet extract

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3 Illustrate a doubtful debts provision within a balance sheet on the overhead projectorwith the following:

4 Inform the students that if a balance sheet extract is required, then a suitable headingshould be included, eg:

5 Copy and hand out or display the following exercise on the overhead projector orboard.Ask the students to work through the exercise.

With reference to Step 4, show each of the following as balance sheet extracts:

(a) The debtors at 31 December Year 4, following the example on page 125.(b) The debtors at 31 December Year 5, following the examples on pages 126 and 127.

Solutions

6 Copy and hand out or show exercises T/16.1 and T16.2 in the Appendix (pages 257–8).Ask the students to work through them.


128

Current Assets £ £Debtors 36,800less Provision for doubtful debts 1,840 34,960

F LucasBalance sheet (extract)at 30 September Year 6


(a) Balance sheet (extract) at 31 December Year 4


(b) Balance sheet (extract) at 31 December Year 5


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Step 6

1 Explain that some firms create 2 categories of debt provision.

(a) After writing off known bad debts, a specific provision is made on a few debtors when there is a high chance that they will become bad debts. They are not yet known as bad debts but information suggests they might become so. The full amount of each high-risk debt might be included in the provision.

(b) A general provision is made on the remaining balance of debtors. The provisions dealt with in Steps 3 and 4 are known as general provisions.

The calculation involving both a specific provision and a general provision might be asfollows:

The balance sheet is shown as follows:

2 Copy and hand out or show exercise T/16.3* in the Appendix (page 259) on theoverhead projector.Ask the students to work through the exercise.

Step 7

1 Debts that have been written off are sometimes recovered, ie the debtor may, after all,be able to pay part of the original debt. Point out that it is necessary to distinguishbetween:


129

£Gross amount of debtors 32,970less Bad debts written off 870

32,100less Specific provision

(ie the total of certain high-risk debts) 1,100

31,000less general provision at 3% 930

30,070

Aim: to be able to make specific provision for the non-recovery of certain debts as wellas a general provision for doubtful debts

Current Assets £Debtors 32,100less Provision for bad and doubtful debts 2,030

30,070

Aim: to be able to record the recovery of debts previously written off

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(a) debts recovered within the same year as the debt was written off;(b) recovery after the year the debts were written off.

2 Explain that if the debts are recovered within the same financial year as the debt was written off, the entries would be:

Dr debtor which reinstates the debt (or part of it) on the debtor’s accountCr bad debts which effectively cancels the previous write offDr cash/bankCr debtor which clears the account

Taking the year as a whole, the debtor is a late payer rather than a bad debtor.The crediton the Bad Debts Account reduces the balance of bad debts to the sum of debts writtenoff and still not received by the year end.

3 If recovered after the year of write off, demonstrate that the entries would be:

Dr debtorCr bad debts recoveredDr cash/bankCr debtor

At the end of the year of recovery, the balance on the bad debts recovered accountwould be transferred to the Profit & Loss Account:

Dr bad debts recoveredCr Profit & Loss Account

4 Advise the students that the LCCIEB believes that, on recovery of a debt (or part of it)that was previously written off, the amount should be reinstated in the account of thedebtor.The debtor has made the effort to clear the debt, even if later than anticipated,and this should be recognized in the account. In any case, decisions about grantingcredit in the future should not be decided by account entries alone.

5 Copy and hand out or show exercises T/16.4 and T/16.5 in the Appendix (pages 260–1) on the overhead projector.Ask the students to work through them.

6 Common errors made by candidates relating to bad debts and provision fordoubtful debtsDraw the students attention to common errors, which include:

(a) not appreciating that the purpose of the Bad Debts Account is to store the amounts of debt written off during a trading period;

(b) wrongly transferring each amount written off to the Profit & Loss Account; it isthe period total that should be transferred;

(c) failure to grasp the meaning of the provision: an especially common mistake is toenter the whole of the latest provision amount in the Profit & Loss Account,regardless of any existing provision;


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(d) the provision account showing a debit balance;(e) incorrect calculation of the provision, which should be a percentage of the debtor

balance after any further bad debts have been written off;(f ) taking bad debts that have been written off to the provision for doubtful debts

account (see the Extended Syllabus, paragraph 15.3) ‘Bad Debts Account shouldnot be written off against the Provision Account’;

(g) poor wording of entries in Bad Debts Account and Provision for Doubtful DebtsAccount.


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Lesson 17: Bank reconciliation statements

Knowledge of bank facilities and practice with the Cash Book (see Lessons 9 and 10) arean essential basis for answering questions relating to bank reconciliation. Candidates areoften unaware of the purpose of the bank statement and of what should be done by thecustomer on receiving it from the bank. Only when the Cash Book has been brought upto date should bank reconciliation begin formally.

132

Topic summary

● The need for reconciling the Cash Book with the bank statement● Updating the Cash Book from the bank statement● Preparing a bank reconciliation statement● The meaning and effects of a cheque being dishonoured● Reconciling the Cash Book and bank statement where a bank overdraft is involved● Drafting a bank statement from the data provided


8.13 The periodic updating of the Cash Book from the bank statement

8.14 The possible reasons for the dishonouring of a cheque and its signficance

8.15 The book-keeping entries arising on the dishonouring of a cheque

9.1 The need for periodic reconciliation between the balance in the bank statementand the balance in the Cash Book (Bank Current Account)

9.2 The updating of the Cash Book (bank column) with as yet non-recorded itemswhich are revealed in the bank statement

9.3 Understanding of and use of the terms:

9.3.1 unpresented cheques (or cheques drawn, not yet presented)9.3.2 cheques paid in (lodged ), not yet credited

9.4 The preparation of a statement reconciling the balance in the Cash Book (BankCurrent Account) with that shown in the bank statement, in respect of itemsstill causing a difference

9.5 From data provided, the drafting of a bank statement

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Step 1

1 Outline the records used to keep the bank and account holder up to date with a bankaccount:

● the Cash Book: the firm’s record of transactions with the bank;● the bank statement: issued by the bank at regular intervals, eg monthly or weekly, it

is the bank’s record of the firm’s account.

2 Explain that differences will arise between the two records, due to:

● timing differences, eg a cheque being paid into the account that the bank has not yetrecorded;

● the Cash Book not yet showing items that appear on the bank statement, ie the account holder can update the Cash Book by including items from the bank statement.

3 Explain and discuss with students the main timing differences. Link the discussion withLesson 9, focusing in particular on how cheque clearance can affect timing. For example:

● a drawn cheque may not be recorded on a bank statement until 2-3 days after it hasbeen drawn; the time delay is increased if the payee delays paying the cheque into hisor her bank account;

● amounts paid into the bank may not yet be included in a current bank statement because the amounts were paid into a different branch of the account holder’s bank;alternatively, they may have been paid in late in the banking day and crediting could be further delayed if the next day(s) are not working days.

Step 2

1 Tell the students that when the bank statement has been received, they should:

(a) compare the Cash Book with the bank statement, tick ( ) off the items that correspond (which might include most items in both sets of record), and look carefully for any mistake made by the bank or the customer;

(b) look for any items in the bank statement that should be entered in the Cash Book before it is (finally) balanced; the items relate to transactions that have already takenplace and that should no longer cause any difference between the two records; suchitems include:

Bank reconciliation statements

133

Aim: to understand the need for reconciling the Cash Book with the bank statement

Aim: to be able to update the Cash Book from the bank statement

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● various means of bank transfer, eg credit transfer, standing order, direct debit – for either the payment or receipt of money (see Lesson 9,‘Other payment methods’,page 53);

● bank charges for operating the account or interest charged for a bank overdraft;● interest paid by the bank to the account holder, which applies to some bank

accounts if the account balance is over a certain minimum figure.

2 Illustrate how to update the Cash Book from the bank statement by showing the example below on the overhead projector or board.

ExampleIt is supposed that Alec Simmons’ Cash Book for August Year 4 appears as follows:

CASH BOOK (bank columns)

Year 4 £ Year 4 £1 Aug Balance b/d 790 5 Aug R Clapton (316) 2803 Aug J Slade 125 14 Aug W Rigden (317) 4069 Aug T Medway 363 26 Aug B Tallon (318) 190

19 Aug N Thorne 95 29 Aug P Gaul (319) 31530 Aug L Nathan 156 31 Aug Balance c/d 338

1,529 1,529

31 Aug Balance b/d 338

The above represents only a preliminary (first) balancing.An alternative practice is notto record a balance at this stage, but to keep a separate note of the preliminary balance.

Alec Simmons receives the following bank statement:

Year 4 Paid out Paid in Balance£ £ £

1 Aug Balance b/f 790 Cr5 Aug J Slade 125 915 Cr7 Aug Credit transfer (C/T): K Jordan 96 1,011 Cr8 Aug R Clapton (214316) 280 731 Cr

10 Aug Direct debit (D/D):Midshire Gas Co 62 669 Cr

11 Aug T Medway 363 1,032 Cr17 Aug W Rigden (214317) 406 626 Cr20 Aug N Thorne 95 721 Cr22 Aug Credit transfer (C/T): Wilders Ltd 310 1,031 Cr27 Aug Standing order (S/O):

DVS Publications 174 857 Cr31 Aug Balance c/f 857 Cr

NoteShow that the reconciliation of the 2 balances should be carried out by:

● ticking ( ) the items that appear in both the Cash Book and bank statement and watching out for errors;


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● entering the unticked items on the bank statement into the Cash Book and checking for errors;

● balancing the Cash Book finally to provide the updated balance;● using the unticked items in the Cash Book to prepare the bank reconciliation statement.

The updated Cash Book appears as follows:

CASH BOOK (bank columns)

Year 4 £ Year 4 £1 Aug Balance b/d 790 5 Aug R Clapton (316) 2803 Aug J Slade 125 14 Aug W Rigden (317) 4069 Aug T Medway 363 26 Aug B Tallon (318) 190

19 Aug N Thorne 95 29 Aug P Gaul (319) 31530 Aug L Nathan 156 31 Aug Balance c/d 338

1,529 1,529

31 Aug Balance b/d 338 31 Aug Midshire Gas Co – 31 Aug K Jordan – direct debit (D/D) 62

credit transfer (C/T) 96 31 Aug DVS Publications – 31 Aug Wilders Ltd – standing order (S/O) 174

credit transfer (C/T) 310 31 Aug Balance c/d 508

744 744

1 Sep Balance b/d 508

NotePoint out that the items obtained from the bank statement are entered at the last dateof the period, ie 31 August Year 4.

Step 3

1 Emphasize that only the final stage of reconciliation is recorded in the bank reconciliationstatement, ie after the Cash Book has been updated.

2 Display the reconciliation for the data regarding Alec Simmons shown overleaf on theoverhead projector or board.


135

Aim: to be able to prepare a bank reconciliation statement

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Alec SimmonsBank reconciliation statement

at 31 August Year 4

£ £Balance as per Cash Book 508add Unpresented cheques:

B Tallon (318) 190P Gaul (319) 315 505

1,013

less Cheque paid in, not yet credited:L Nathan 156

Balance as per bank statement 857

3 An alternative way of showing the reconciliation would be to start with the bankstatement balance. If so, the items appear in reverse order to those shown above.Thebank reconciliation statement for Alec Simmons would then be:

Alec SimmonsBank reconciliation statement

at 31 August Year 4

£ £Balance as per bank statement 857add Cheque paid in, not yet credited:

L Nathan 156

1,013

less Unpresented cheques:B Tallon (318) 190P Gaul (319) 315 505

Balance as per Cash Book 508

4 Ensure that the students are able to prepare a bank reconciliation statement in bothways: starting either with Cash Book balance or the bank statement balance.

5 Common errors made by candidates concerning bank reconciliationstatementsDraw the students’ attention to the common errors, which are:

● failing to update the Cash Book before preparing the bank reconciliation statement;● attempting the wrong ‘reconciliation’, eg attempting to reconcile the closing bank

statement balance with the opening Cash Book balance, which is sometimes doneeven though the students have updated the Cash Book.

6 Copy and hand out or show exercises T/17.1, T/17.2, and T/17.3 in the Appendix(pages 262–5) on the overhead projector.Ask the students to work through them.


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Step 4

1 Explain that the meaning and significance of a cheque being dishonoured is that thedrawer’s bank refuses to accept (ie to honour) the cheque.

2 Tell the students that a cheque may be dishonoured because:

(a) the cheque has been prepared incorrectly, which may not have been noticed before;(b) the cheque may have become ‘stale’ (ie too old to be accepted by the paying bank);

a cheque is usually considered stale 6 months after the date on the cheque, althoughpractice varies;

(c) the drawer has insufficient funds in his or her bank account.

3 Illustrate the effects of a cheque being dishonoured by showing the example below onthe overhead projector or board.

ExampleIt is supposed that on 9 July Year 8 a cheque for £3,000 is received from J Fargo in settlement of a debt.

Bank

Year 8 £9 Jul J Fargo 3,000

J Fargo

Year 8 £ Year 8 £1 Jul Balance b/f 3,000 9 Jul Bank 3,000

On 14 July Year 8, the bank returns the cheque marked ‘refer to drawer’. The bankaccount needs to be adjusted and the debt reinstated on Fargo’s account.

Bank

Year 8 £ Year 8 £9 Jul J Fargo 3,000 14 Jul J Fargo – cheque

dishonoured 3,000

J Fargo

Year 8 £ Year 8 £1 Jul Balance b/f 3,000 9 Jul Bank 3,000

14 Jul Bank – cheque dishonoured 3,000

J Fargo is once again a debtor.


137

Aim: to understand the meaning and effects of a cheque being dishonoured

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Step 5

Candidates tend to find reconciling the Cash Book and bank statement more difficult if theprocedure involves a bank overdraft.The measure of the problem depends upon the stageat which the overdraft arises. If, for instance, the Cash Book opens with an overdraft, thisoverdraft might be turned into a positive balance once the Cash Book is updated. The positive balance removes the difficulty of dealing with the overdraft. An overdraft is problematic, however, when it exists at the stage of formal reconciliation, ie after the CashBook has been updated.

ExampleThe example that follows can be used to show the students how to produce a bankreconciliation statement when an overdraft is involved.The following Cash Book has beenupdated from the bank statement at the bottom of the page.

Bank statement

Year 6 Paid out Paid in Balance£ £ £

1 Apr Balance b/f 715 O/D4 Apr J Drake 57 658 O/D

11 Apr Credit transfer (C/T): T Lofter 68 590 O/D13 Apr R Upton: 217572 96 686 O/D18 Apr L Trim 203 483 O/D23 Apr Direct debit (D/D): Uplands Services 142 625 O/D30 Apr Bank interest 28 653 O/D


138

Aim: to be able to reconcile the Cash Book and bank statement where a bank overdraftis involved

CASH BOOK

Year 6 £ Year 6 £3 Apr J Drake 57 1 Apr Balance b/f 715

18 Apr L Trim 203 9 Apr R Upton (572) 9629 Apr A Simes 59 17 Apr T Gunge (573) 11530 Apr Balance c/d 694 25 Apr P Skate (574) 87

1,013 1,013

30 Apr T Lofter – 30 Apr Balance b/d 694credit transfer (C/T) 68 30 Apr Uplands Services –

30 Apr Balance c/d 796 direct debit (D/D) 14230 Apr Bank interest 28

864 864

1 May Balance b/d 796

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Note‘O/D’ on the bank statement means that the account is overdrawn.

In this case, not only is the opening Cash Book balance overdrawn but an overdraft alsoexists at the stage of formal reconciliation. The bank reconciliation statement might beshown as follows:

NoteThe addition is serving to reduce the overdraft and any deduction serving to increase it.

Alternatively, the bank reconciliation statement might be shown as follows:

Step 6

1 Display the following example of a bank statement on the overhead projector.


139

Bank reconciliation statementat 30 April Year 6

£ £Balance per Cash Book – overdraft (796)add Unpresented cheques:

T Gunge (573) 115P Skate (574) 87 202

(594)less Cheque paid in, not credited: A Simes 59

Balance per bank statement – overdraft (653)

Bank reconciliation statementat 30 April Year 6

£ £Balance per Cash Book – overdraft 796add Cheque paid in, not yet credited: A Simes 59

less Unpresented cheques: 855T Gunge (573) 115P Skate (574) 87 202

Balance per bank statement – overdraft 653

Aim: to be able to draft a bank statement from the data provided

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Westshires Bank12 High Street

CramptonShropshire CR3 5TU

Mr Roger Dolby

Account No. 75643

Date Year 4 Particulars Paid out Paid in Balance£ £ £

1 May Balance b/f 716.00 O/D3 May R Tenby: 200136 92.00 808.00 O/D5 May C/T – R Beale 405.00 403.00 O/D8 May L Scales 392.00 11.00 O/D

12 May D/D – Selsby Services 125.50 136.50 O/D14 May L Germaine: 200137 33.00 169.50 O/D17 May C/T – F Renoir 253.50 84.00 Cr20 May L Pinter 141.00 225.00 Cr22 May S/O – Loxby

Publications 174.00 51.00 Cr24 May A Croft: 200138 207.00 156.00 O/D27 May L Scales 367.00 211.00 Cr31 May Interest 32.00 179.00 Cr

Key:C/T credit transferD/D direct debitO/D overdrawnS/O standing order

2 Point out that bank statements are prepared in running balance format, so that the ‘balance’ column is automatically updated as each transaction is entered.

3 Explain that bank statements have become more ‘user friendly’ in recent years.Thus theheadings of Dr and Cr above the amount columns – confusing for many bank customers – have been replaced by some banks by ‘paid out’ and ‘paid in’.

4 Make it clear that, in the ‘particulars’ column, it is now common for cheques drawn onthe bank to be entered on the bank statement by cheque number only. In examinationquestions, there will be sufficient information provided to link the items. In bank reconciliation statements, it is desirable to include names and cheque numbers (if applicable) wherever possible.



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Lesson 18: Petty Cash Book – imprest system

The students should understand the function of the Petty Cash Book, its relationship to theCash Book itself, its part in the double-entry system, and the practical way in which it isoperated (including the imprest system).The means of analysing expenditure that is used ina Petty Cash Book can be applied also to the main Cash Book, which is covered in Step 7.

141

Topic summary

● The purpose and uses of petty cash● The principle and working of the imprest system● Recording the opening imprest and individual payments in the Petty Cash Book● Totalling and balancing the Petty Cash Book and recording the reimbursement of

the float at the period end● The purpose of the petty-cash analysis columns and making double-entry postings

to the ledger● Responding to questions involving (i) variations within the Petty Cash Book and

(ii) the part played by the Petty Cash Book in the double-entry system● Preparing a Cash Book with analysis of expenditure


8.16 The use of simple columnar analysis (of expenditure) within the Cash Book

10.1 The possible need for one (or more) Petty Cash Book(s) as subsidiary to themain Cash Book

10.2 Petty cash as a system for effecting minor disbursements

10.3 The use of sequentially numbered vouchers and their authorization for payment

10.4 The practice of setting a limit to the amount allowed in reimbursement per claim/voucher

10.5 The basis of the imprest system; periodic reimbursement of the (controlled) float

10.6 The recording of incidental receipts of money into petty cash, other than theperiodic reimbursement of the float

10.7 The balancing of the Petty Cash Book and the book-keeping entries relating tothe reimbursement of the float, as well as in respect of any adjustment of thefloat

10.8 The analysis of petty cash outlay, the totalling of the analysis columns, and theposting of these totals as required to appropriate ledger accounts

10.9 The dual role of the Petty Cash Book as a book of prime entry and an integralpart of the double-entry record

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Step 1

1 The students will often have had experience of using petty cash, even if only as a useror beneficiary. Draw upon their experience when discussing the purpose and uses ofpetty cash. Emphasize that in numerous cases many of the disbursements will be tomembers of staff, ie reimbursing them for payments already made on behalf of theiremployer, such as travelling expenses. A limit, such as a maximum of £50, may beplaced on the amount of any individual payment from petty cash.

2 Point out that the Petty Cash Book is a means of lessening the load on the main CashBook.The Petty Cash Book is concerned with minor payments, while the Cash Bookis for recording payments above a certain figure and for entering the receipt of money.

3 Explain that, by having analysis columns (where petty cash outlay is classified) besidethe total payments column, expenditure can be recorded under different headings, suchas postage or ‘travelling’.This analysis can provide useful information and can be usedto save time and effort when making account entries.The role of analysis columns isexplained in greater detail in Step 5 (page 146).

Step 2

1 Explain the basis of the imprest system. The petty cashier starts each week or monthwith a certain amount of money, called the imprest amount or ‘float’. As payments aremade during the week or month, the amount of money decreases. At the end of theperiod (or the beginning of the next one), the fund of cash is made up by the maincashier to the imprest amount.

2 Illustrate the principle and working of the imprest system by showing the examplebelow on the overhead projector or board.

Example

£Amount of cash at first made available to the petty cashier 100Amount spent during the month 79Amount left in cash ‘float’ at month-end 21Amount reimbursed from main Cash Book 79Float topped up ready for next month 100

Petty Cash Book – imprest system

142

Aim: to appreciate the purpose and uses of petty cash

Aim: to understand the principle and working of the imprest system

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3 Point out that if at any time the size of the float proves to be insufficient for the demandsplaced upon it, the imprest amount may be increased, either temporarily or permanently.

4 Acquaint the students with the use of vouchers to control payments from petty cash.An employee must present a voucher with a request for petty cash. Each voucher mustbe signed by someone in authority to formally authorize the payment.The vouchersshould be numbered and filed in numerical order.Vouchers help to make an imprestsystem of petty cash self-regulating:

the total of voucher amounts for the period + the balance of cash = the float

Step 3

1 Show that for first setting up the float (with reference to the figures in Step 2) the book-keeping entries would be:

Dr Petty cash £100Cr Cash/bank £100

Entries for reimbursing (or topping up) the float in the example in Step 2 would be:

Dr Petty cash £79Cr Cash/bank £79

2 Illustrate how to record individual petty-cash payments by displaying the informationbelow and the analysed Petty Cash Book that follows it.

Example

Year 41 Nov The cashier gives £200 in cash to the petty cashier as the starting

imprest of petty cashVoucher no £

4 Nov Postage 1 3.706 Nov Cleaning expenses 2 14.609 Nov Stationery 3 5.30

11 Nov T Fallon – travel expenses 4 11.8014 Nov Cleaning expenses 5 16.2018 Nov Payment of the amount owing to

J Wilds in the Purchases Ledger 6 31.1021 Nov Postage 7 4.5024 Nov Stationery 8 9.4027 Nov Refund of overpayment by debtor,

W Costain 9 40.3029 Nov R Ward – travel expenses 10 13.90


143

Aim: to be able to record the opening imprest and individual payments in the petty cashbook

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The Petty Cash Book appears as follows:

PETTY CASH BOOK

Voucher TravelReceipts Date Details no Total Postage Stationery Cleaning expenses Ledger£ Year 4 £ £ £ £ £ £200.00 1 Nov Cash

4 Nov Postage 1 3.70 3.706 Nov Cleaning

expenses 2 14.60 14.609 Nov Stationery 3 5.30 5.30

11 Nov T Fallon – travel 4 11.80 11.80

14 Nov Cleaning expenses 5 16.20 16.20

18 Nov J Wilds (creditor) 6 31.10 31.10

21 Nov Postage 7 4.50 4.5024 Nov Stationery 8 9.40 9.4027 Nov W Costain

(debtor) 9 40.30 40.3029 Nov R Ward –

travel 10 13.90 13.90

3 Inform the students that columns headed from ‘postage’ to ‘ledger’ are the analysiscolumns.

4 Emphasize the following points about the Petty Cash Book:

(a) the ‘date’ and ‘details’ columns are shared by both Dr and Cr sides;(b) the ‘receipts’ column represents the debit side and the ‘total’ column the credit side;(c) the voucher numbers are entered in sequence, in this instance starting with ‘1’; from

the beginning of December Year 4, the voucher numbers will start with ‘11’;(d) each item is entered in the ‘total’ column and in the appropriate analysis column;(e) the column headed ‘ledger’ is used for other ledger postings not covered by the

other analysis columns.

Step 4

1 Show that the columns are totalled at the end of the period.The total of the ‘total’column should agree with the total of all the analysis columns.


144

Aim: to be able to total and balance the Petty Cash Book and record reimbursement ofthe float at the period end

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In line with common practice, reimbursement of money paid out takes place on thefirst day of the next period.This time, the cashier hands a cheque to the petty cashierfor the amount of the reimbursement.

2 Display the Petty Cash Book as it would now look on the overhead projector or board.

3 Show the students that, if reimbursements were made on the last day of the period, theprevious balancing would be laid out as follows:


145

PETTY CASH BOOK

Voucher TravelReceipts Date Details no Total Postage Stationery Cleaning expenses Ledger£ Year 4 £ £ £ £ £ £200.00 1 Nov Cash

4 Nov Postage 1 3.70 3.706 Nov Cleaning

expenses 2 14.60 14.609 Nov Stationery 3 5.30 5.30

11 Nov T Fallon – travel 4 11.80 11.80

14 Nov Cleaning expenses 5 16.20 16.20

18 Nov J Wilds (creditor) 6 31.10 31.10

21 Nov Postage 7 4.50 4.5024 Nov Stationery 8 9.40 9.4027 Nov W Costain

(debtor) 9 40.30 40.3029 Nov R Ward –

travel 10 13.90 13.90

150.80 8.20 14.70 30.80 25.70 71.40

30 Nov Balance c/d 49.20200.00 200.00

49.20 1 Dec Balance b/d150.80 1 Dec Bank

Receipts Date Total£ £

150.80150.80 30 Nov Bank

30 Nov Balance c/d 200.00

350.80 350.80

200.00 1 Dec Balance b/d

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NoteThe total of all the analysis columns should equal the total of the ‘total’ column.

4 Display the Cash Book entries relating to the period-end reimbursements of petty cashshown above.


Step 5

1 Explain the existence of analysis columns in the Petty Cash Book means that the expenditure is grouped (classified) under different expenditure headings. If the classifications were not made, then each item would have to be posted individually toan expense account to ensure double entry.The credit entry in petty cash, remember,merely records a fall in the cash float.

2 Point out that the analysis columns serve as collection points, which are similar, in principle, to the discount columns in the Cash Book. At the end of each period, thetotal of each analysis column is posted to an appropriate expense account in the GeneralLedger.An exception to this procedure is the total of the ‘ledger’ column: it is not postedanywhere. Instead, the individual entries are posted directly to the relevant personalaccounts as soon as possible. The existence of that total, however, is useful for crosschecking the column totals.

3 Demonstrate that the analysis columns are posted to the ledger accounts as follows:

GENERAL LEDGERPostage

Year 4 £30 Nov Petty cash 8.20


146

CASH BOOK

Cash BankYear 4 £ £1 Nov Petty cash 200.001 Dec Petty cash 150.80

Aim: to appreciate the purpose of the petty-cash analysis columns and be able to makethe double-entry postings to the ledger

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Stationery


Cleaning


Travel expenses


PURCHASES LEDGERJ Wilds

Year 4 £ Year 4 £18 Nov Petty cash 31.10 1 Nov Balance b/f 31.10

SALES LEDGERW Costain

Year 4 £ Year 4 £27 Nov Petty cash 40.30 1 Nov Balance b/f 40.30


Step 6

1 Sometimes, employees of the firm or members of the public pay small sums of moneyto use the services of the firm, ie there is income from sources other than sales. Anexample of this type of transaction might be paying for the private use of the telephone.This money might be paid into petty cash, temporarily increasing the float. One way ofrecording this transaction is to enter it in the receipts column (debit) with suitableexplanation in the details column.When totalling and balancing at the end of the period,an allowance must be made for this amount.The appropriate expense account must becredited with the amount (see exercise T/18.3* in the Appendix, page 269).

2 An increase in the float would usually take place at the time of reimbursement, ie at thebeginning or end of a period.The amount received from cash or bank would then bethe amount of the reimbursement, plus the increase in the float. Increase of the floatalso arises in exercise T/18.3*. Copy and hand out or show exercise T/18.3* on theoverhead projector.Work through the exercise with the students.


147

Aim: to be able to respond to questions involving (i) variations within the Petty CashBook; and (ii) the part played by the Petty Cash Book in the double-entry system

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3 An examination question might require the preparation of the Petty Cash Book for 2periods, and totalling and balancing at the end of each period. Preparation for 2 periodsis required in exercise T/18.4 in the Appendix (page 271), a question from a past paper.The period covered in the situation given is 2 weeks. It should be noted that the exercisestates that the Petty Cash Book is to be balanced and the analysis columns totalled atthe end of each week. Some candidates balanced the account at the end of each weekbut then wrongly provided one total only for each analysis column.

Part (b) of T/18.4 is a test of the students’ insight into a practical situation. It providesscope for some discussion with the students, which should take place before any ‘solution’ is handed to them.

4 Copy and hand out or show exercise T/18.4 on the overhead projector. Ask the studentsto work through the exercise.

5 Common errors made by candidates concerning the Petty Cash BookErrors that are commonly made include:

● faulty balancing at period-end and incorrect reimbursement of the float;● poor balancing when there is more than one period to record, eg 2 separate weeks,

and, especially, poor recording of separate (weekly) totals for the analysis columns;● faulty recording of double entry in the Cash Book in respect of reimbursement;● failing to keep to instructions regarding the headings of analysis columns;● faulty posting of period totals to General Ledger accounts.

Step 7

1 Advise the students that an alternative to using a Petty Cash Book and float is to recordall disbursements, including minor ones, in the Cash Book itself.The practice of havingcolumns for analysing expenditure can be applied to the Cash Book just as it can to thePetty Cash Book.The same principle of analysing items can be applied also to income,but the LCCIEB First Level syllabus is restricted to the analysis of expenditure.

2 Explain that there might be, eg, 5 regular classes of expenditure recorded in the analysiscolumns.Anything apart from these regular expenses could be entered in a ‘ledger’ column.

3 Illustrate the preparation of a Cash Book with analysis columns by showing the examplebelow on the overhead projector.

ExampleJ Kilbride, trader, maintains a 2-column Cash Book with additional columns for theanalysis of expenditure. Expenditure is analysed under the following headings: Wages,


148

Aim: to be able to prepare a Cash Book with analysis of expenditure

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Stationery, Cleaning, Postage,Travelling, Ledger. On 1 March Year 6, she had a balanceof £65 in cash and a bank balance of £2,030 (Dr). The following transactions tookplace in March Year 6:

3 Mar Withdrew £130 in cash from bank for office5 Mar Purchased stationery for £43 in cash 8 Mar Received cheque for £250 from L Dunster9 Mar Paid £67 for travelling expenses in cash

11 Mar Withdrew £350 in cash from bank for office12 Mar Paid £230 in wages in cash14 Mar Sales for cash £44015 Mar Paid £300 cash into bank16 Mar Paid £95 by cheque for cleaning17 Mar Paid £27 for postage in cash18 Mar Sent cheque for £315 to T Smart21 Mar Paid £52 for travelling expenses in cash23 Mar Paid £195 in wages by cheque25 Mar Purchased stationery for £17 in cash27 Mar Paid £31 for postage in cash28 Mar Cash sales £21630 Mar Paid £230 for machinery repairs by cheque31 Mar Paid £180 in wages in cash

RequiredPrepare for J Kilbride the Cash Book for March Year 6. Balance the Cash Book at 31 MarchYear 6 and bring down the balances. (The answer is shown overleaf.)

The transaction recorded in the ‘ledger’ column would be posted directly, and as soon aspossible, to the ledger accounts concerned.Thus, the account of T Smart would be debitedat 18 March Year 6 with £315; the Machinery Repairs Account would be debited at30 March Year 6 with £230.The column totals would be posted to the 5 expense accountsin the General Ledger at the end of each month.

NoteFor checking purposes:

The total of the analysis columns = total of cash and bank credit columns less the amounts of contra entries


149

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151

Lesson 19: Capital and revenue expenditure

Examination answers from some LCCIEB Centres strongly suggest that the topic of capitaland revenue expenditure has been given little attention or has been overlooked. Often,candidates are able to select between examples presented to them, either capital or revenue.However, they have much greater difficulty in applying their knowledge to a situation thatrequires correction, for example.

Step 1

1 Explain that capital expenditure is the type of expenditure that is expected to providebenefit to the business over a period longer than the current accounting period. Capitalexpenditure usually involves the purchase of fixed assets or expenditure that adds to thevalue of existing fixed assets. For example, extending a factory, shop, or office premises,or adding a fitment to a machine or adapting a machine so that its productivity improvesrequires capital expenditure.

Topic summary

● The nature of capital expenditure and revenue expenditure● Classifying examples of expenditure as capital expenditure or revenue expenditure● The significance of classifying capital and revenue expenditure for net profit and the

balance sheet● The basic accounting significance of the distinction between the two types of

expenditure


12.1 The distinctive nature of capital expenditure and revenue expenditure

12.2 The definition, in brief, of capital expenditure and revenue expenditure

12.3 Classifying a list of items into capital expenditure and revenue expenditurerespectively

12.4 The different ways in which capital expenditure and revenue expenditure itemsare dealt with in the accounts

12.5 The effect on final accounts of the incorrect treatment of capital expenditureand/or revenue expenditure

Aim: to understand the nature of both capital expenditure and revenue expenditure

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2 Inform the students that, by contrast to capital expenditure, the benefit provided by revenue expenditure is expected to be obtained within the accounting year.This typeof expenditure may include:

● buying goods to sell;● buying raw materials and/or parts to use in the course of manufacturing;● running the business, the selling and distributing of goods;● maintaining fixed assets, eg repairing or servicing machines, which does not add to the

original value of the fixed assets.

3 Show that capital expenditure is sometimes treated as revenue expenditure.This treatmentmight occur when expenditure on developing new products might take several years toresult in increased sales.This capital expenditure is charged against profits in the year inwhich it is spent as though it were revenue expenditure.1

Step 2

1 Tell the students that treating an item of expenditure as capital expenditure, ie ‘capitalizing’it, means that the outlay is not included in the year’s Profit & Loss Account but is carriedforward as an asset in the balance sheet. Of course, if a provision for depreciation werecreated on a newly purchased fixed asset, then there would be some charge for the yearin the Profit & Loss Account.

Expense items such as rent, insurance, and salaries are likely to be reviewed at the endof each financial year. Thus at the end of Year 1, if prepayments are identified, the prepayments will not be charged against the income of Year 1 but will be carried forward as a current asset into Year 2. Effectively, the prepayment is ‘capitalized’ at theend of Year 1.

2 Illustrate the classification of expenditure by showing the example opposite on theoverhead projector.

Capital and revenue expenditure

152

Aim: to be able to classify examples of expenditure as capital expenditure or revenue expenditure

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153

ExampleCapital Revenueexpenditure expenditure£ £

(1) Purchase of office equipment £27,000 27,000(2) Repairs to existing office equipment £760 760(3) Salaries and wages £28,400 28,400(4) Construction of new warehouse £45,000 45,000(5) Cleaning of offices £1,520 1,520(6) Painting of office premises £3,200 3,200(7) Purchase of goods for resale £980 980(8) Painting of newly constructed warehouse £1,750 1,750(9) Wages and salaries £63,800, of which £8,000

was paid to employees engaged on building an addition on to the office premises 8,000 55,800

(10) Purchase of land for building new premises £30,000 30,000(11) Payment of fee for legal services in connection with

purchase of the land mentioned in (10) £2,500 2,500

3 Advise the students that, regarding item (6) in the example, it might be argued that ifthe paintwork is expected to last 4 years for example, then the cost of painting the warehouse should be capitalized and spread over the next 4 years.This, however, wouldbe incorrect. If repairs, renovation, painting, etc merely restore an asset to its originalcondition, the outlay is regarded as revenue expenditure and should be fully charged inthe year that the cost was incurred. Item (8) contrasts with item (6).The initial paintingof the warehouse helps to complete the construction (item (4)) and is therefore treatedas capital expenditure.The cost of painting the warehouse at a later time would then,of course, be treated as revenue expenditure.

4 Point out that in item (9) the expenditure is partly capital and partly revenue.The costhas been ‘apportioned’ between the two categories of expenditure. Note also that item(11) is capitalized; the legal services are necessary to make the purchase of land possible.

5 Copy and hand out or show the following exercise on the overhead projector or board.Ask the students to work through the exercise.

Exercise

In the columns beside the items listed below, enter the amount of capital expenditureor revenue expenditure for each item.

Capital Revenueexpenditure expenditure£ £

(1) Paid heating and lighting bill £68(2) Purchased stationery £1,760(3) Fitting of new refrigerator in delivery vehicle £2,100(4) Repairs to motor vehicle £215(5) Paid insurance £470(6) Fitting of new tyres to motor vehicle £190

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SolutionCapital Revenue expenditure expenditure£ £

(1) 68(2) 1,760(3) 2,100(4) 215(5) 470(6) 190

NoteItem (2) – is treated as a consumable purchase.Item (3) – improves the usefulness of the vehicle and might well increase the vehicle’sresale value.Item (6) – fitting new tyres merely helps to ‘make good’ the wear on the vehicle anddoes not increase the value of the vehicle beyond the original value.Although the tyresmay have a useful life of more than one accounting year, such a purchase would generallybe treated as revenue expenditure.


Candidates should be ready to apply their knowledge by suggesting examples of capitaland revenue expenditure for different types of business activity.

7 Copy and hand out or show on the overhead projector or board the exercise below.Ask the students to work through the exercise.

Exercise

Give one example of (a) capital expenditure, and (b) revenue expenditure for each ofthe following business organizations:

(i) a manufacturer of washing machines(ii) a motor-vehicle distributor(iii) a retailer of books, newspapers, and magazines.

Solution

(a) Capital expenditure (b) Revenue expenditure

(i) Purchase of machinery for production Wages, advertising, etc(ii) Purchase and improvement of Salespersons’ salaries and commission

showrooms(iii) Purchase of retail shop premises Purchase of newspapers, books, etc

NoteThese answers are only examples from a range of possible answers.The answers shouldbe related to the type of business organization.


154

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155


Step 3

1 Make it clear to the students that capital expenditure relates to assets and revenueexpenditure to running expenses. Capital expenditure is treated as affecting the balancesheet, and payment is expected to be used up over more than one financial period.Revenue expenditure, however, is treated as a profit & loss expense that is used upwithin a financial period. Therefore, incorrect classification of capital and revenueexpenditure will have consequences for both net profit and the balance sheet.

2 Illustrate the consequences of incorrect classification by displaying the following tableon the overhead projector or board.

3 Explain that incorrect classification can also distort the gross profit, an effect that isshown in the next 2 exercises.

4 Copy and hand out or show exercise T/19.5* and T/19.6* in the Appendix (pages 275–6) on the overhead projector.Ask the students to work through them.

Aim: to appreciate the significance of classifying capital and revenue expenditure for netprofit and the balance sheet

Incorrect Effect on Effect on net Effect on balance classification accounts profit sheet

Expense overstated Understated Capital understated

Fixed asset account Fixed asset understated understated

Expenses understated Overstated Capital overstated

Fixed asset account Fixed asset overstated overstated

Purchase of fixedasset treated asrevenue expenditure

Revenue expensetreated as capital item

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Step 4

1 Tell the students that they should be able to apply their knowledge of expenditure classification to different situations. Exercises T/19.7* and T/19.8* in the Appendix(pages 277 and 279), taken from LCCIEB First Level Book-keeping past examinationpapers, will give them some practice at applying what they have learnt.

2 Copy and hand out or show exercises T/19.7* and T/19.8* on the overhead projector.Ask the students to work through the exercises and to explain the comments given.

3 The explanation of the comments in T/19.7* should be as follows:

Item (1) – these are all items of capital expenditure and should be deducted fromthe figure for purchases.Item (2) – £1,600 should be deducted from the figure for sales. A common mistakemade by candidates is to deduct the book value of the old delivery van, ie £3,400.Thatfigure is completely internal to the business and would not enter into the transaction ofselling the delivery van.Item (3) – the figures for closing stock should be reduced by £300.Item (4) – the £2,100 is capital expenditure and should be deducted from the wagesfigure.

4 The explanation of the comments in T/19.8* should be as follows:

(a) John Bradford failed to make the distinction between capital and revenue.(b) ● Item (1) – the total of recorded sales is the total value of sales transactions in the

period, not the amount received in cash.Therefore, the amount of £1,082 shouldbe added to the existing figure to give a ‘true’ sales figure of £23,746.

● Item (2) – the accrual of £286 increases the item ‘Wages’ to £2,926.● Item (3) – £1,730 becomes the figure for closing stock.● Item (4) – the purchase price of the motor vehicle less expected trade in value of

£700 = £1,500 cost to be carried over 3 years. £1,500 ÷ 3 = £500 depreciationper annum. The item, ‘Cash taken for own use’ in the profit statement reallymeans ‘drawings’.This item is not an expense of the business and therefore should

not be included in the Profit & Loss Account. It would, of course, appear in a balance sheet as a deduction from capital.

5 Common errors made by candidates in dealing with capital and revenue expenditureDraw the students’ attention to these comments.


156

Aim: to develop an understanding of the basic accounting significance of the distinctionbetween the two types of expenditure

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157

(a) Overlooking the significance of information in the question that explains thepurpose of certain expenditure.The information provides the clue about whetherthe expenditure is to be classed as capital or revenue expenditure.

(b) In considering the effect on net profit of certain capital expenditure, studentssometimes disregard the effect of any provision for depreciation. For example, thepurchase of a motor vehicle, as a capital item, has no direct effect on net profit;however, the need to provide for depreciation over the life of the motor vehiclewould result in reduced net profit.

(c) Students may provide an unnecessary explanation of the chosen classification whenall that is required is a one-word answer.

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158

Lesson 20: The journal

Questions requiring journal entries are quite common in the LCCIEB First Level Book-keeping examination and yet the answers are often disappointing.The quality of theanswers indicates that not enough attention is given to this topic.

The questions may test the use of the journal in its own right, eg as a record of the purchaseor sale on credit of fixed assets. Alternatively, journal entries may be used as a convenientand direct way of testing the students’ understanding of a number of features of double-entry book-keeping that would otherwise require the use of too much examination time.

Topic summary

● The role and main uses of the journal and the advantages of having a journal● The preparation of journal entries with the correct layout● Making journal entries for certain transactions or purposes● Making journal entries for non-regular transactions or adjustments● The role and uses of the journal


4.1 The function of the ledger

16.1 The main uses of the (General) Journal

16.2 The advantages of having a journal, as a support to the double-entry system

16.3 Journal entries, in standard format, covering:

16.3.1 the purchase and sale on credit of fixed assets16.3.2 the correction of errors16.3.3 opening entries16.3.4 other non-regular transactions or adjustments

16.4 The books of original entry; their function

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Step 1

1 Explain the origin of the journal and its present-day function.The day books exist toassist the ledger. Detail is recorded in the day books and more summarized postings aremade to the ledger. Originally, the day books were part of the journal and the journalwas like a notebook for recording the detail of transactions. In the course of time,specialized day books (eg the Purchases Day Book) or journals came into use and thejournal was used to record less common transactions or adjustments.Today, the journalis sometimes termed the Main Journal, Journal Proper, or General Journal.

2 Point out that the Cash Book serves as both a book of prime entry – effectively a daybook – and as part of the ledger.The ledger and the various day books cover the greatmajority of transactions.A general rule is that any transaction not included in any of theday books should be noted in the General Journal.

3 Tell the students that the main uses of the General Journal are to make notes on:

● the purchase and sale on credit of fixed assets;● opening entries, ie the opening of a new set of accounts;● the correction of errors;● other transfers.

4 Draw the students’ attention to the advantages of having and using a journal, that:

● it is an easily accessible record of the purchase and sale of fixed assets;● it helps to explain entries, eg various adjustments or the correction of errors;● there is less chance of omitting a transaction altogether, or of making an entry on one

side only of the accounts.

Regarding the first point above, some firms include the purchase and sale of fixed assetsfor cash or bank, even though these are recorded anyway in the Cash Book – a bookof prime entry. More details of the assets, authority to purchase, etc can be shownthere than is possible in the Cash Book.1

5 Emphasize the role of the journal, that it is to support the ledger.The journal itself isnot part of the double-entry system.

The journal

159

Aim: to be aware of the role and main uses of the journal and the advantages of havinga journal

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The journal

160

Step 2

1 Demonstrate the standard layout for a journal on the board or overhead projector usingthe example below.

ExampleT Morley

JOURNAL

Dr Cr£ £

Date Name of account to be debited XName of account to be credited XNarrative

2 Highlight the following points:

● a date should always, if possible, be entered for each journal entry;● the account to be debited should always appear first; followed by the account to be

credited;● a narrative is an explanation of the journal entry; narratives, if required, should be

relevant, meaningful, and to the point.

Concerning the second point above, some candidates show the credit entries first or, evenworse, mix the entries – sometimes debit entries first, sometimes credit entries first. Thestudents should avoid both these errors, which are confusing for the Examiner and whichmay lose them marks.

Step 3

1 Introduce the students to some uses of the journal with the aid of the examples givenbelow.

(a) The purchase and sale on credit of fixed assets

Example(i) On 9 June Year 3, a computer is bought on credit from Datarite Limited for £23,600.

Aim: to be able to prepare journal entries with the correct layout

Aim: to be able to make journal entries for certain transactions or purposes

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Dr CrYear 3 £ £

9 Jun Computer equipment 23,600Datarite Ltd 23,600

Purchase, on credit from Datarite Ltd, computer . . . .

(ii) On 21 June Year 3, a motor vehicle, used for delivery purposes within the firm, wassold on credit to Smithson Garages for £2,300. No provision for depreciation hadbeen made.

Dr CrYear 3 £ £21 Jun Smithson Garages 2,300

Motor-vehicle disposal 2,300

Sale on credit of motorvehicle no . . . .

In practice, more detail concerning the fixed assets is likely to be included, but this isnot required for examination purposes.

(b) The correction of errors See Lessons 21 and 22 (pages 168–77).

(c) Opening entriesOpening entries are to be used when a business is started or for opening a new set ofaccounts for an already established business.

ExampleN Maxwell has been in business for some years. He now decides to set up and maintaina proper set of double-entry accounts. On 1 March Year 8, his assets and liabilities were asfollows:

Assets Premises £42,000 Fixtures and fittings £5,200 Office equipment £4,800 Motor vehicle £7,500Stock £4,360 Debtors £1,840 (C Brandon £720;R Sims £440; L Upton £680) Cash £130 Bank £1,100

Liabilities Creditors £1,370 (M Denby £580; A Trott £790)

Solution

The total of the assets £66,930 less liabilities £1,370 = £65,560 capital

The journal

161

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The opening journal entries appear as follows:

JOURNAL

Dr CrYear 8 £ £

1 Mar Premises 42,000Fixtures and fittings 5,200Office equipment 4,800Motor vehicle 7,500Stock 4,360

£Debtors: C Brandon 720

R Sims 440L Upton 680 1,840

Cash 130Bank 1,100

£Creditors: M Denby 580

A Trott 790 1,370Capital 65,560

66,930 66,930

The journal is the basis for opening the set of accounts as follows:

GENERAL LEDGERPremises

Year 8 £1 Mar Balance 42,000

Fixtures and fittings


Office equipment


Motor vehicle


Stock


Capital*


The journal

162

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SALES LEDGERC Brandon

Year 8 £1 Mar Balance 720

R Sims


L Upton


PURCHASES LEDGERM Denby


A Trott


CASH BOOK

Cash BankYear 8 £ £

1 Mar Balance 130 1,100

* The Capital Account could, alternatively, be kept in a Private Ledger

2 Ask the students whether journal opening entries are prepared each year.The correctanswer is that they are not.The opening entries are prepared only as required, eg as anew set of accounts is opened, which, in practice, is rare.


Step 4

1 Explain that non-regular transactions or adjustments that are not otherwise recorded ina book of prime entry, include:

The journal

163

Aim: to be able to make journal entries for non-regular transactions or adjustments

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● special transactions or adjustments arising during the course of the year;● year-end adjustments.

Possible adjustments include:

● transfers to the Trading and Profit & Loss Account;● accruals and prepayments;● provision for depreciation;● writing off a fixed asset, ie transferring the remaining balance on the asset account to

the Profit & Loss Account;● writing off bad debts;● creating or adjusting a provision for doubtful debts;● adjusting for owner’s drawings.

2 Illustrate journal entries for non-regular transactions or adjustments by showing theexamples below on the board or overhead projector.

Example (a)At 31 December Year 5, the balance on the Advertising Account is £4,850 (Dr). Of this,£4,100 relates to Year 5, while £750 is a prepayment for Year 6.

Dr CrYear 5 £ £31 Dec Profit & loss 4,100

Advertising 4,100

Transfer of expenditure for advertising for the year ended 31 Dec Yr 5

Example (b)At 31 December Year 5, the balance on the Rent Receivable Account is £3,350.All ofthis relates to Year 5. In addition, £450 is accrued for Year 5.

Dr CrYear 5 £ £31 Dec Rent receivable 3,800

Profit & loss 3,800

Transfer of the amount of rent receivable for the year ended 31 Dec Year 5

The journal

164

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Example (c)At 31 December Year 5, bad debts written off for the year amount to £715.

Dr CrYear 5 £ £31 Dec Profit & loss 715

Bad debts 715

Total of bad debts written offfor the year ended 31 Dec Year 5

Example (d)At 31 December Year 5, the existing provision for doubtful debts is to be increased by£370.

Dr CrYear 5 £ £31 Dec Profit & loss 370

Provision for doubtful debts 370

Increase in provision fordoubtful debts

Step 5

1 Review the relationship between the various books of account. Figure 20.1 (overleaf )structurally illustrates the various books of account. Note that the books of prime entryare not part of the double-entry system.The Cash Book and Petty Cash Book are bothbooks of prime entry and part of the ledger in the wider sense. Also note that, apartfrom contra entries in the Cash Book, it is still necessary to post from these two booksinto the ledger itself to complete the double entry.

2 Remind the students that the Trading and Profit & Loss Account is part of the double-entrysystem but that the balance sheet is not.The General Journal, in its function as a diary,holds information on transactions that are not entered into any other book of primeentry. It should also contain adjustments – changes made without a transaction arising.In addition, transactions of a special nature may be recorded there even though they areentered in another book of prime entry, eg the purchase or sale of fixed assets for cashor bank payment.

3 Advise the students to practise answering questions requiring journal entries as muchas possible.These questions can be a compact way of testing the students’ knowledge ofthe rules of double entry; the importance of this topic cannot be overstated.

The journal

165

Aim: to develop and reinforce learning on the role and uses of the journal

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4 Copy and hand out or show exercises T/20.2*, T/20.3, T/20.4*, and T/20.5* in theAppendix (pages 281, 283–4, and 286). It is important that the students workthrough these exercises and that you review the answers with them. Overall they showthe range of topics that can be covered in journal entries.

5 When the students work through T/20.4*, emphasize that they must provide sufficientinformation in journal entries that relate to year-end adjustments on expense or incomeaccounts. ‘Common errors’ below deals further with this feature.

6 Common errors made by candidates regarding journal entries Candidates sometimes:

● provide ledger accounts instead of journal entries;● provide insufficient information for year-end adjustments on expense/income

accounts, eg:

£ £Date Insurance 90

Insurance 90Narration . . . .

The journal

166

PurchasesDay

Book

ReturnsOutwards

DayBook

SalesDay

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ReturnsInwards

DayBook

GeneralJournal

Cash

Book

BOOKSOF

PRIMEENTRY

DOUBLE-ENTRYSYSTEM

LedgerGeneral (Nominal) Ledger

Purchases LedgerSales Ledger

(Private Ledger)

Trading and Profit & Loss Account

Balancesheet

Figure 20.1 The account system

Dis

coun

t co

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Pet

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ash

Boo

k

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The correct entries appear as follows:

£ £Date Insurance (year to 30 Jun Yr 9) 90

Insurance (year to 30 Jun Yr 8) 90Narration . . . .

ie, the financial years must be stated for the entry to be valid.

● lay out journal entries poorly; eg, the entries might be cramped together – sometimesit is not clear which is debit and which is credit

● provide description and explanation instead of an account name● either state no date (where it can or should be provided) or show an incorrect date;

the date given should be the one on which (in the firm concerned) the journal entryis made.

The journal

167

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Lesson 21: Errors in the accounts 1

Students often experience difficulty with this topic, and the terms used should be explainedwith care.

Step 1

1 Explain that errors in accounts may be classified as:

● those that have no effect on agreement of the trial balance;● those that usually affect the trial balance.

2 Review the range of errors (below) that do not affect agreement of the trial balance.

168

Topic summary

● The basic classification of errors and errors that have no effect on agreement of thetrial balance

● Errors that might affect agreement of the trial balance and how the trial balancemight be affected

Aim: to be aware of the basic classification of errors and, in particular, of the errors thathave no effect on agreement of the trial balance


11.3 Errors in the accounts and their effect on the trial balance

11.4 The revising of an incorrectly drafted trial balance

11.5 The limitations of the trial balance as a means of check

17.1 The difference between errors which affect agreement of the trial balance andthose errors which do not affect such agreement

17.2 Those errors which do not affect agreement of the trial balance; types of sucherror

17.3 From data provided, the selection of the relevant type of error

17.4 The drafting of appropriate adjusting journal entries

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(a) Errors of omissionThis type of error occurs when a transaction is completely omitted from the books.Use the example that follows to illustrate errors of omission.

Example Credit note number 387 for £73 is issued to a customer. A Doyle, on the return ofgoods, has not been entered in the accounts.

An adjusting journal entry should be made, as follows, before making the necessarycorrecting entries in the two ledger accounts concerned.

JOURNAL

Dr Cr£ £

Returns inwards 73A Doyle 73Correction of omission of entryof credit note no 387

(b) Errors of commissionThese errors occur when a transaction is entered in a wrong account of the same classas the one in which it should have been recorded. Often, this error means that atransaction is entered in the wrong person’s account (either debtor or creditor). Usethe example below to illustrate this type of error of commission.

Example Invoice number S/598 for goods bought on credit for £345 from Eastern Supplies hadbeen entered in the account of Eastern Sundries.

The adjusting entry would appear as:

JOURNAL

Dr Cr£ £

Eastern Sundries 345Eastern Supplies 345

Purchase invoice no S/598 entered in wrong supplier account, now corrected

In the Purchases Ledger, the 2 accounts would appear as:

Eastern Supplies

£Purchases (entered wronglyin Eastern Sundries Account) 345

(continued)

Errors in the accounts 1

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Eastern Sundries

£ £Eastern Supplies Purchases 345(posting error corrected) 345

The correction of an error involving impersonal accounts is as follows:

JOURNAL

Dr Cr£ £

Postage 19Telephone 19

Payment in cash for postagewas wrongly posted to Telephone Account, now corrected

Stress that both accounts are in the same class, ie they are both nominal accounts.

A further example for impersonal accounts is as follows:

JOURNAL

Dr Cr£ £

Office furniture 463Fixtures and fittings 463

Purchase by cheque of office furniture,wrongly posted to Fixtures and Fittings Account, now corrected

In this case, both accounts are real accounts.

(c) Reversal of entriesDebit and credit entries for the correct amount have been made, but on the wrong sideof the 2 accounts. Use the example that follows to illustrate the reversal of entries.

Example The sale of goods for £420 cash has been entered as a debit to the Sales Account anda credit to the Cash Account.


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The correct entries should be:

Sales

£Cash 420

Cash

£Sales 420

If the correct entries are adjusted by crediting the Sales Account and debiting the CashAccount with £420, it merely cancels the errors.To adjust fully, and to achieve what wasfirst intended, it is necessary to double the amount.

Sales

£ £Cash 420 Cash (correction of error) 840

Cash

£ £Sales (correction of error) 840 Sales 420

Therefore, the journal entry would be:

JOURNAL

Dr Cr£ £

Cash 840Sales 840

Sales of goods for £420 cashand wrongly reversed in theaccounts, now corrected

(d) Error of principleWhen a transaction is entered in the wrong class of account, an error of principleoccurs. Use the example given below to illustrate this type of error.

Example The purchase of office equipment for £1,264 has been wrongly debited to thePurchases Account. This purchase is an item of capital expenditure that, wrongly, hasbeen treated as revenue expenditure and entered in a nominal account. As capitalexpenditure, it should have been recorded in a real account. It is therefore necessary tocancel the incorrect entry in the Purchases Account, ie using a credit entry, and to makea debit entry in the Office Equipment Account.


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JOURNAL

Dr Cr£ £

Office equipment 1,264Purchases 1,264

Purchase of office equipment wrongly debited in Purchases Account, now corrected

(e) Error of original entryWhen an error of original entry occurs, the correct accounts have been used and theentries are on the correct sides, but the amount has been entered incorrectly in bothaccounts. Often, although not necessarily, this error is the result of the source documentbeing incorrect. Use the following example to illustrate error of original entry.

ExampleSale of goods £350 on credit to T Hogan has been entered in the accounts as £380.Both entries are £30 too much.

JOURNAL

Dr Cr£ £

Sales 30T Hogan 30

Sales overstated by £30,now corrected

(f) Compensating errorA compensating error occurs when errors cancel each other out. Use the example thatfollows to illustrate this type of error.

ExamplePurchases account (debit) is understated by £10 and rent receivable (credit) also isunderstated by £10. The trial balance is still in balance, provided there are no othererrors in the accounts.

JOURNAL

Dr Cr£ £

Purchases 10Rent receivable 10

Purchases Account and Rent Receivable Account each undercast by £10, now corrected


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(g) Error of duplicationIn this instance, a transaction is entered correctly in the accounts and then, in error, isentered again.This error is not revealed by the trial balance.


Step 2

1 Outline the errors that would usually affect the trial balance, including:

● an incorrect posting on one side of the transaction;● an error in addition, eg of entries within an account;● a balance wrongly brought forward to the trial balance;● a balance omitted from the trial balance.

These errors affect agreement within the trial balance only if they do not compensateone another.

2 Ask the students when the errors are likely to become known.The answer is that somewill become known during the course of the year, partly through checks in the system.They will then be corrected. Others will become known at the end of the year whenthe trial balance is prepared. Either way, the adjustments necessary to correct the errorsshould be ‘journalized’.

3 Discuss with the students how the various errors will affect the trial balance.

4 Explain that agreement between the 2 sides of a trial balance does not prove that allentries have been made correctly in the accounts.The trial balance is limited as a meansof checking entries.

The 2 sides of the trial balance could be in agreement even though any of the errorsoutlined in Step 1 could have been made, eg the complete omission of a transaction, acompensating error, or an error of commission.

5 Fully discuss the limitations of the trial balance with the students.

6 Copy and hand out or show exercises T/21.4 and T/21.5 in the Appendix (pages 290–1)on the overhead projector.Ask the students to work through them.

7 Review and discuss the answers to the questions.


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Aim: to be aware of errors that might affect agreement of the trial balance and of howthe trial balance might be affected

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Lesson 22: Errors in the accounts 2

A topic that frequently occurs in LCCIEB First Level Book-keeping examinations is correcting errors by means of journal entries or by entries in accounts. Answers to questions requiring the correction of journal entries strongly indicate that insufficientattention is paid to this topic.

It is also evident that candidates experience some difficulty in answering questions on theeffect of errors on profit and the balance sheet.The guidance in Step 2 and the supportingexercises should help to overcome this problem.

Step 1

1 The problem for candidates in answering this type of question is often one of method.In preparing for the examination as well as in the examination itself, attention shouldbe paid to the points listed below.

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Aim: to understand the effect of errors or of correcting errors on gross and net profits, aswell as on the balance sheet

Topic summary

● Adjustments for errors through journal entries or in accounts ● The effect of errors or of correcting errors on gross and net profits, as well as upon

the balance sheet


17.4 The drafting of appropriate adjusting journal entries

17.5 The effect of errors and/or the effect of the correction of errors both in principleas well as by calculation on:

17.5.1 the trial balance17.5.2 gross profit17.5.3 net profit17.5.4 the balance sheet

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(a) Have the students fully grasped the question? Often marks are lost because parts of the question have been misunderstood. Lack of understanding might be the resultof unfamiliarity with the topic or with the particular form of question.

(b) In preparing an answer requiring journal entries, candidates may find it helpful todraft T-type accounts.This exercise might help them to visualize debit and creditentries.The T-type accounts should not be in detail – just miniature ‘accounts’ areenough. If necessary, the account can be written in the answer book and then boldlycrossed through. It is, of course, wrong to show accounts as part of an answer whenonly journal entries are required.

(c) Does the question require narrations? Or does it state that narrations are notrequired?

(d) Journal entries should always be in the correct format with the debit entry first andthe credit entry following it.When an answer requires a multiple of account entries,eg in recording the sale of a depreciated fixed asset, there may be various ways of setting out the answer, but the same rule applies: debit comes before credit.


3 Explain that, sometimes, an item in a question may require a one-sided journal entryonly. For example, an error could be the result of a posting failure. Illustrate this pointwith the example below.

ExampleStationery purchased on 12 March Year 3 for £37 in cash is correctly entered in theCash Book but is not posted to the Stationery Account in the General Ledger.The trialbalance would therefore be short on the debit side by £37.The correcting journal entrymade on 31 March Year 3 would be:

JOURNAL

Dr CrYear 3 £ £31 Mar Stationery 37

–

Stationery purchased on 12 March Year 3: entered in cash book but notposted, now corrected.

NoteThe dash (–) in the credit column gives a positive indication to the Examiner that that candidate recognizes that no credit entry is required.


Note that this question requires some one-sided journal entries.


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Step 2

1 Explain that the effect of errors in terms of reported profits and a prepared balance sheetis being discussed.

2 Stress the need to distinguish between the effect of the error itself and the effect of correcting the error.Thus, if purchases were undercast:

the effect the effect ofof the error correcting the error

gross profit overstated gross profit reduced

The amount is the same for both effects.The distinction is of fundamental importance:often questions relating to errors are answered from the wrong angle.When errors aremade, there is a sequence of consequences. It will help the students considerably if theybecome used to working through the likely consequences of various types of error. Forexample, the understatement of purchases mentioned above will, by itself, lead to:

3 Copy and hand out or show the following exercise on the overhead projector. Theerrors should be put to students one-by-one. Review the consequences of each onebefore moving on to the next.

Exercise

Trace the sequence of consequences of the following errors through to the balance sheet:

(1) overstatement of sales(2) overstatement of returns outwards(3) understatement of carriage outwards


176

Aim: to understand the effect of errors or of correcting errors on gross and net profits,as well as on the balance sheet

● understatement of cost of goods sold which results in

● overstatement of gross profit which results in

● overstatement of net profit which results in

● overstatement of the additionto capital on the balance sheet

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(4) overstatement of closing stock(5) overstatement of carriage inwards(6) understatement of returns inwards.

4 Use Table 22.1 to illustrate the differences between the effects of errors on reportedprofits, etc, before making any correction, and the effects resulting from correction.Thistable also appears on page 217 of the student’s book, How to Pass Book-keeping, FirstLevel.

Table 22.1 Effects of the error and effects of correcting the error

NoteAny overstatement or understatement of either an asset or a liability affects only thebalance sheet.

5 Exercise T/22.4* in the Appendix (page 294) shows the effects of errors and of their correction. Copy and hand out, or show the exercise on the overhead projector, andwork through it with the students. Pay special attention to the note at the end ofT/22.4A.


177

Effects of the error, Effects (upon already reportedie before correction profits) of correcting the error

Gross Net Balance Gross Net Balanceprofit profit sheet profit profit sheet

Purchases Over- Over- Capital Reduced Reduced Capitalundercast stated stated over- reduced

stated

Closing Over- Over- Capital Reduced Reduced Capitalstock stated stated over- reducedover- stated Stockvalued Stock reduced

over-stated

Expense No Under- Capital No Increased Capitalitem, effect stated under- effect increasedeg rent statedoverstated

Income No Over- Capital No Reduced Capitalitem, eg effect stated over- effect reducedcommission statedoverstated

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Lesson 23: Final accounts and adjustments further considered Stock valuation

This lesson considers the further adjustments that might have to be made to the finalaccounts.The adjustments include different forms of drawings and the valuation of stock.Stock valuation could also be the main subject of a question or a part of a question.Thevertical layout of the Trading and Profit & Loss Account is also discussed.

By this stage of their studies, the students should have gained a fair knowledge of thevarious topics that have been discussed. Final accounts brings together many facets ofbook-keeping.The working and review of final accounts affords an opportunity to clarifypoints, sort out difficulties, and if necessary to reinforce key study points.

178

Topic summary

● Adjustments for drawings other than cash drawings● End-of-period adjustments for outstanding purchase invoices ● Year-end adjustments in the preparation of final accounts● Trading and Profit & Loss Accounts in a vertical format● The basic rule for stock valuation


13.6 Adjustments in the Trading Account and balance sheet for end-of-period‘outstanding’ purchases, ie goods received but invoices still awaited

13.11 Adjustments for end-of-period income accrual and income prepayment in theProfit & Loss Account and balance sheet

18.2 The meaning of the term drawings; the various forms of drawings

18.3 The book-keeping entries for drawings

18.4 The possible effect of drawings upon the amount of capital

18.5 How drawings are stated in the balance sheet and, where necessary, in theTrading Account (where goods are withdrawn for private benefit)

19.4 The valuation of closing stock: the lower of cost or net realizable value

19.13 Showing income and expenses within the final accounts, with related itemsbeing suitably brought together

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Stress that the overriding aim of the final accounts is to present a true picture of a businessby showing that:

● the net profit is a true result after taking into account all relevant costs and incomefor the given period

● the balance sheet is a true statement of assets and liabilities at the balance sheet date

Correctly classifying expenditure between capital and revenue, and making period-endadjustments for accruals and prepayments, all contribute towards presenting a true pictureof a business.

Step 1

1 Remind the students of the entries for drawings by the proprietor (ie owner of thebusiness), that they are:

Dr Drawings AccountCr Cash/bank account

In the balance sheet, the total of the drawings for the year is deducted from the owner’scapital balance at the start of the year.

If the drawings take the form of goods being withdrawn from the business for privateuse, the necessary adjustment would be:

Dr Drawings AccountCr Purchases Account

2 Point out that if the adjustment for drawings is made before the preparation of the trialbalance, then the purchases balance will already be reduced by the amount of thedrawings, while the Drawings Account will show both cash and goods drawings.However, the candidates may be required to prepare final accounts that incorporate anadjustment for goods withdrawn by the proprietor, using an already prepared trial balancethat is not adjusted for the withdrawal. It will then be necessary to:

● show a deduction from purchases in the Trading Account;● increase the amount deducted as drawings in the balance sheet.

Sometimes, examination candidates merge these figures, eg drawings of cash and drawingsof goods are added together and entered as one figure.Advise the students to show eachadjustment to make sure they obtain the mark(s).

Final accounts and adjustments further considered

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Aim: to be able to make adjustments for drawings other than cash drawings

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3 Explain that there are other alternative forms of drawings (ie besides cash) that usuallyinvolve the private use of business facilities. For example, the owner may use a motorvehicle or the business telephone, or live in part of the business premises for whichrent would otherwise be payable to the business. Use of these facilities may meanthat the cost of a facility is shared (or ‘apportioned’) between the business and theowner personally.

4 Illustrate how to show shared cost by displaying the following example on the overheadprojector or board.

ExampleThe business telephone is also used by the owner for private purposes.The yearly costof the telephone is apportioned as follows:

business 4/5owner’s private use 1/5

At the year end, an adjustment would be made to allow for the owner’s private use.Theamount paid from the business bank account for the telephone during the year ended 30 JuneYear 7 was £380, of which £30 was prepaid at the year end.

Solution

The period-end adjustments in the ledger would be:

Dr Drawings £70Cr Telephone £70

In the final accounts:

● the figure for the telephone in the Profit & Loss Account would be shown as £280;● drawings in the balance sheet should be increased by £70.

The increased figure fordrawings is offset by (= capital reduced)

the increased figure of net profit (= capital increased)


180

£Amount paid during year ended 30 Jun Yr 7 380less Prepayment at 30 Jun Yr 7 30

Annual charge 350

To be apportioned:£

business use 4/5 280private use 1/5 70

350

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Step 2

Explain that, at the end of a financial period, purchased goods might already have beenreceived but the invoice may still have to come from the seller.The Purchases Account willtherefore be understated, while the period-end stock check will include the goods in thevalue of the closing stock. In addition, creditors will be understated in the Purchases Ledger.The effects will be that:

● the cost of goods sold will be understated, resulting in an overstated gross profitand overstated net profit;

● in the balance sheet, creditors will be understated, while capital (through the additionof net profit) will be overstated.

The adjustment for this at the period-end would therefore be to debit the PurchasesAccount and credit the creditor’s account with the amount of the anticipated invoice.Theaccount entries should be supported by a journal entry. If, for some reason the amount inthe invoice (when it is received) is different from the amount shown in the adjustment, thena further adjustment for the difference in amount has to be made. For examination purposes,if Trading Account and balance sheet adjustments are required, the candidates should makeit clear that they are including the amount in their figures, ie it should not be lost in thetotal figure.

Step 3

1 Explain that, at the stage of preparing final accounts from a trial balance, the studentsshould keep in mind that, with the trial balance in agreement, a position of balanceexists at the start of drafting the final accounts.Therefore, if any adjustment has to bemade, the student should always look for 2 effects: a debit adjustment and a creditadjustment. An adjustment for an expense prepayment of £100 will reduce total expenditure in the Profit & Loss Account and will also create an asset balance for theexpense prepaid (debit effect).The matching effect will be an increase of £100 in netprofit and consequently in the amount of capital (credit effect).

2 Copy and hand out or show exercise T/23.1* in the Appendix (page 299) on theoverhead projector. Ask the students to work through the exercise and give themguidance on method and the particular items.


181

Aim: to be able to make end-of-period adjustments for outstanding purchase invoices

Aim: to reinforce understanding and practice in making year-end adjustments in the preparation of final accounts

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Remind the students that the techniques recommended in Lesson 7 for marking eachitem with its position in the final accounts should be followed here.

After the students have had time to scan the question, review the adjustments one byone, pointing out the two-fold aspect of each adjustment:

(1)(a) The increase in each depreciation provision is charged to the Profit & LossAccount, which reduces the net profit;

(b) this decrease is matched by a reduction in the figure for fixed assets.

(2)(a) Closing stock, as a deduction, reduces the cost of goods sold;(b) therefore the gross profit is increased and, as a result, net profit is increased.

(3)(a) The revised provision for doubtful debts at 2% of debtors, ie 2% of £35,000 = £700 less the existing provision of £600 = an increase of £100which is charged to the Profit & Loss Account which reduces net profit by £100;

(b) in the balance sheet, the smaller net assets figure (ie from a reduced figure for netdebtors) is matched by a reduced addition of net profit to capital.

(4)(a) £520 is added to motor-vehicle running expenses and £420 is added to heatingand lighting in the Profit & Loss Account, so reducing the net profit;

(b) this reduction is matched in the balance sheet by 2 accrual items included underliabilities.

(5)(a) Rates and insurances in the Profit & Loss Account is reduced by £120, making the net profit £120 more;

(b) in the balance sheet, the increased net profit addition to capital is matched by anitem, ‘rates and insurances prepaid’, among the current assets.

Note The adjusted entries are highlighted in the solution given in T/23.1A.

3 Copy and hand out or show exercises T/23.2 and T/23.3 in the Appendix (pages 302–3)on the overhead projector.Ask the students to work through them. Note that in T/23.3,item (6), the Sales Ledger figure of £370 is set off against the Purchases Ledger figureof £4,096, resulting in a net figure of £3,726.

Step 4

1 Explain that the practice is now well established of preparing Trading and Profit & LossAccounts in vertical format. Stress that the double entry is maintained; only the presentation is different.


182

Aim: to be able to prepare Trading and Profit & Loss Accounts in vertical format

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2 Illustrate vertical format on the board or overhead projector with the Trading and Profit& Loss Account for J Salmon for the year ended 30 June Year 6 (see exercise T/23.1*,page 299), shown below.

J SalmonTrading and Profit & Loss Accountfor the year ended 30 June Year 6

£ £ £Sales 370,000less Sales returns 3,400 366,600

less Cost of goods sold:Stock, 1 Jul Yr 5 15,700Purchases 263,500less Purchases returns 7,300 256,200

271,900less Stock, 30 Jun Yr 6 17,400 254,500

Gross profit 112,100

add Discount received 1,600

113,700Depreciation: Motor vehicles 20,000

Fixtures and fittings 8,200 28,200Discount allowed 2,300Bad debts 650Provision for doubtful debts 100Rent 12,000Motor-vehicle running expenses 3,870Rates and insurances 3,300Salaries 12,300Lighting and heating 4,350 67,070

Net profit 46,630

3 Ask the students to rewrite the Trading and Profit & Loss Account for exercise T/23.3in vertical format.

Step 5

1 Remind students of the significance of the value placed on closing stock. Show that:


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Aim: to appreciate and be able to apply the basic rule for stock valuation

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2 Point out that (closing) stock is usually valued at the end of a trading period (generallya year).Valuation involves:

(a) a check on and count of the items in stock, to allow for items lost, stolen, that havephysically deteriorated, or that are otherwise unsaleable;

(b) placing a value per item on the stock.

Then

total stock value = number of items held × stock value per item

Each item of stock is valued according to the rule of valuing at the lower of:

● cost price

or

● net realizable value.

3 Tell the students that profit should not be anticipated, ie it should not be included inthe accounts until the goods concerned have actually been sold. Net realizable value isdefined as the selling price less the costs of getting the goods into a saleable condition.This means, for example, that costs incurred for repairing damaged goods before theycan be sold must first be deducted.

4 Emphasize that the result of applying the rule of valuing at the lower cost price or netrealizable value is that stock is cautiously valued.A lower figure for closing stock meansa higher ‘cost of goods sold’ and therefore a lower gross profit.This is known as being‘prudent’.

5 Illustrate how to apply the basic rule of stock valuation by showing the example oppositeon the board or overhead projector.


184

the value of closing stock affects cost of goods sold

which in turn affects gross profit

which then affects net profit

with balance sheet asset value andconsequences amount of capital

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Example Andy Struddles has valued his stock at 31 December Year 3 at cost £6,340. Included inthis figure are items for which the stock value is under review.

● Item 1 cost £410.The likely selling price has fallen from £590 to £530.● Item 2 cost £290. Its normal selling price is £350 but it is now expected to sell for

only £270.● Item 3 cost £330.The item now has no sale or scrap value.The normal selling price

is £450.● Item 4, which cost £215, has been damaged and cannot be repaired. Its normal selling

price is £280 but it is now expected to sell for only £220.● Item 5 cost £170. Its normal selling price was £250 but this had been reduced in

November Year 3 to £190.● Item 6, which cost £520, has been damaged and is to be repaired at a cost of £110.

Once repaired it is expected to sell for £570.

Andy StruddlesRevised stock valuationat 31 December Year 3

£Pre-revised stock valuation 6,340

Item 1 Valued at cost. The stock value is unchanged. The likely selling priceis well above this figure.

Item 2 Valued at net realizable value. The expected selling price has fallenbelow the cost price, so that £270 becomes the stock valuation figure. (20)

Item 3 Valued at net realizable value. The stock value has fallen to zero.This will be written off. (330)

Item 4 Valued at cost. Although the selling price has fallen it is still above cost. The stock value is unchanged.

Item 5 Valued at cost. The stock value is unchanged. The reduced selling price remains above cost.

Item 6 Valued at net realizable value. The expected selling price has fallenbelow the cost price, so that £460 (ie £570 - £110) becomes thestock valuation figure. (60)

Revised stock valuation 5,930

Note A detailed explanation is given here for each item. Usually a question would not requiresuch detail to be provided.

6 Explain that the type of question similar to the example above requires adjustment forthe difference in valuation. In examination answers, some candidates add the total netrealizable value to the existing stock figure, which results in a much higher figure thanthey started with.

7 Show the significance of the stock valuation rule by displaying the example overleaf onthe board or overhead projector.


185

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ExampleIn Year 1 a trader purchases 8 machines at a cost of £1,000 each. During the course ofthe year, 6 machines are sold at £1,500 each.The remaining 2 machines are valued atthe year end at cost price, ie at £1,000 each.The profit is calculated as follows:

£ £Sales (6 × £1,500) 9,000less Cost of goods sold:

Purchases (8 × £1,000) 8,000less Stock (2 × £1,000) 2,000 6,000

Profit 3,000

The profit in Year 1 consists of £500 on each of the 6 machines sold. If the unsoldmachines had been valued at the selling price, ie at £1,500, the profit for Year 1 wouldhave been calculated as follows:

£ £Sales (6 × £1,500) 9,000less Purchases (8 × £1,000) 8,000

less Stock (2 × £1,500) 3,000 5,000

Profit 4,000

The profit is therefore equal to £500 on each of the 8 machines when, in fact, only 6have been sold. The profit on the 2 unsold machines has been ‘anticipated’. If themachines are sold in Year 2 then no profit on their sale is recorded for that year eventhough plenty of effort, time, and expense might have gone into selling them in that year.

The stock at the end of Year 1 becomes the opening stock for Year 2. By valuingthe stock in Year 1 at selling price (ie the higher figure), the opening stock for Year 2 isincreased. The cost of goods sold is also increased and gross profit is reduced. Therecorded position between the 2 years is incorrect and misleading.

8 Copy and hand out or show exercises T/23.4 and T/23.5 in the Appendix (pages 304–5)on the overhead projector.Ask the students to work through them.

9 Explain the term ‘mark-up’. It is a term used in questions relating to stock valuation,and it often causes students problems in the examination. ‘Mark-up’ can be defined as:

10 Display Figure 23.1 (opposite) on the board or overhead projector to illustrate howmark-up is obtained.

11 With reference to Figure 23.1, explain that goods may be ‘marked up’ from the costprice to ensure that an amount is received towards running costs and, if possible, to makesome net profit. For example, if the cost price of a product is £300 and the mark-up to


186

cost of goods sold+ some running cost+ profit

= mark-up = selling price

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selling price is 331/3%, the selling price will be £400.The original cost portion can beviewed as thirds.The extra 1/3 at the end means that there are now 4 thirds (4/3) insteadof 3 thirds (3/3).The mark-up or 1/3 on the cost price = 1/4 (25%) of the selling price.

12 Point out that the cost portion may also be viewed as quarters, fifths, and so on.By adding the numerator to the denominator in the fraction of the cost price, thedenominator of the fraction in the selling price (the mark-up) can be obtained.Thus:

1/3 on cost price = 1 + 3 = 1/4 of selling priceor1/3 on cost price = 1 + 4 = 1/5 of selling priceor1/5 on cost price = 1 + 5 = 1/6 of selling price



187

Selling Price

Cost of goods soldRunning cost + profit

1 2 43

Mark-up 331/3% = 1/3Figure 23.1 Mark-up

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Lesson 24: Club and society accounts

Many candidates will have personal experience of club or society accounts, whether as clubmember recipients of the accounts or whether in helping to prepare the accounts. Thisexperience can be drawn upon when teaching this topic. Unfortunately, though, clubaccounts are often not prepared according to good accounting principles.

Questions on this topic can be set with various kinds of starting information.The questionsusually start from either a trial balance or a Receipts & Payments Account. Plenty of careis needed to answer the questions and some distinctive terms should be learned. Clubaccounts, nevertheless, are based on the same accounting principles as those for a business.

188

Topic summary

● The deficiencies of a Receipts & Payments Account● The presentation of an Income & Expenditure Account with regard to the distinctive

features of club or society accounts● The suitable and effective presentation of subsidiary income and expense information● The calculation of the accumulated fund of a club or society● The presentation of a balance sheet of a club or society● The correct recording of amounts received through donations


21.1 The differences between a Receipts & Payments Account and an Income &Expenditure Account

21.2 The preparation of an Income & Expenditure Account from a list of balances orfrom a Receipts & Payments Account (both with supporting data)

21.3 The suitable grouping of associated items of income and expenditure within anIncome & Expenditure Account

21.4 The preparation, if required, of an ancillary account for trading activities, eg Refreshments Account, and the carrying of the surplus/deficit into the Income & Expenditure Account

21.5 The preparation of the balance sheet of a club or society

21.6 The calculation, if necessary, of the amount of the Accumulated Fund

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Step 1

1 Explain the nature of a Receipts & Payments Account, ie that it represents a summary(in debit and credit form) of cash/bank transactions for a given period.

2 Display the example of a Receipts & Payments Account that follows on the board oroverhead projector.

ExampleLinkwell Social Club

Receipts & Payments Accountfor the year ended 31 December Year 9

Receipts £ £ Payments £Balance at bank, 1 Jan Yr 9 870 Hire of rooms 1,860Subscriptions Printing and stationery 570

received: Purchase of video equipment 1,160Year ended 31 Dec Yr 8 420 Hire of films 320

31 Dec Yr 9 4,100 Annual social 49031 Dec Yr 10 240 Visit to Bruges 380

4,760 Balance at bank, 31 Dec Yr 9 850

5,630 5,630

3 Point out that the 2 sides of the account relate to the debit and credit of a cash or bankaccount.The amounts, however, are item totals for the year and not individual transactionentries.

Ask the students to identify the weaknesses of a Receipts & Payments Account.

The weaknesses are that:

● there is no allowance for accruals and/or prepayments, eg subscriptions are included for Years 8 and 10;

● no account is taken of capital expenditure as distinct from revenue expenditure, eg thevideo equipment is fully charged to Year 9 even though it may well be in use forseveral years;

● by itself the Receipts & Payments Account is incomplete: there is no mention of assets owned other than those mentioned in the account;

● there is no mention of liabilities and, unfortunately, the Receipts & Payments Accountis sometimes the only account statement issued to members.

Regarding the third and fourth points, assets and liabilities should be dealt with separately,ie in a balance sheet. The club or society members also need to know by means ofthe balance sheet whether the capital has increased or decreased over the period andwhy this is so.

Club and society accounts

189

Aim: to recognize the deficiencies of a Receipts & Payments Account

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Step 2

1 Explain that the Income & Expenditure Account is used by clubs and societies, ie non-profit-making organizations, as a replacement for the Profit & Loss Account.Theaccount has certain distinctive features, but it is constructed on similar principles to theProfit & Loss Account. It incorporates adjustments for:

● accruals● prepayments● provision for depreciation of fixed assets.

Thus, the reason for using an Income & Expenditure Account is to include only ‘true’income & expenditure for a period, in order to obtain a result that correctly reflects theactivities of the club or society for the period.

2 Tell the students that, like the Profit & Loss Account, the Income & ExpenditureAccount is part of the double-entry system: the period totals for income and the variousexpenses are transferred to it from the General Ledger.

3 Emphasize that the final accounts issued to members of clubs or societies should be:

● meaningful● relevant● easily understood.

Many club members may have little if any knowledge of accounting.They should besupplied with statements that are informative and yet easily read.The members shouldnot have to search for separate pieces of information and then have to put themtogether to form a complete financial picture.Therefore, matters relating to a particulartopic should be brought together, ie items should be appropriately ‘grouped’.

4 Illustrate how to present an Income & Expenditure Account by showing the exampleopposite on the board or overhead projector.


190

Aim: to be able to present an Income & Expenditure Account with regard to the distinctive features of club or society accounts

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Example

Tattenham Sports ClubTrial balance at 31 December Year 4

Dr Cr£ £

Sports equipment at cost 6,300Video equipment at cost 2,200

Provision for depreciation:Sports equipment 2,400Video equipment 800

Balance at bank 1,860Subscriptions received 7,150Rent payable 3,400Insurance 530Telephone and postage 410General expenses 260Surplus on annual dance 180Accumulated fund 4,430

14,960 14,960

Additional information that applies at 31 December Year 4:

(1) subscriptions: £280 has been received in advance of Year 5; £360 is accrued due forYear 4;

(2) rent payable accrued due amounted to £400;(3) prepaid insurance £80;(4) depreciation to be provided:

sports equipment – 20% on costvideo equipment – 121/2% on cost.

RequiredAn Income & Expenditure Account for Tattenham Sports Club for the year ended 31 December Year 4.

NoteRemind the students that capital expenditure items and liabilities are not included in thisaccount.They are shown in the balance sheet, which is dealt with on page 196.


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Solution

Tattenham Sports ClubIncome & Expenditure Account


Expenditure £ £ Income £Rent payable (+400) 3,800 Subscriptions 7,150Insurance (-80) 450 less received in advance 280

Telephone and postage 410 6,870General expenses 260 add accrued due for Year 4 360

7,230Depreciation:

Sports equipment 1,260 Annual dance – surplus 180Video equipment 275 1,535

Surplus of incomeover expenditure 955

7,410 7,410

5 Point out that a common mistake made by candidates is that they confuse this accountwith the Receipts & Payments Account. Stress that income is entered on the credit sideof Income & Expenditure Account and expenditure on the debit side, as they are in theProfit & Loss Account.

6 SubscriptionsHighlight the fact that in the above account, it is acceptable merely to state ‘7,230’against subscriptions without any detail of adjustments. However, the students should bewarned that this method is unwise. Examiners like to award marks for correct workings,if possible. If only the adjusted figure is given with no indication of the adjustmentsmade and that figure is incorrect, then no marks for workings can be awarded.

An alternative to showing adjustments within the Income & Expenditure Account is tokey the adjusted figures to workings shown clearly after the account.This practice can,of course, be applied to other workings and is discussed further in Lesson 25.

7 EventsClubs or societies may hold events or have special occasions, eg a dance, a social, a dayout, or a trip abroad.These events may be aimed at raising funds.The outcome may bea surplus, which can boost club funds, or it may be a deficit where expenditure exceedsincome.These events might involve 2 or even 3 items that are classified as partly incomeand partly expenditure.

The members would be interested in the result of any particular event, ie whether asurplus or a deficit. It is therefore essential that these items are brought together, ie‘grouped’. If the outcome is a deficit, the group should be positioned on the debit side;if a surplus, the group should be on the credit side. Candidates often fail to positiongroups correctly and consequently lose marks.


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In the example on page 192, surplus on the annual dance is recorded as one entry onlyin the trial balance, ie it is shown as the outcome.This entry could have been shown as2 or more items.The best practice is for the students to develop the habit of lookingfor appropriate groupings when presented with a question concerning Income &Expenditure Accounts.The exercises in this lesson provide the opportunity for practice.

8 With reference to the Income & Expenditure Account above, draw attention to use ofthe phrase ‘surplus of income over expenditure’. For Income & Expenditure Accounts,this phrase replaces the term ‘net profit’ found in Profit & Loss Accounts. If expenditureexceeds income, the phrase to use is ‘deficit, excess of expenditure over income’, not‘net loss’.


Step 3

1 The presentation of subsidiary income and expense information has been referred to inStep 2. Explain that this can be taken a stage further by using a separate account to dealspecifically with a club or society’s trading activities.The examination might require aseparate Trading Account to carry the trading activities. The Trading Account shouldreach a profit or loss on trading which is then transferred to the Income & ExpenditureAccount.A common and major mistake made by candidates is to fail to carry the tradingprofit or loss into the Income & Expenditure Account or else to repeat the items alreadyincluded in the Trading Account in the Income & Expenditure Account.

Set out the correct sequence of the effect of trading and other activities:

Trading Account

£ £Trading expenditure Trading incomeProfit on trading c/d X1

Income & Expenditure Account

£ £Various expenditure items Profit on trading b/d X2Surplus of income

over expenditure X3

2 Copy and hand out or show exercise T/24.2* in the Appendix (page 308) on theoverhead projector.Work through the exercise with the students. Stress that with T/24.2capital expenditure items are not included in the account.


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Aim: to be able to present subsidiary income and expense information suitably andeffectively

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The item ‘subscriptions’ might involve making a number of adjustments.This situationoccurs in exercise T/24.3* in the Appendix (page 310), which also involves thepreparation of a separate Trading Account.Ask the students to work through the exercise.

NoteAdvise the students to follow the requirements of the question closely. A separateTrading Account should be provided in an examination answer only if it is specificallyrequired. Some candidates prepare one when it is not required – and forfeit marks bypreparing it incorrectly.

Step 4

1 Explain that instead of a Capital Account, a non-profit-making organization has an‘accumulated fund’. Like a Capital Account, the fund represents the difference betweenassets and liabilities.Therefore,

assets = capital + liabilities

is replaced by

assets = accumulated fund + liabilities

2 Illustrate how to calculate an accumulated fund by showing the following example onthe board or overhead projector.

ExampleThe following receipts and payments account has been prepared for the BloxmoreTravel Group for the year ended 31 December Year 5:

Receipts £ Payments £ Balance at bank 1,020 Refreshments 182Cash in hand 48 Rent of room 1,680Subscriptions for Year 5 2,760 Travelling expenses 64Interest on bank account 32 Postage, printing and stationery 53Subscriptions for Year 6 75 Expenses for guest speakers 810

Hire of films 78Cash in hand 82Balance at bank 986

3,935 3,935

Additional information:31 December 31 DecemberYear 4 Year 5£ £

Subscriptions in arrears – 60Rent accrued due 40 50Stock of stationery 18 15


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Aim: to be able to calculate the accumulated fund of a club or society

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The calculation of the accumulated fund at 1 January Year 5 is as follows:

£ £Balance at bank 1,020Cash in hand 48Stock of stationery 18

1,086less Rent accrued 40

1,046

3 Ask the students to prepare the Income & Expenditure Account for Bloxmore TravelGroup in vertical format for the year ended 31 December Year 5. This Income &Expenditure Account is shown below.

Bloxmore Travel GroupIncome & Expenditure Account


Income£ £

Subscriptions 2,760add accrued due Year 5 60 2,820Interest on bank account 32

2,852

less ExpenditureRefreshments 182Rent of room (1,680 - 40 + 50) 1,690Travelling expenses 64Postage, printing and stationery

(53 + 18 - 15) 56Expenses for guest speakers 810Hire of films 78 2,880

Excess of expenditure over income (deficit) (28)

Step 5

1 As a straightforward example, work through the balance sheet for Bloxmore TravelGroup (overleaf) with the students. Carefully explain each item.


195

Aim: to be able to present a balance sheet of a club or society

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Bloxmore Travel GroupBalance sheet at 31 December Year 5

Current assets £ £Stock of stationery 15Subscriptions accrued due 60Bank balance 986Cash in hand 82 1,143

less Amounts due within 1 yearRent accrued due 50Subscriptions received for Year 6 75 125

1,018

Accumulated fundBalance at 1 Jan Yr 5 1,046less Deficit for Yr 5 28

1,018

2 Refer the students to the example in Step 2 (pages 191–2).The items not yet markedoff should be brought into the balance sheet for Tattenham Sports Club at 31 DecemberYear 4.The balance sheet is presented below in vertical format.

Tattenham Sports ClubBalance sheet at 31 December Year 4

Accumulated Net bookCost depreciation value

Fixed Assets £ £ £Sports equipment 6,300 3,660 2,640Video equipment 2,200 1,075 1,125

8,500 4,735 3,765

Current AssetsSubscriptions accrued due 360Prepaid insurance 80Bank 1,860

2,300

less Amounts due within 1 yearRent 400Subscriptions in advance 280 680

1,620

5,385

Financed by:Accumulated fund 4,430add Surplus of income over expenditure 955

5,385

3 Refer the students back to exercise T/24.1 and ask them to prepare the balance sheetof the Southern Jazz Club.


196

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Step 6

Explain that a donation is a gift of money to an organization.There are two ways in whicha donation can be recorded in the books of account:

(a) as income in the Income & Expenditure Account;(b) by adding the amount to the accumulated fund in the balance sheet, ie ‘capitalizing’ it.

If the amount is small it is more likely, that method (a) will be used.

NoteIn any examination question involving a donation, the candidates will be told if it is to becapitalized. If there is no specific instruction, the amount should be placed to the credit ofIncome & Expenditure Account.


197

Aim: to be able to record correctly amounts received by a club or society throughdonations

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Lesson 25: The presentation of answers

This lesson is devoted to bringing together points regarding the layout and presentation ofexamination answers. It is often evident that candidates understand the subject matter of aquestion but throw away vital marks by overlooking or disregarding key points of presentation.Attention to the appearance of the answers could well make all the difference between anoverall fail or pass.

A number of matters are highlighted, regarding presentation, that could be introduced intothe course at appropriate stages.These points can be particularly related to the requirementsof worked questions. However, it is advisable to reinforce them for the concluding stagesof the course and when finally helping the students to prepare for the examination itself.

1 Ledger accountsThe correct description must be shown for each debit and credit entry.The rule is thatthis should be the name of the related account, ie where the double entry is completed.

Whenever possible, the date should be included as part of an entry.When balancing anaccount, the double entry should be completed by bringing down the balance.The dateshown should be the first day of the next accounting period.

2 Layout of final accountsFor the Trading and Profit & Loss Account and balance sheet, vertical presentation ispurely optional and the students will not lose marks by using horizontal layout.However, the balance sheet, in particular, can often be presented more effectively in vertical format.

3 The difference between an account and a statementThis difference needs to be fully stressed. If a statement is required, it must not bepresented in account form. For an example of a statement, see ‘Andy Struddles: revisedstock valuation at 31 December Year 3’ in Lesson 23, page 185.

A suitable heading should always be provided for a statement. Where an account isspecified as being required, it must be in proper account format with debit and credit.Running balance format is usually acceptable, as long as the debit and credit columnsare clearly marked with Dr and Cr respectively, and the cumulative (updated) balance isclearly shown as well (either Dr or Cr).

Vertical presentation of a Trading and Profit & Loss Account effectively becomes astatement, but that is acceptable.The balance sheet is a statement anyway.

4 Presentation in columns (‘columnar presentation’)The 3-column Cash Book is probably the most familiar example.This should be shownin the recognized sequence as follows:

198

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Dr CrDiscount Discountallowed Cash Bank received Cash Bank£ £ £ £ £ £

Another example could be as follows:

Year 1 Year 2 Year 3

A

B

C

A question might specify this layout. If so, an answer should keep to the instructions andnot show something totally different, as may sometimes be the case.

5 WorkingsWorkings should be clearly shown. They should not be unnecessarily complicated.Thus, if an adjustment is made to the figure of ‘rent payable’ in the Profit & LossAccount, it is sufficient to show the adjustment as follows:

£Rent payable (16,000 - 2,400) 13,600

The examiner can spot the working straightaway instead of having to search it out at amore distant point.

If, however, the adjustment of an item has to be more complicated, workings (W1 W2

and so on) should be shown underneath the main account but ‘keyed’ to it, eg:


£ £

W 1

Rent & rates 12,130 Gross profit b/d X

Various other entries X

X

X

X

Net profit X

X X

W 1 X

X

X

X

The presentation of answers

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6 SpacingThe spacing of examination answers often leaves much to be desired. Sometimes workis crammed together within the first 3 or so pages of the answer book and becomesdifficult to read. Sensible spacing comes with practice and some guidance.

Where work is cancelled, it should be struck through with a bold diagonal line. If partof the answer is shown later on in the answer book, the earlier stage of the answershould clearly signal the fact.

Work often lacks legibility because candidates use too light a shade of ink. Dark blue orblack inks are strongly recommended. Pencil should never be used to write answers toquestions in this examination.

The presentation of answers

200

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201

Appendix 1: Exercises, some worked solutions,and support material

T/1.1

State the effect on a balance sheet of each of the following transactions, in each case statingwhich assets and/or liabilities are affected.

(1) Purchase of goods by cheque £350.

(2) Sale of goods for cash £290.

(3) Purchase of office furniture from D Jackson on credit £318.

(4) Repayment by cheque of £1,500, previously borrowed from T Walls.

(5) The receipt of a cheque for £965 from a debtor, F Wiles.

(6) Purchase of postage stamps for £11 in cash.

(7) Payment by cheque of £617, due to T Gates, creditor.

T/1.2

State the effect on a balance sheet of selling a computer for £3,600:

(i) if the purchaser paid by cheque;(ii) if it were sold on credit;(iii) if £2,000 were paid by cheque on account and if the remainder were on credit.

T/1.3

Draw up A Grant’s complete balance sheet from the following incomplete data at 31 MarchYear 4, including any missing items:

£Creditors 3,970Goods 5,160Debtors 4,250Cash at bank 2,380Loan from J Tesco 3,500Motor vehicle 5,600Office equipment 3,400Fixtures and fittings 2,870

pages 201-266 15/3/03 11:18 am Page 201

T/1.4

Enter the following transactions into the accounts of K Morgan:

Year 81 Aug Started business with £15,000 in cash3 Aug Transferred £14,200 of the cash into a newly opened business bank account7 Aug Bought goods on credit from B Fury for £760

12 Aug Bought office furniture, for £390, paid by cheque16 Aug Sold for cash £125-worth of goods that had cost the same amount19 Aug Purchased a lease on premises, for £8,200 paid by cheque25 Aug Bought stationery for £27 in cash28 Aug Paid B Fury the amount owing30 Aug Received from N Lawson a cheque for £2,000, as a loan to the business

T/1.5

R Lines has the following items in his balance sheet on 31 October Year 3:

£Cash at bank 1,615Debtors 3,740Goods 4,850Creditors 2,860Motor vehicle 6,400Office equipment 4,100Fixtures and fittings 2,200Loan from T Clasp 4,000

During November Year 3, R Lines:

● banked cheques received from debtors, amounting to £2,900;● paid creditors £2,060 by cheque;● bought goods on credit for £1,300;● sold on credit goods that had cost £1,450 for the same amount.

RequiredPrepare the balance sheet of R Lines at:

(i) 31 October Year 3 (ii) 30 November Year 3.

Appendix 1: Exercises

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203

T/2.1

Beside each of the details in the table, state:

(i) the name of the account to be debited;(ii) the name of the account to be credited.

Account Accountdebited credited

(1) Bought goods on credit from T Ball(2) Sold goods for cash(3) Weighing equipment for use in the business

bought by cheque(4) Returned some of the goods previously bought from T Ball(5) Sold goods on credit to D Trill(6) Some furniture for use in the business bought on credit

from T Doyle

T/2.2

Beside each of the details in the table, state:

(i) the name of the account to be debited;(ii) the name of the account to be credited.


(1) Sold goods on credit to A Darby(2) A Brittle, debtor, returns goods(3) A Darby pays his account by cheque(4) Goods are returned to T Zuck, creditor(5) The account of F Lane, a creditor, is paid by cheque(6) A Darby returns some of the goods previously sold to him

T/2.3

You are required to enter the transactions of B Lancaster in the appropriate accounts.

Year 92 Jan Commenced business with £15,000 in the bank5 Jan Bought goods from T Minott on credit for £6209 Jan Bought office equipment by cheque for £940

13 Jan Sold goods to R Lake on credit for £37016 Jan R Lake returned goods worth £8022 Jan Sent cheque for £350 to T Minott on account25 Jan Returned goods worth £120, to T Minott27 Jan Sold goods for £90 in cash30 Jan Purchased goods from T Marner on credit for £430

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T/2.4

You are required to enter the transactions of R Quarnby in the appropriate accounts.

Year 53 Sep Bought goods from A Little on credit for £846 6 Sep Sold goods for £73 in cash8 Sep Bought motor vehicle by cheque for £4,300

11 Sep Sold goods to H Keen on credit for £38013 Sep H Keen returned goods worth £8317 Sep Returned goods to A Little worth £14320 Sep Received cheque for £60 from H Keen on account24 Sep Bought office furniture by cheque for £36527 Sep Sent cheque to A Little in settlement of account29 Sep Sold goods to J Strong on credit for £412

T/3.1

In the column beside each of the details in the table, state which account is to be debitedand which account is to be credited.


(1) Bought goods for cash(2) Paid creditor the amount owing by cheque (3) Bought office equipment on credit from Office Services Ltd(4) Paid rent in cash(5) Sold goods for cash(6) F Tracey, debtor, paid her account by cheque

T/3.2

In the column beside each of the details in the table, state which account is to be debitedand which account is to be credited.


(1) Received cheque from T Ward as a loan(2) Sold goods on credit to J King(3) Paid telephone account by cheque(4) Sold office furniture for cash(5) Paid insurance by cheque(6) Bought goods on credit from R Veal(7) A customer, B Trent, returned goods


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205

T/3.3

Record the following in accounts:

Year 51 Jul Jen Ling started in business with £17,000 in a new bank account3 Jul Purchased goods from K Merrit on credit for £6207 Jul Returned goods to K Merrit worth £459 Jul Paid rent by cheque for £310

11 Jul Drew £130 from bank for office cash12 Jul Bought office furniture by cheque for £42014 Jul Sold goods to T Larkspur on credit for £56016 Jul T Larkspur returned goods worth £6519 Jul Purchased stationery for £34 in cash20 Jul Sold goods for £370, paid by cheque22 Jul Bought a computer for use in the business for £3,500 from Comtec Ltd,

£1,000 of which was paid by cheque, with the remainder on credit.25 Jul Drew from bank £360 in cash for office26 Jul Paid wages in cash, £33028 Jul Sold goods to T Larkspur for £850 on credit30 Jul Received cheque from T Larkspur for the amount owing on 17 July Year 531 Jul Paid insurance by cheque for £270

T/3.4

Record the following in accounts:

Year 31 Oct Choi Wing started in business with £21,000 in cash2 Oct Paid £19,000 cash into a newly opened business bank account4 Oct Purchased goods from N Tucker on credit for £8507 Oct Bought office furniture by cheque for £9309 Oct Bought a fax machine for use in the business for £2,500 from Oftech Ltd,

£1,000 of which was paid by cheque with the remainder of the account oncredit

10 Oct Returned goods worth £70 to N Tucker12 Oct Paid wages in cash, £15013 Oct Sold goods to K Francis on credit for £59014 Oct Paid insurance by cheque for £28016 Oct Choi Wing drew £350 from bank for private use18 Oct Purchased stationery for £210 in cash20 Oct K Francis returned goods worth £8021 Oct Bought goods from B Minott on credit for £38022 Oct Sold to A Jenkins some office furniture bought for £200 on 7 October:

received a cheque for £30, with the balance of £170 on credit24 Oct Sent cheque to N Tucker to settle the account26 Oct Paid wages in cash, £18028 Oct Received cheque from K Francis in settlement of the amount owing30 Oct Choi Wing drew £430 from bank for private use31 Oct Sold goods on credit to R Flinn for £360

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T/4.1

(a) Balance the following account:

Ching Wong

Year 4 £ Year 4 £6 May Returns outwards 80 2 May Purchases 730

9 May Purchases 31517 May Purchases 250

(b) How would you describe the balance you have just entered?

T/4.2

Enter the following into debtor and creditor accounts only.Balance each account at 31 OctoberYear 3 and bring down the balances.

Year 32 Oct Bought goods from F Swain on credit for £4806 Oct Sold goods to N Knight on credit for £2159 Oct Returned goods to F Swain that had cost £62

12 Oct Bought goods from A Hinter on credit for £39015 Oct N Knight returned goods which she had bought on 6 October for £4518 Oct Returned goods to A Minter that had cost £6520 Oct Received cheque for £80 from N Knight in part payment21 Oct Sold goods to W Mull on credit for £53523 Oct Sent cheque for £418 to F Swain26 Oct W Mull returned goods that he had bought on 21 October for £9027 Oct Sold goods to N Knight on credit for £38329 Oct Received cheque for £70 on account from W Mull


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T/4.3

This bank account is an example of running balance format.

Bank account

Debit Credit Balance

Year 7 £ £ £1 Mar Balance 1,316 Dr4 Mar Insurance 300 1,016 Dr7 Mar Sales 740 1,756 Dr

11 Mar Drawings 200 1,556 Dr14 Mar Purchases 450 1,106 Dr18 Mar Wages 300 806 Dr20 Mar Sales 860 1,666 Dr23 Mar Machine repairs 700 966 Dr25 Mar L Logan 570 1,536 Dr26 Mar Wages 380 1,156 Dr28 Mar Sales 920 2,076 Dr30 Mar Rent 450 1,626 Dr31 Mar Balance 1,626 Dr

NoteThe above is not a representation of statements issued by banks to their customers. It is ofan account drawn up and maintained by the customer.

T/4.4

The following transactions are to be entered in (two-sided) accounts:

Year 51 Apr Chan Lee commenced business with £12,000 in cash 2 Apr Transferred £11,000 in cash into a bank account5 Apr Purchased goods from D Styles on credit for £8309 Apr Bought office furniture for £250 in cash

12 Apr Sold goods to S Wick on credit for £57014 Apr Returned goods worth £75 to D Styles16 Apr Paid rent by cheque for £35018 Apr Purchased office stationery for £30 in cash21 Apr Chan Lee made drawings in cash for £14024 Apr Paid insurance by cheque for £17025 Apr Sold goods to S Wick on credit for £49028 Apr Purchased goods from D Styles on credit for £56030 Apr Sent cheque to D Styles for £755


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T/4.5

Against each of the listed items, tick ( ) either the debit column or the credit columnaccording to which side of the trial balance you would expect the item to appear.

Debit CreditOffice equipmentCreditorsInsuranceCashRent payableDebtorsSalesRent receivableDrawingsMotor vehicleLoan from F LangCapitalWagesPremises

T/4.6

On 30 June Year 4, D Lamb had the following account balances:

£Debtors 2,530Creditors 3,670Rent 1,400Motor vehicle 5,300Loan from A Green 2,500General expenses 1,040Purchases 3,650Sales 5,980Cash at bank 7,900Wages 2,740Drawings 420Fixtures and fittings 6,800Capital 19,630

RequiredPrepare the trial balance of D Lamb at 30 June Year 4.


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T/5.1*

(a) The following details relate to K Fox for the year ended 30 September Year 3:

£Sales 15,800Cost of goods sold 8,500Running expenses 4,300

RequiredA statement relating to K Fox showing the following for the year ended 30 SeptemberYear 3:

(i) gross profit (ii) total net profit.

(b) The following information is available relating to R Lott in respect of the year ended31 December Year 2:

£Sales 26,900Income from other than trading 1,200Cost of goods sold 9,300Running expenses 12,400

RequiredPrepare a statement relating to R Lott showing the following for the year ended31 December Year 2:

(i) gross profit (ii) total net profit.

T/5.1/A

(a) K FoxIncome and profit

for the year ended 30 September Year 3

£ £Sales 15,800less Cost of goods sold 8,500

Gross profit 7,300less Running expenses 4,300Net profit 3,000


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(b) R LottIncome and profit


£ £Sales 26,900less Cost of goods sold 9,300

Gross profit 17,600add Non-trading income 1,200

18,800less Running expenses 12,400

(Total) Net profit 6,400

NoteThe above are statements – not accounts.

T/5.2


Dr Cr£ £

Purchases 5,160Sales 6,320Debtors 750Creditors 910Rent payable 700Office expenses 360Lighting and heating 420Rent receivable 450Fixtures and fittings 800Motor vehicle 1,600Cash at bank 1,040Cash in office 50Drawings 800Capital 4,000

11,680 11,680

NoteIt is assumed that T Avis started in business on 1 January Year 5 by placing £4,000 in abusiness bank account.Therefore, there is no opening stock. Stock at 31 December Year 5was valued at cost at £2,100.This figure is due to be brought into the accounts of TAvisafter the agreement of the trial balance.


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211

T/5.3

At the end of her first year’s trading, Shui Ling drafted the following trial balance.You arerequired to draw up a Trading and Profit & Loss Account for the year ended 31 DecemberYear 4.

Shui LingTrial balance at 31 December Year 4

Dr Cr£ £

Purchases 19,800Sales 32,360Cash at bank 3,960Wages 7,510Debtors 3,680Creditors 2,100Rent 3,700Motor vehicles 12,400Insurance 390Office equipment 5,400General expenses 520Fixtures and fittings 3,800Drawings 4,300Capital 31,000

65,460 65,460

Shui Ling valued her stock at 31 December Year 4 at cost at £4,650.

NoteA balance sheet is not required.

pages 201-266 15/3/03 11:18 am Page 211

T/5.4

The following is the trial balance of Fred Trotter after his first year’s trading. You arerequired to draw up a Trading and Profit & Loss Account for the year ended 30 June Year 8.

Fred TrotterTrial balance at 30 June Year 8

Dr Cr£ £

Cash at bank and in office 2,080Rent 2,600Motor vehicles 9,200Debtors 3,100Creditors 5,100Purchases 36,440Wages 15,100Sales 59,400Fixtures and fittings 3,600Sundry expenses 1,620Premises 38,500Drawings 4,300Lighting and heating 570Insurance 390Capital 53,000

117,500 117,500

Stock at 30 June Year 8 was valued at £4,220.


T/6.1*

From the following details you are required to draw up a complete balance sheet for Sai Yoon at 31 October Year 7, including any item that you believe to be missing.The balancesheet should be in the correct format.

Loan from T Gaul, repayable 31 December Year 9, £4,000Stock £3,980 Premises £42,000 Bank £3,130Motor vehicle £7,100 Cash £110 Creditors £7,120Debtors £7,800 Fixtures and fittings £2,750


212

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213

T/6.1/A

Sai YoonBalance sheet at 31 October Year 7

£ £Fixed Assets Capital 55,750Premises 42,000Fixtures and fittings 2,750 Amount due in more than 1 yearMotor vehicle 7,100 Loan: T Gaul, repayable

51,850 31 Dec Yr 9 4,000

Current Assets £ Amount due within 1 yearStock 3,980 Creditors 7,120Debtors 7,800Bank 3,130Cash 110 15,020

66,870 66,870

T/6.2*

With reference to the data in T/5.3 and the answer to it, draw up a balance sheet for ShuiLing at 31 December Year 4.

T/6.2/A

Shui LingBalance sheet at 31 December Year 4

£ £ £Fixed Assets CapitalFixtures and fittings 3,800 Commencing balance 31,000Office equipment 5,400 add Net profit 5,090Motor vehicles 12,400 less Drawings 4,300 790

21,600 31,790

£Current Assets

Amount due withinStock 4,650 1 yearDebtors 3,680 12,290 Creditors 2,100

Bank 3,960 33,890 33,890

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214

T/6.3*

By reference to the data of T/5.4 and the answer to it, draw up a balance sheet for FredTrotter at 30 June Year 8.

T/6.3/A

Fred TrotterBalance sheet at 30 June Year 8

£ £ £Fixed Assets CapitalPremises 38,500 Balance at 1 Jul Yr 7 53,000Fixtures and fittings 3,600 add Net profit 6,900Motor vehicles 9,200 less Drawings 4,300 2,600

51,300 55,600

Current Assets £Amount due within

Stock 4,220 1 yearDebtors 3,100 9,400 Creditors 5,100

Bank 2,080 60,700 60,700

T/6.4*

(a) The ledger of Alison Sharpe includes the following balances at 30 September Year 4:

£Debtors 3,640Motor vehicle 2,100Stock 4,080Cash at bank 1,970Cash in office 60Creditors 2,940Loan from T Wylie, repayable 30 Jun Yr 7 2,000Fixtures and fittings 980

RequiredPrepare a balance sheet for Alison Sharpe at 30 September Year 4, complete with the balance of capital, which has not been shown above.

(b) On 1 October Year 4,Alison Sharpe purchased another motor vehicle for business usefor £2,600. She paid T Rolt £400 by cheque and the remainder of the amount wason credit.

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Required

(i) In ledger accounts, record the entries for the transaction.

(ii) State which one of the following effects this transaction will have:

(1) an increase of current assets by £2,600(2) a decrease of current assets by £2,600(3) a decrease of current assets by £400(4) no effect on current assets(5) an increase of current assets by £2,200.

T/6.4/A

(a) Alison SharpeBalance sheet at 30 September Year 4

£ £Fixed Assets Capital 7,890Fixtures and fittings 980Motor vehicle 2,100 Amount due in more than 1 year

Loan – T Wylie(repayable 30 Jun Yr 7) 2,000

3,080£

Current AssetsStock 4,080 Amount due within 1 yearDebtors 3,640 Creditors 2,940Bank 1,970Cash 60 9,750

12,830 12,830

(b) (i) Motor Vehicle

Year 4 £1 Oct Balance 2,1001 Oct Bank and T Rolt 2,600

Bank

Year 4 £ Year 4 £1 Oct Balance 1,970 1 Oct Motor vehicle 400

T Rolt

Year 4 £1 Oct Motor vehicle 2,200

(ii) Answer = (3) a decrease of current assets by £400


215

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216

T/7.1

Prepare a Trading and Profit & Loss Account for Lui Man for the year ended 31 DecemberYear 6 from the following details:

£Purchases 15,460Sales 31,970Returns outwards 840Returns inwards 1,250Carriage inwards 860Carriage outwards 1,030Wages 8,460General expenses 1,270Stock at 31 Dec Yr 6 2,790

NoteYear 6 was Lui Man’s first year of trading.

T/7.2


Dr Cr£ £

Purchases 9,260Sales 13,050Carriage inwards 430Debtors 1,170Creditors 1,750Rent payable 1,100Office expenses 590Lighting and heating 610Rent receivable 450Returns inwards 480Returns outwards 340Carriage outwards 380Fixtures and fittings 900Motor vehicle 1,600Cash at bank 1,230Cash in office 70Stock at 1 Jan Yr 6 2,100Drawings 1,100Capital 5,430

21,020 21,020

Stock at 31 December Year 6 was valued at £2,450.

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T/7.3

Using the following information, draw up a Trading and Profit & Loss Account for CheaYee for the year ended 31 May Year 4:

£Stock at 31 May Yr 3 27,380Purchases 143,700Sales 231,600Returns outwards 980Returns inwards 1,540Carriage outwards 4,950Wages 53,200Sundry expenses 3,860Stock at 31 May Year 4 25,300

T/7.4

From the following information, draw up a Trading and Profit & Loss Account for G Crumbfor the year ended 31 October Year 7:

£Sales 68,890Returns outwards 570Stock at 31 Oct Yr 6 7,640Rent payable 2,800Carriage outwards 760Purchases 49,620Returns inwards 980Rent receivable 1,200Wages 8,030Lighting and heating 540Carriage inwards 1,010Office expenses 390Stock at 31 Oct Yr 7 7,960


217

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T/7.5: The end-of-year procedure


218

PurchasesSalesReturns outwardsReturns inwardsOpening stockClosing stock

account balancestransferred to

Trading Account

Gross profit toProfit & Loss Account

Expense accounts

Other incomeaccounts

accountbalancestransferred to


Net profit to Capital Account

Drawings Account Capital Account

Cash/bank account(s)Debtor/creditor accountsAsset accounts

Balanced, iebalances c/don each account

Balance sheet

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219

T/7.6

From the following trial balance of T Brackwell, prepare a Trading and Profit & LossAccount for the year ended 31 July Year 8, together with a balance sheet at that date.

T BrackwellTrial balance at 31 July Year 8

Dr Cr£ £

Purchases 177,500Sales 256,800Stock at 1 Aug Yr 7 13,200Returns inwards 3,900Returns outwards 5,750Rent payable 4,500Wages 53,650Lighting and heating 4,300Sundry expenses 5,100Debtors 24,960Equipment 29,500Bank 1,340Cash 194Premises 110,000Creditors 16,394Loan from T Royal,

repayable 31 Jul Yr 13 26,000Motor vehicles 23,000Drawings 11,200Capital 157,400

462,344 462,344

Stock at 31 July Year 8 was valued at £14,400.

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T/8.1*

Philip Wilshaw, a sole trader, uses the following accounts in his books:

Fixtures and fittingsRentMotor vansLight and heatJ Symes, a creditorPurchasesSalesStockT P Stanley, a debtorBankCapitalDrawings

RequiredSet out the following headings:

To be found in the Account Type of account following ledger

List under the heading ‘Account’ each of the accounts given above, fill in the column ‘Typeof account’ and, in the last column, state the ledger in which you would find the account.

T/8.1/A

To be found in the Account Type of account following ledger

Fixtures and fittings Real General (or Nominal)Rent Nominal General (or Nominal)Motor vans Real General (or Nominal)Light and heat Nominal General (or Nominal)J Symes, a creditor Personal Purchases (or Bought)Purchases Nominal General (or Nominal)Sales Nominal General (or Nominal)Stock Real General (or Nominal)T P Stanley, a debtor Personal Sales (or Debtors)Bank Real Cash BookCapital Personal Private or GeneralDrawings Personal Private or General


220

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T/8.2*

Division of the (A) (B)ledger Type of account Name of account

Sales LedgerPurchases Ledger General LedgerPrivate Ledger

Required

(a) In column (A), state the type of accounts you would expect to find in each division ofthe ledger.

(b) In column (B), against the General Ledger and Private Ledger, name 3 accountsthat might be included.

T/8.2/A

Division of the (A) (B)ledger Type of account Name of account

Sales Ledger Personal/customers (or debtors)Purchases Ledger Personal/suppliers (or creditors)General Ledger Impersonal: nominal or real Wages, sales,

rent receivable, etcPrivate Ledger Personal (private) Capital

DrawingsTrading and Profit & Loss

T/8.3*

(a) Set out the following table. In the right-hand column, enter the name of the ledger inwhich each of the accounts is recorded.

Name of account Name of ledger

(1) Drawings(2) T Lucan, creditor(3) Trading(4) Rent receivable(5) Fixtures and fittings(6) Wages(7) Capital

(b) Suggest 3 ways in which the Sales Ledger might be subdivided.


221

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T/8.3/A

(a)Name of account Name of ledger

(1) Drawings Private or General(2) T Lucan, creditor Purchases (or Bought)(3) Trading Private or General(4) Rent receivable General (or Nominal)(5) Fixtures and fittings General (or Nominal)(6) Wages General (or Nominal)(7) Capital Private or General

(b) Answers to ways of subdividing the Sales Ledger might include:

● alphabetically, eg by customer names;● numerically, in which customers are numbered individually, then grouped;● geographically, ie by sales areas;● on a product basis, ie according to product categories;● by type of customer, eg trade as opposed to private customers.

T/8.4


£ £Fixed AssetsFixtures and fittings 900Motor vehicle 1,600

2,500

Current AssetsStock 2,450Debtors 1,170Bank 1,230Cash 70

4,920

less Amounts due within 1 yearCreditors 1,750

Net current assets 3,170

5,670

Financed by:

Capital – balance at 1 Jan Yr 6 5,430add Net profit 1,340less Drawings 1,100 240

5,670


222

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T/8.5*

From the following trial balance of J Penarth, prepare:

(i) a Trading and Profit & Loss Account for the year ended 30 April Year 8;(ii) a balance sheet, in vertical format, at 30 April Year 8.

J PenarthTrial balance at 30 April Year 8

Dr Cr£ £

Purchases 154,300Sales 212,600Premises 48,000Stock at 1 May Yr 7 39,650Rent 7,200Returns inwards 615Loan from R Jenks, repayable Yr 12 20,000Debtors 32,290Creditors 18,160Wages and salaries 22,400Carriage inwards 915Cash at bank 6,670Cash in office 265Returns outwards 1,430Insurance 475Fixtures and fittings 6,400Carriage outwards 3,510Drawings 16,500Capital 87,000

339,190 339,190

Stock at 30 April Year 8 was valued at £41,080.


223

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224

T/8.5/A

(i) J PenarthTrading and Profit & Loss AccountFor the year ended 30 April Year 8

£ £ £Stock at 1 May Yr 7 39,650 Sales 212,600Purchases 154,300 less Returns inwards 615

add Carriage inwards 915 211,985

155,215

less Returns outwards 1,430 153,785

193,435less Stock at 30 Apr Yr 8 41,080Cost of goods sold 152,355Gross profit c/d 59,630

211,985 211,985

Rent 7,200 Gross profit b/d 59,630Wages and salaries 22,400Insurance 475Carriage outwards 3,510Net profit 26,045

59,630 59,630

(ii) Balance sheet at 30 April Year 8

£ £Fixed AssetsPremises 48,000Fixtures and fittings 6,400

54,400Current AssetsStock 41,080Debtors 32,290Bank 6,670Cash 265

80,305less Amounts due within 1 year

Creditors 18,160Net current assets 62,145

116,545less Amount due in more than 1 year

Loan from R Jenks, repayable Yr 12 20,00096,545

Financed by:

Capital – at 1 May Yr 7 87,000add Net profit 26,045less Drawings 16,500 9,545

96,545

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T/9.1: The journey of a ‘drawn’ cheque

The journey of a ‘drawn’ cheque:

● the cheque is drawn by T Royle (an account holder at Albion Bank,York East branch);● the cheque is made payable to P Sempster (an account holder at Derbyshire Bank,

Chester branch).

NoteThe delay in clearance will increase if P Sempster (the payee) were to delay paying thecheque into his account.


225

Year 4 T Royle (drawer)

7 May cheque T Royle creditssent to bank account

P Sempster (payee)receives cheque P Sempster debits

bank account

8 May pays cheque intoaccount with

Derbyshire BankChester branch

9 May cheque sent to

10 May Derbyshire Bankclearance centre

sent (with othercheques) to

10 May Albion Bankclearance centre

11 May Albion Bank charged againstYork East branch account of T Royle

pages 201-266 15/3/03 11:18 am Page 225

T/9.2

Multiple choice questions

(1) Which of the following are true of bank current accounts?

(a) The account must not be overdrawn.(b) They provide the facilities for regular banking.(c) The transfer of funds requires the use of a cheque.(d) It may be shown in the books of the account holder as having a credit balance.

Choose the answer from the following:(a) and (b)(a) and (c)(b) and (c)(b) and (d)

(2) Which of the following are true of the standing-order method of payment?

(a) It is suited to payment of fixed amounts.(b) It requires the use of a cheque.(c) It can be cancelled by the payer.(d) It gives the payee freedom to draw upon the bank account of the debtor.

Choose the answer from the following:(a) and (b)(b) and (d)(a) and (c)(b) and (c)

(3) Which of the following are not true of the direct-debit method of payment?

(a) It is unsuited to the payment of wages and salaries.(b) Payments are always at pre-stated intervals.(c) It is suited to the payment of gas bills.(d) It is not intended for variable amounts.

Choose the answer from the following:(a) and (b)(a) and (c)(b) and (c)(b) and (d)


226

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227

T/9.3*

Chandran Yin had the following balances on 1 October Year 9:

£Cash 96Bank 387 (Dr)

During October Year 9, she had the following transactions:

Year 93 Oct Purchased stationery for £27 in cash5 Oct Received cheque from L Tarne for £3128 Oct Paid T Womble £95 by cheque

13 Oct Sales for £117 in cash 20 Oct Paid wages in cash, £8723 Oct Carriage outwards paid in cash, £3227 Oct Received cheque from T Lyle, £134

RequiredEnter the balances and transactions in the 2-column Cash Book of Chandran Yin and balance it at 31 October Year 9.

T/9.3/A

Chandran YinCASH BOOK


1 Oct Balances b/d 96 387 3 Oct Stationery 275 Oct L Tarne 312 8 Oct T Womble 95

13 Oct Sales 117 20 Oct Wages 8727 Oct T Lyle 134 27 Oct Carriage outwards 32

31 Oct Balances c/d 67 738

213 833 213 833

1 Nov Balances b/d 67 738

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228

T/9.4*

Record the following in the 2-column Cash Book of W Towcester and balance theaccounts at the end of the month:

Year 6 £1 Apr Balances brought forward: Cash 162

Bank (Dr) 9304 Apr Paid rent by cheque 2406 Apr Cash sales 4708 Apr Purchased stationery for cash 589 Apr Banked some office cash 400

13 Apr Paid wages in cash 19016 Apr Drew from bank for office cash 8020 Apr Received cheque from N Vine 23523 Apr Sales for cash 36024 Apr Banked some office cash 34026 Apr Paid for cleaning in cash 4528 Apr Sent cheque to B Lines 283

T/9.4/A

W TowcesterCASH BOOK


1 Apr Balances b/d 162 930 4 Apr Rent 2406 Apr Sales 470 8 Apr Stationery 589 Apr Cash C 400 9 Apr Bank C 400

16 Apr Bank C 80 13 Apr Wages 19020 Apr N Vine 235 16 Apr Cash C 8023 Apr Sales 360 24 Apr Bank C 34024 Apr Cash C 340 26 Apr Cleaning 45

28 Apr B Lines 28330 Apr Balances c/d 39 1,302

1,072 1,905 1,072 1,905

1 May Balances b/d 39 1,302

pages 201-266 15/3/03 11:18 am Page 228

T/9.5*

Prepare a 2-column Cash Book from the following transactions. Balance the Cash Book atthe end of the month.

Year 51 Nov F Swaine started in business with £12,000 in cash2 Nov Placed £11,500 of cash in a newly opened business bank account5 Nov Bought motor vehicle for £4,200, paid by cheque8 Nov Sales for £860 in cash, which was banked the same day

10 Nov Paid wages in cash, £27013 Nov Bought goods by cheque for £1,04015 Nov Paid carriage in cash, £4317 Nov Withdrew £130 from bank for office cash18 Nov Paid wages in cash, £29020 Nov Received cheque from T Dart for £31523 Nov Sales for £910 in cash, of which £700 was banked the same day28 Nov F Swaine withdrew £150 in cash for private use29 Nov Paid F Glubb £460 by cheque

T/9.5/A

F SwaineCASH BOOK


1 Nov Capital 12,000 3 Nov Bank C 11,5003 Nov Cash C 11,500 5 Nov Motor vehicle 4,2008 Nov Sales 860 10 Nov Wages 270

17 Nov Bank C 130 13 Nov Purchases 1,04020 Nov T Dart 315 15 Nov Carriage 4323 Nov Sales 210 700 17 Nov Cash C 130

18 Nov Wages 29028 Nov Drawings 15029 Nov F Glubb 46030 Nov Balances c/d 87 7,545

12,340 13,375 12,340 13,375

1 Dec Balances b/d 87 7,545


229

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T/10.1

The following information relates to the business of J Mander:

Year 5 £1 May Balances brought forward:

Cash 93Bank (Dr) 1,040Debtors – A Croft 440

– R Vine 350Creditors – T Dole 280

– W Kone 300

11 May R Vine settled his account by cheque after deducting a 2% cash discount13 May Purchased stationery for £56 in cash18 May Settled the account of T Dole by cheque number 136214, after deducting a

21/2% cash discount21 May Paid insurance by cheque number 136215 for £19024 May A Croft settled his account by cheque, after deducting a 21/2% cash discount28 May Withdrew £80 from bank (cheque number 136216) for office cash30 May Settled the account of W Kone by cheque number 136217, after deducting a

3% cash discount

RequiredRecord these balances and transactions in the books of J Mander. Use a 3-column CashBook, ie which includes discount columns. Balance the Cash Book at 31 May Year 5 andpost the totals of the discount columns to the General Ledger.


230

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231

T/10.2

Thelma Cook keeps a 3-column Cash Book for her business.The following informationrefers to the month of March Year 6:

Year 61 Mar Balances of cash and bank were £106 and £3,214 (Dr) respectively2 Mar Drew cheque number 10674, for rent of £2503 Mar Sales totalled £1,050, of which £950 was banked on the same day5 Mar Paid cleaning expenses of £35 from cash8 Mar Sales banked £1,6809 Mar Drew cheque number 10675, for purchases costing £1,200

11 Mar Drew cheque number 10676 for £150, to replenish office cash13 Mar Cash from sales totalling £1,800 was banked16 Mar Paid postage of £50 from cash18 Mar Drew cheque number 10677 for £168, to pay a telephone bill20 Mar Paid £128 for stationery from cash22 Mar Drew cheque number 10678 for £150, to replenish office cash25 Mar Cash from sales totalling £2,108 was banked26 Mar Paid office expenses of £70 from cash27 Mar Drew cheque number 10679 for £2,000, to pay wages29 Mar Income from sales totalled £2,200, of which £2,000 was banked on the same day30 Mar Drew cheque number 10680 for £106, to pay a gas bill31 Mar Drew cheque number 10681 for £855 payable to D Coyne, in settlement of a debt of

£90031 Mar Drew cheque number 10682 for £494 payable to F Cox, in settlement of a debt of

£52031 Mar Received cheque for £720 from S Britton, in settlement of an amount of £75031 Mar Received cheque for £1,160 from D F Pratt, in settlement of an amount of £1,210

RequiredWrite up the 3-column Cash Book, bringing down the balances at 1 April Year 6.

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232

T/10.3

On 1 November Year 4, the Cash Book of T Jackson, a sole trader, showed a debit balanceof cash in hand of £34 and a credit balance on bank account of £287.

Jackson prepared the Cash Book by entering the cheque-book counterfoils directly fromthe bank paying-in book and by entering from a record of movements of cash in the office.For the month of November Year 4, these showed respectively:

(1) Bank paying-in book

£7 Nov Cheque – K Lawton 153

12 Nov Cash banked 42519 Nov Cheque – N West 37324 Nov Cash banked 42029 Nov Cash banked 360

(2) Cheque-book counterfoils

£8 Nov B Thwaites 423

14 Nov Electricity account 4618 Nov T Smith 32722 Nov Telephone account 6826 Nov C Lord 197

(3) Record of movements of cash

£11 Nov Cash sales 46023 Nov Cash sales 44029 Nov Cash sales 51030 Nov Taken for personal use 140

All these transactions were entered by Jackson. He then received the bank statement, whichshowed the following additional items for November Year 4:

11 Nov Standing order payment: subscription to local trade association £2515 Nov T Drummond, a debtor of Jackson, settled his account by credit transfer £23621 Nov The account for servicing the heating system in Jackson’s office was settled by

direct debit £5429 Nov Jackson instructed the bank to pay monthly salary direct into an employee’s bank

account £340

RequiredPrepare the cash and bank columns of Jackson’s Cash Book for November Year 4, enteringthe information given in (1) to (3) above and balancing the cash and bank columns.Thenrecord the additional items obtained from the bank statement, showing the final balance atthe end of November.

(LCCIEB)

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233

T/10.4

Ket Rampalla owns a small catering business. On 1 May Year 11, there was a credit balanceof £345 in the bank column of his Cash Book.

During May Year 11, he paid the following cheques into his bank account:

Amount of Cash discountcheque allowed

£ £3 May Keston Services 242 18

12 May F Savage 83 –19 May Quantell Ltd 156 726 May L Wright 95 –

He also paid the following amounts from cash sales into his bank account:£

6 May 58513 May 61420 May 60327 May 526

He received the following remittances, which were paid directly into his bank account:£

14 May From Westerns Ltd 18022 May From Dugard & Wells 76

During the month, he drew the following cheques:Amount of Cash discount

In favour of cheque received

£ £5 May Malata Foods 507 25

11 May Kentish Supplies 335 –15 May Ambrostic Dairies 261 821 May Kenton Electricals 68 –28 May Malata Foods 283 14

In addition, the following took place:£

(1) 18 May Payment by direct debit to Wombles Linen Services 63(2) 19 May Bank charges 36(3) 23 May Payment by standing order of annual subscription to

Caterers’ Association 40(4) 29 May Bank interest charged 24

Required

(a) Prepare the bank and discount columns of the Cash Book of Ket Rampalla for May Year 11, in date order, and balance the Cash Book at 31 May.

(b) Open the ledger accounts and post the totals of the discount columns of the Cash Book.Include in your answer the name of the ledger in which the posting would be made.

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234

T/11.1

From the following details, you are to:

(a) enter the transactions in the Sales Day Book;

(b) post the items to relevant accounts in the Sales Ledger;

(c) record the transfer to the Sales Account in the General Ledger at the end of the month.

Year 6 Credit sales to Invoice no £

2 Aug F Dene 3,516 2585 Aug T Marchant 3,517 312

12 Aug P Drummond 3,518 40618 Aug T Marchant 3,519 19423 Aug F Dene 3,520 42529 Aug S Field 3,521 538

T/11.2

From the following details, you are to:

(a) enter the items in the Sales Day Book;

(b) post the items to the relevant accounts in the Sales Ledger;

(c) record the transfer to the Sales Account in the General Ledger at the end of the month.

Invoice List TradeYear 6 Credit sales to no price discount

£ £ %4 Sep J Burton 5,839 320 121/2

9 Sep W Thorne 5,840 460 1515 Sep A Glenn 5,841 240 71/2

22 Sep J Burton 5,842 580 2026 Sep W Thorne 5,843 360 121/2

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235

T/11.3

From the following details, you are required to:

(a) enter the items in the Purchases Day Book;

(b) post the items to the relevant accounts in the Purchases Ledger;

(c) record the transfer to the Purchases Account in the General Ledger at the end of themonth.

Credit purchases Invoice List TradeYear 8 from no* price discount

£ %3 Oct T Slocombe B361 190 108 Oct J Barnaby 1634 370 20

12 Oct K Linden 958 240 121/2

17 Oct R Tredgarth A179 420 2024 Oct J Barnaby 2583 860 2529 Oct T Slocombe B398 320 15

* The invoice numbers are those provided by each supplier.

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T/11.4

The Cash Book balances of Rachel McLeod at 30 June Year 2 were:

Cash £100Bank £850 (Dr)

In July Year 2, she had the following transactions:

Date Details

Year 22 Jul Drew cheque number 554 for telephone expenses of £2244 Jul Paid sundry expenses in cash, £456 Jul Cash sales of £750, £650 of which was paid into the bank7 Jul Drew cheque number 555 for electricity, £145

10 Jul Drew cheque number 556 for purchases, £65011 Jul Received cheque from J Royle for £880, in settlement of a debt of £90013 Jul Cash sales totalled £8015 Jul Drew cheque number 557, payable to N Henry for £480 to settle an account of £50018 Jul Cash sales totalled £440, £400 of which was paid into the bank20 Jul Paid travelling expenses in cash, £1221 Jul Drew cheque number 558, payable to D Beckford for £240 to settle an account of

£25023 Jul Drew cheque number 559 for insurance, £44224 Jul Received and banked cheque from G Halle for £360 in settlement of a debt of £37028 Jul Drew cheque number 560 for drawings of £40029 Jul Received and banked cheque from R Holden for £620 in settlement of a debt of £65030 Jul Cash sales totalling £950 were banked the same day

RequiredIn Rachel McLeod’s Cash Book, enter the balances at 1 July Year 2 and the transactions forthe month of July, bringing down the balances at 1 August Year 2.

(LCCIEB)


236

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T/12.1


(a) enter the transactions in:

(i) the Sales Day Book(ii) the Returns Inwards Day Book;

(b) post to the relevant accounts in the Sales Ledger;

(c) show the transfers to the General Ledger.

Year 35 Dec Credit sales of £196 to S Preen 8 Dec Credit sales of £430 to M Quant

11 Dec Goods worth £38 returned by S Preen18 Dec Credit sales of £287 to M Quant21 Dec Goods worth £53 returned by M Quant23 Dec Credit sales of £392 to R Robson30 Dec Goods worth £61 returned by M Quant

T/12.2


(a) enter the transactions in:

(i) the Purchases Day Book(ii) the Returns Outwards Day book;

(b) post to the relevant accounts in the Purchases Ledger;

(c) show the transfers to the General Ledger.

Year 63 May Credit purchases of £254 from L Squires7 May Credit purchases of £385 from N Neale

12 May Goods worth £37 returned to L Squires 19 May Credit purchases of £138 from N Neale24 May Goods worth £72 returned to N Neale28 May Credit purchases of £364 from T Roberts


237

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T/12.3


(a) enter the transactions in the Purchases, Sales, Returns Outwards and Returns InwardsDay Books;

(b) post the items to the personal accounts in the Purchases and Sales Ledgers; and

(c) record the transfer to appropriate accounts in the General Ledger at the end of OctoberYear 6.

Year 63 Oct Credit purchase from R Varney, at a list price of £480, subject to a trade discount

of 121/2%5 Oct Credit sale to K Petts at a list price of £420, subject to a trade discount of 15%8 Oct Returned goods to R Varney with a list price of £64

11 Oct Credit sale to J Beaver at a list price of £560, subject to a trade discount of 20%15 Oct K Petts returned goods with a list price of £12017 Oct Credit purchase of £296 from T Langton19 Oct J Beaver returned goods with a list price of £9021 Oct Credit sale to K Petts at a list price of £680, subject to a trade discount of 20%24 Oct Credit purchase from R Varney at a list price of £320, subject to a trade discount

of 15%27 Oct Returned goods worth £37 to T Langton30 Oct Returned to R Varney, goods bought on 24 October Year 6 at a list price of £40

NoteThe entry about the returns to R Varney on 8 October refers back to the purchase of 3 October, ie a discount rate of 121/2% must be applied to the returns. The entry concerning returns to R Varney on 30 October is related to the purchase on 24 October;therefore, a trade discount of 15% must be applied to the returns.


238

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T/12.4

During the month of January Year 4, Lung Kwok had the following transactions:

5 Jan Bought goods on credit from T Brown with a list price of £720, subject to a tradediscount of 25%

7 Jan Sold goods on credit to B Stevens for £340, subject to a cash discount of 5%, if paid within 10 days

12 Jan Bought goods from F Robins with a list price of £420, subject to a trade discount of 20% and a cash discount of 5%, if paid within 14 days

17 Jan Sold goods to J New for £580, subject to a trade discount of 25% and a cashdiscount of 3%, if paid within 10 days

18 Jan Paid cheque to F Robins, in full settlement, for goods bought on 12 January22 Jan Received cheque from J New, in full settlement, for goods sold on 17 January22 Jan Bought goods from P Harper with a list price of £840, subject to a 331/3% trade

discount and a cash discount of 21/2%, if paid within 14 days23 Jan Sold goods to K Burton for £660 less a trade discount of 15% and a cash discount

of 5%, if paid within 10 days25 Jan Paid cheque to T Brown, in full settlement, for goods bought on 5 January30 Jan Received cheque from B Stevens, in full settlement, for goods bought on 7 January

Required

(a) Enter the above transactions in Lung Kwok’s Purchases Day Book, Sales Day Book andPurchases Returns Day Book and show the Cash Book entries.

(b) Why do traders allow cash discount?


239

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T/12.5

T Riggan is a sole trader and has a sports goods shop. She regularly purchases goods oncredit. Each of her suppliers grants a trade discount of 5% if the value of a transactionexceeds £2,000.

She made the following credit purchases in May Year 8:

Gross purchases Date Supplier value

£8 May M Boyce 3,000

12 May B Jones 1,80015 May C Smith 4,20022 May S Morris 3,70023 May M Boyce 1,80026 May C Smith 1,200

During May, Riggan had to return some of the goods to her suppliers.The returns were asfollows:

Gross purchasesDate Supplier value

£14 May B Jones 30022 May S Morris 50027 May M Boyce* 200

* relating to goods purchased on 23 May

M Boyce also offers a 2% cash discount if Riggan pays the account by the end of the month.Riggan pays this account monthly to take advantage of the cash discount.

Required

(a) Prepare the Purchases Day Book for May.

(b) Prepare the Purchases Account and the Purchases Returns Account for May, showingthe transfer to the Trading Account.

(c) Prepare the personal account of M Boyce for the month of May. Assume that there was a nil balance at the beginning of the month.

(LCCIEB)


240

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T/13.1*

On 1 January Year 4, the following were 3 of the account balances in E Parker’s ledger:

£Rent 230 DrInsurance 65 DrAdvertising 110 Cr

During the year ended 31 December Year 4, he paid the following amounts by cheque:

£31 Jan Advertising 11028 Feb Rent 46031 May Rent 69031 Aug Rent 69031 Aug Insurance 18030 Sep Rent 250

Additional information:

(1) The monthly rent was increased to £250 from 1 October Year 4.(2) An advertising bill amounting to £85 had not been paid by 31 December Year 4.(3) The insurance premium paid on 31 August Year 4 covered the year ended 31 August

Year 5.

RequiredPrepare accounts in the ledger of E Parker for the year ended 31 December Year 4, for:

(i) rent(ii) insurance(iii) advertising.

Give particular attention to dates, and show, in each account, the transfer to the Profit &Loss Account for the year ended 31 December Year 4.

(LCCIEB)


241

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T/13.1/A

Rent

Year 4 £ Year 4 £1 Jan Balance b/d 230 31 Dec Profit & loss 2,820

28 Feb Bank 46031 May Bank 69031 Aug Bank 69030 Sep Bank 25031 Dec Balance c/d 500

2,820 2,820


Insurance


31 Aug Bank 180 31 Dec Balance c/d 120

245 245


Advertising

Year 4 £ Year 4 £31 Jan Bank 110 1 Jan Balance b/d 11031 Dec Balance c/d 85 31 Dec Profit & loss 85

195 195



242

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243

T/13.2*

The following details are from the books of Melville & Co for the year ended 30 SeptemberYear 9:

£Sales 279,300Purchases 118,650Stock at 1 Oct Yr 8 20,470Stock at 30 Sep Yr 9 17,320Wages and salaries 83,540Heating and lighting 2,530Rent and rates 9,860Motor-vehicle expenses 11,940Office expenses 3,970

In addition, at 30 September Year 9:

● wages and salaries owing amount to £620● rent payable accrued due, £250● rates prepaid amount to £180● heating and lighting accrued due, £60● office stationery is in stock amounting to £380.

RequiredPrepare for Melville & Co a Trading and Profit & Loss Account for the year ended 30 September Year 9.

T/13.2/AMelville & Co

Trading and Profit & Loss Accountfor the year ended 30 September Year 9

£ £Stock at 1 Oct Yr 8 20,470 Sales 269,300Purchases 118,650

139,120less Stock at 30 Sep Yr 9 17,320

Cost of goods sold 121,800Gross profit 147,500

269,300 269,300

Wages and salaries (+620) 84,160 Gross profit b/d 147,500Heating and lighting (+60) 2,590Rent and rates (+250-180) 9,930Motor-vehicle expenses 11,940Office expenses (-380) 3,590Net profit 35,290

147,500 147,500

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244

T/13.3*

The following are details relating to N Tulloch’s Rent Payable Account:

Year 530 Jun Balance on the account of £300, representing 2 months’ rent paid in advance8 Sep Paid £450 by cheque, being rent for the 3 months ended 30 November Year 5

27 Nov Paid £720 by cheque, being rent for the 4 months ended 31 March Year 6

Year 69 Apr Paid £360 by cheque, being rent for the 2 months ended 31 May Year 6

RequiredPrepare for N Tulloch the Rent Payable Account for the year ended 30 June Year 6. Balancethe account at the year end and show the transfer to the Profit & Loss Account.

T/13.3/A

N TullochRent Payable

Year 5 £ Year 6 £1 Jul Balance b/f 300 30 Jun Profit & loss 2,0108 Sep Bank 450

27 Nov Bank 720

Year 69 Apr Bank 360

30 Jun Balance c/d 180

2,010 2,010

1 Jul Balance b/d 180

The transfer to the Profit & Loss Account is calculated as:

£5 months at £150 = 7507 months at £180 = 1,260

2,010

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245

T/13.4*

Tan Lian, a sole trader, had the following account balances on 1 January Year 5:

£Insurance 70 DrOffice expenses 160 DrRent payable 240 Cr

During Year 5, the following payments were made by cheque:

Year 526 Jan Office expenses: purchase of stationery, £63 9 Feb Rent for 4 months ended 31 March Year 5, £960

25 Feb Insurance for 6 months ended 31 August Year 5, £21012 Apr Office expenses, £928 Jun Rent for 4 months ended 31 July Year 5, £1,040

25 Aug Insurance for 6 months ended 28 February Year 6, £2406 Nov Rent for 4 months ended 30 November Year 5, £1,040

11 Dec Office expenses, £280

At 31 December Year 5, there was a stock of stationery valued at a cost of £90.There wasno further increase in the monthly charge for rent in December Year 5.

RequiredOpen the 3 accounts listed above and enter the transactions that occurred in Year 5. Balancethe accounts and make the appropriate transfers to the Profit & Loss Account for the yearended 31 December Year 5.

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T/13.4/A

Tan LianInsurance


25 Feb Bank 210 31 Dec Balance c/d 8025 Aug Bank 240

520 520

Year 61 Jan Balance b/d 80 Check profit & loss transfer:

Sep–Dec 4 months 160*

440

* £40 per month

Office Expenses


26 Jan Bank 63 31 Dec Balance c/d 9012 Apr Bank 9211 Dec Bank 280

595 595


Rent Payable

Year 5 £ Year 5 £9 Feb Bank 960 1 Jan Balance b/d 2408 Jun Bank 1,040 31 Dec Profit & loss 3,0606 Nov Bank 1,040


3,300 3,300


£Check profit & loss transfer:Jan–Mar (960 × 3/4) 720 £240 per month

£260 per month

3,060


246

Apr–July 1,040Aug–Nov 1,040Dec (1,040 × 1/4) 260

Jan–Feb 2 months 70Mar–Aug 6 months 210

£35 per

month

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247

T/14.1

M Paine, a sole trader, is about to prepare his final accounts. As book-keeper, you need toadjust the figures shown in certain accounts.

M Paine’s financial year ends on 31 December Year 5.At that date, certain accounts carrythe following balances:

£Rates 1,960 (Dr)Telephone 215 (Dr)Insurance 760 (Dr)Rent receivable 3,840 (Cr)Wages 45,630 (Dr)

You ascertain the following information relating to the accounts above.

(1) Rates – included in the Rates Account is a payment of £900 for the half-year to 31 March Year 6.

(2) Telephone – the amount accrued due, not yet paid to 31 December Year 5, is £47.

(3) Insurance – a premium of £720 paid for the year to 31 January Year 6 is included inthe Insurance Account.

(4) Rent receivable – the tenant owes £160 for rent outstanding at 31 December Year 5.

(5) Wages – the amount accrued due at 31 December Year 5 was £840.

Required

(a) Open these accounts, enter the balances given, deal with the accrual or prepaymentas necessary, and show the transfers to the Profit & Loss Account.

(b) Show how any remaining balances on the above accounts would appear in the balancesheet of M Paine at 31 December Year 5.

(LCCIEB)

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T/14.2

L Reinholdt is a theatrical agent whose accounting year ends on 31 December. He providesthe following details for the year ended 31 December Year 10:

(1) On 1 January, 3 months rent had been paid in advance – £1,200.On 1 April, he paid 6 months rent in advance – £2,400.On 1 October, he paid rent for the 6 months ending 31 March Year 11 – £2,700.

(2) On 1 January, commission due to Reinholdt, and not yet received, amounted to £3,200.January–December: commission received – £64,300.At 31 December, commission due and not yet received in respect of Year 10 amountedto £4,700.

(3) On 1 January, the estimated amount outstanding on the Telephone Account was £320.On 31 March, he paid the telephone bill in respect of the previous 6 months, £510.On 30 September, he paid the telephone bill in respect of the previous 6 months, £520.On 31 December, the estimated amount outstanding on the Telephone Account was£300.

Required

(a) Prepare the following accounts for Reinholdt for the year ended 31 December Year 10:

(i) Rent Account(ii) Commission Receivable Account(iii) Telephone Account.

(b) Prepare a balance sheet extract for Reinholdt at 31 December Year 10, showing howthe 3 balances would appear.

(LCCIEB)


248

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249

T/14.3*

At 1 January Year 8, L Johnston, a trader, owed £320 for rent, but her rates were prepaid by£110. During Year 8, she made the following payments by cheque:

Rent£

2 Apr 60028 Sep 630

Rates7 Apr 1605 Oct 180

At 31 December Year 8 there was accrued rent of £350 and rates were prepaid by £120.

RequiredPrepare L Johnston’s combined Rent & Rates Account for Year 8, showing the transfer tothe Profit & Loss Account and the account fully balanced.

T/14.3/A

In the books of L Johnston:

Rent & Rates

Year 8 £ Year 8 £1 Jan Balance b/d (rates) 110 1 Jan Balance b/d (rent) 3202 Apr Bank (rent) 600 31 Dec Profit & loss 1,590*7 Apr Bank (rates) 160

28 Sep Bank (rent) 6305 Oct Bank (rates) 180

31 Dec Balance c/d (rent) 350 31 Dec Balance c/d (rates) 120

2,030 2,030

Year 9 Year 91 Jan Balance b/d 1 Jan Balance b/d (rent) 350

(rates) 120

* rent £1,260rates £330

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250

T/14.4

The following information relates to some of the expense and income accounts of Jan Goldsmith for the year ended 31 December Year 5:

£InsurancePaid by cheque 23 Feb Yr 5 630Prepaid 31 Dec Yr 4 85Prepaid 31 Dec Yr 5 95

StationeryPaid by cheque 19 Mar Yr 5 765Stock 31 Dec Yr 4 130Stock 31 Dec Yr 5 160Owing to stationery suppliers 31 Dec Yr 5 45

TelephonePaid by cheque 11 Jun Yr 5 295Paid by cheque 4 Dec Yr 5 285Owing 31 Dec Yr 4 64Owing 31 Dec Yr 5 56

Rent payablePaid by cheque 16 Feb Yr 5 2,160Paid by cheque 12 Aug Yr 5 2,510Owing 31 Dec Yr 4 360Prepaid 31 Dec Yr 5 740

Rent receivableReceived by cheque 31 Mar Yr 5 450Received by cheque 30 Sep Yr 5 375Owing 31 Dec Yr 4 75Owing 31 Dec Yr 5 150

Required

(a) Prepare the 5 ledger accounts, incorporating the information given above, for the yearended 31 December Year 5. In each account, show the transfer to the Profit & Loss Account and bring down the balance(s) at 1 January Year 6.

(b) Show how the balances on the accounts would be displayed in Jan Goldsmith’s balancesheet at 31 December Year 5.

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251

T/14.5

In the books of Frank Napier, a sole trader, the following account balances were broughtforward on 1 July Year 4:

£Advertising 260 (Cr)Insurance 40 (Dr)Office cleaning 260 (Cr)Rent receivable 350 (Dr)

During the year ended 30 June Year 5, the following amounts were paid by cheque:

Year 4 £25 Jul Office cleaning (3 months to 31 Jul Yr 4) 3901 Aug Insurance premium (6 months to 31 Jan Yr 5) 2705 Sep Advertising 260

24 Oct Office cleaning (3 months to 31 Oct Yr 4) 390

Year 526 Jan Office cleaning (3 months to 31 Jan Yr 5) 4201 Feb Insurance premium (6 months to 31 Jul Yr 5) 3008 Mar Advertising 210

21 Apr Office cleaning (3 months to 30 Apr Yr 5) 420

The following amounts were received by cheque during the year ended 30 June Year 5:

Year 4 £17 Aug Rent (1 May – 31 Aug Yr 4) 7003 Oct Rent (1 Sep – 31 Oct Yr 4) 350

15 Dec Rent (1 Nov – 31 Dec Yr 4) 380

Year 512 Jan Advertising (part refund) 403 Mar Rent (1 Jan – 31 Mar Yr 5) 570

19 May Rent (1 Apr – 31 Jul Yr 5) 760

Frank Napier was aware that, at the end of his financial year, 30 June Year 5, there was anoutstanding advertising bill for £190 and 2 months’ payment outstanding on the officecleaning account, at £140 per month.

Required

(a) Open the following accounts:

(i) Advertising(ii) Insurance(iii) Office Cleaning(iv) Rent Receivable.

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(b) Post the various items to the accounts.

(c) Show the transfer entries to the Profit & Loss Account for the year ended 30 June Year 5.

(d) Balance the accounts at 30 June Year 5.

NoteYou are not required to show the Profit & Loss Account.

T/14.6

The following information is from the books of Enterprise Services in respect of the yearended 30 June Year 9:

Rent Receivable

Year 8 £1 Jul 3 months’ rent prepaid 6301 Oct 8 months’ rent received by cheque 1,260

Year 91 Apr 6 months’ rent received by cheque at revised

rate of £2,960 per annum 1,480

Rates

Year 81 Jul 3 months’ rates prepaid 7801 Oct Paid 6 months’ rates by cheque 1,680

Year 91 Apr Paid 6 months’ rates by cheque 1,680

Advertising

Year 81 Jul Accrued due 370

28 Aug Paid by cheque 1,250

Year 915 May Paid by cheque 2,100

Printing and Stationery

Year 81 Jul Stock of stationery 3,400

14 Sep Purchased stationery by cheque 850

Year 912 Feb Paid printing account by cheque 420


252

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At 30 June Year 9:

(1) Payments for advertising during the year included £580 for poster advertising that wasdue to be carried out in August Year 9.

(2) The stock of stationery was valued at £3,100. There was also an unpaid invoice for£615 for printing.

Required

(a) Prepare the following accounts for the year ended 30 June Year 9, including transfers to the Profit & Loss Account and year-end balances.

(i) Rent Receivable(ii) Rates(iii) Advertising(iv) Printing and Stationery

(b) Show, in the form of a balance sheet extract, how the balances on these accountswould appear at 30 June Year 9.

T/15.1

Jack Millard commenced business on 1 January Year 3 and on that date purchased a motorvehicle for £10,400.

On 31 December Year 3, he wished to determine the depreciation expense for the year justcompleted. He is unsure whether to use the:

(a) straight line method – the vehicle would have a 3-year life with an estimated resalevalue of £4,100;

(b) reducing balance method – using a rate of 40% on cost.

RequiredTo help Jack Millard decide between the 2 methods, draw up and complete the followingtable:

Depreciation charge inProfit & Loss Accountfor the year ended Net book value31 Dec Year 3 at 31 Dec Year 3£ £

Method(a)(b)


253

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T/15.2

Charles Day started a business on 1 January Year 4. On that date, he purchased by chequea motor van costing £9,600 from Greenaway Motors Ltd. He decided to depreciate thisasset, using the rate of 40% per annum on the reducing balance method. He also purchased,on the same day, on credit, fixtures and fittings costing £15,000 from P J Shop Fitters Ltd.He decided to depreciate these fixtures and fittings using the straight line method. Heestimated that they would have a useful life of 15 years, and would have a scrap value of£2,100.

He kept the asset accounts at cost, and used a provision for depreciation account for eachasset.

RequiredPrepare for Charles Day the following accounts for each of Years 4, 5, 6, and 7:

(i) Motor Van(ii) Provision for Depreciation of Motor Van (showing calculations to the nearest £)(iii) Fixtures and Fittings(iv) Provision for Depreciation of Fixtures and Fittings.

(LCCIEB)

T/15.3

RequiredWith reference to T/15.2, prepare an extract to show how both assets would appear inCharles Day’s balance sheet at 31 December Year 7.

(LCCIEB)


254

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T/15.4

On 8 February Year 5, Southern Stores bought a computer for use in the office, paying£8,600 by cheque. It was decided to provide for depreciation by use of the straight linemethod. It was estimated that, at the end of 5 years, the residual (scrap) value would be£600.

On 12 September Year 5, Southern Stores purchased a motor vehicle for use in the business,paying £10,000 by cheque. The vehicle was to be depreciated at the rate of 40% perannum, using the reducing balance method.

The business retained the asset accounts at cost and dealt with depreciation using a separateProvision for Depreciation Account for each asset.The financial year ends on 31 December.Any asset purchased in the first 6 months of a year has a whole year’s depreciation provided, while any asset purchased in the second half of the year has only half a year’sdepreciation written off.

Required

(a) Prepare the following accounts for the years ended 31 December Years 5, 6, and 7:

(i) Computer Equipment(ii) Provision for Depreciation of Computer Equipment(iii) Motor Vehicle(iv) Provision for Depreciation of Motor Vehicle.

(b) Show a balance sheet extract at 31 December Year 7 for both the Computer Equipmentand Motor Vehicle Accounts.

(LCCIEB)


255

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T/15.5

D Amos purchased fixtures and fittings for £6,000 by cheque on 1 January Year 3. On 1 Julyof the same year, he purchased by cheque a motor vehicle for £18,000. He decided todepreciate his fixed assets as follows:

(1) Fixtures and fittings – using the straight line method. He estimated that they wouldhave a working life of 8 years, with a residual (scrap) value of £1,000.

(2) Motor vehicle – using the reducing balance method. He set the rate at 40% on reducing balance each full year.

He kept the asset accounts at cost and kept accumulated depreciation of each type of assetin a separate Provision for Depreciation Account. Assets acquired during the year weredepreciated from the date of purchase.

RequiredIn the books of D Amos, prepare the following accounts for the 3 financial years ended 31 December Year 3,Year 4, and Year 5, balancing the accounts at the end of each year:

(i) Fixtures and Fittings(ii) Provision for Depreciation of Fixtures and Fittings(iii) Motor Vehicle(iv) Provision for Depreciation of Motor Vehicle.

(LCCIEB)

T/15.6

On 1 January Year 4, Frank Saunders purchased furniture and equipment by cheque for£11,000. He decided to provide for depreciation on this asset using the straight linemethod over 8 years. He estimated that the scrap value at the end of that time would be£600.

On 14 February Year 4, he purchased a motor van by cheque for £8,400, for use in thebusiness. He decided to provide for depreciation on this asset at the rate of 40% per annum,using the reducing balance method. He allowed a full year’s depreciation in the year of purchase and calculated the depreciation to the nearest £.

On 31 December Year 6, he sold the motor van for £3,200 and was paid by cheque.

His practice is to record and leave the asset accounts at cost and to accumulate the depreciation in a Provision for Depreciation Account for each asset. His financial year endson 31 December.


256

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RequiredIn the books of Frank Saunders, open the following accounts and enter the transactions forthe years ended 31 December Years 4, 5, and 6:

(i) Furniture and Equipment(ii) Provision for Depreciation of Furniture and Equipment(iii) Motor Van(iv) Provision for Depreciation of Motor Van(v) Disposal of Motor Van.

(LCCIEB)

T/16.1

F Openshaw submitted the following information at 31 March for Years 4, 5, and 6:

Total debtorsbefore writing off Bad debts

Date bad debts to be written off

£ £31 MarYr 4 18,640 F Dale 117

T Wylie 163

31 MarYr 5 20,835 G Block 315

31 MarYr 6 17,694 A Dolt 78

E Fox 216

Openshaw provides for doubtful debts at the rate of 21/2% of the remaining debtors at theend of each financial year. At 31 March Year 3, the provision for doubtful debts was £380.

Required

(a) In the books of F Openshaw,prepare the following accounts for the years ended 31 MarchYears 4, 5, and 6, including the transfers to the Profit & Loss Account at the end of eachfinancial year:

(i) Bad Debts(ii) Provision for Doubtful Debts.

(b) Show extracts from the balance sheets of F Openshaw at 31 March Years 4, 5, and 6,placing debtors under current assets.

(LCCIEB)


257

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T/16.2

(a) It is the practice of Coniston & Son to write off bad debts as they occur and to provide for doubtful debts. For the 3 years from the commencement of business to 31 December Year 3, the following information is available:

At year ended 31 December:

Year 1 Year 2 Year 3£ £ £

Balance of debtors before writing off bad debts 47,800 76,300 91,400

Bad debts to be written off 800 1,100 1,500

Provision for doubtfuldebts, as a percentageof debtors 3% 4% 2%

Required(i) Prepare the following accounts for Years 1, 2, and 3, showing the transfers to the

Profit & Loss Account at the end of each year:

● Bad Debts● Provision for Doubtful Debts.

(ii) Show the balance sheet extract in respect of debtors at 31 December each year.

(b) On 7 June Year 4, Coniston & Son received a payment of £129 from S Atkins for anoutstanding debt of £320. Coniston wrote off the balance as a bad debt.

RequiredShow the account of S Atkins in Coniston’s ledger.


258

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T/16.3*

At 31 December Year 8,AB & Co has debtors totalling £42,560.Debts amounting to £760have yet to be written off as bad. A specific provision is to be created covering in full thefollowing debts:

D £620E £570F £710

A general doubtful debts provision of 4% of remaining debts is also to be created. Noprovision exists as yet.

Required

(a) Show in a statement:

(i) how the 2 provisions are calculated(ii) the amount of net debtors.

(b) Show as an extract how the item ‘debtors’ would appear in the balance sheet of AB & Coat 31 December Year 8.

T/16.3/A

(a) Calculation of debt provisions

£Gross debtors 42,560less Bad debts written off 760

41,800

less Specific provision: D 620E 570F 710 1,900

39,900less General provision at 4% 1,596

Net debtors 38,304

(b) AB & CoBalance sheet (extract)at 31 December Year 8

£ £Current assetsDebtors 41,800less Provision for bad and

doubtful debts 3,496 38,304


259

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T/16.4

Donald Lisher, a sole trader, maintains a provision for doubtful debts that he adjusts at theend of each financial year.At 1 January Year 8, the balance on the account was £860.

The following additional information is available:

Bad debtswritten off Debtor year-end Provision for

Year ended during year balances doubtful debts£ £ %

31 Dec Yr 8 1,235 25,300 431 Dec Yr 9 1,640 29,600 631 Dec Yr 10 1,320 28,800 5

On 12 October Year 10, Donald Lisher received a cheque for £240 in respect of a debtwhich had been written off in Year 9.

Required

(a) From the above information, prepare for the years ended 31 December Years 8, 9,and 10:

(i) the Bad Debts Account, including the closing entries;(ii) the Provision for Doubtful Debts Account, showing the balance carried forward

each year.

(b) Show, in a brief statement, the entries which would be made in the books of Donald Lisher to record the recovery of £240 for the debt written off in Year 9.

NoteBad debts written off should not be taken to the Provision for Doubtful Debts Account.


260

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261

T/16.5

The accounting year of R Cleaver, a trader, ends on 31 December.At 31 December Year 3,his trade debtors amounted to £37,500 and he had a provision for doubtful debts amountingto 2% of debtors.

During Year 4, Cleaver wrote off debts as follows:

(1) The whole of the debt of £460, due from L Paul, was written off as irrecoverable on15 August Year 4.

(2) Another debtor, K Sang, who owed £220, paid a contribution of 25%; the balance wasimmediately written off as irrecoverable on 26 November Year 4.

At 31 December Year 4, debtors amounted to £41,000 and the provision for doubtful debts was adjusted to 2.5% of this figure.

In Year 5, bad debts written off amounted to £560. In addition, on 20 October, K Sangpaid the balance of his debt, which had been written off in Year 4. It was the practice ofCleaver to keep a Bad Debts Recovered Account for recording debts recovered in a yearfollowing the one in which they were written off.

At 31 December Year 5, debtors amounted to £39,000 and the Provision for DoubtfulDebts was adjusted to 2% of this figure.

RequiredPrepare the following accounts to include the above information relating to the yearsended 31 December Year 4 and 31 December Year 5:

(i) L Paul(ii) K Sang(iii) Bad Debts(iv) Provision for Doubtful Debts(v) Bad Debts Recovered.

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T/17.1

The following information is available in respect of A Wolfson, a trader:

CASH BOOK (bank only)

Year 5 £ Year 5 £1 Sep Balance b/f 2,806 4 Sep Purchases (915) 2345 Sep Sales 1,020 9 Sep Wages (916) 635

10 Sep T Swithin 857 16 Sep N Victor (917) 52615 Sep Sales 1,370 24 Sep Rent (918) 37023 Sep K Smart 524 26 Sep Wages (919) 68025 Sep T Hunt 413 27 Sep N Hills (920) 41628 Sep Sales 1,245 29 Sep S Twitchin (921) 285

30 Sep Purchases (922) 54030 Sep Balance ?

Bank statement

Paid out Paid in Balance

Year 5 £ £ £1 Sep Balance 2,806 Cr7 Sep Cash: 915 234 2,572 Cr9 Sep Credit 1,020 3,592 Cr

12 Sep Cash: 916 635 2,957 Cr15 Sep Credit 857 3,814 Cr17 Sep Credit transfer – P Mott 271 4,085 Cr19 Sep Credit 1,370 5,455 Cr21 Sep Standing order – Minster 96 5,359 Cr

Publications23 Sep Credit transfer – T Lennox 870 4,489 Cr26 Sep Direct debit – Insurance 230 4,259 Cr28 Sep Cash: 919 680 3,579 Cr30 Sep Bank interest 8 3,587 Cr

Required

(a) Calculate the missing balance in the Cash Book and enter it in your answer book asthe balance brought down at 30 September Year 5.

(b) Bring the Cash Book up to date by entering in it the items you consider appropriatefrom the bank statement. Balance the Cash Book and bring down the new balance at1 October Year 5.

(c) Prepare the bank reconciliation statement at 30 September Year 5.


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T/17.2

The following is a copy of F Holme’s Cash Book for April Year 5:

CASH BOOK

ChequeBank no Bank

Year 5 £ Year 5 £1 Apr Balance b/d 3,240 3 Apr Purchases 10648 1,0604 Apr Sales 1,250 6 Apr Rates 10649 650

10 Apr Sales 2,610 9 Apr Electricity 10650 19616 Apr Sales 1,925 12 Apr Purchases 10651 1,40024 Apr Sales 1,368 15 Apr Telephone 10652 24528 Apr Sales 1,701 18 Apr Stationery 10653 9830 Apr F Tait 450 20 Apr Travelling 10654 7230 Apr Sales 1,116 25 Apr Salary 10655 1,057

27 Apr G Stewart 10656 74629 Apr D Usher 10657 2,36029 Apr Fixtures 10658 2,20030 Apr Balance c/d 3,576

13,660 13,660

1 May Balance b/d 3,576

He received the following bank statement for April Year 5:

Bank statement

Date Details Paid out Paid in Balance

Year 5 £ £ £1 Apr Balance 3,240 Cr3 Apr Cash: 10648 1,060 2,180 Cr4 Apr Standing order –

Insurance Co 260 1,920 Cr5 Apr Credit 1,250 3,170 Cr9 Apr 10649 650 2,520 Cr

11 Apr Credit 2,610 5,130 Cr12 Apr 10651 1,400 3,730 Cr13 Apr 10650 196 3,534 Cr16 Apr Direct debit – Water 50 3,484 Cr17 Apr Credit 1,925 5,409 Cr19 Apr 10652 245 5,164 Cr22 Apr Credit transfer –

John Bates 360 5,524 Cr23 Apr 10654 72 5,452 Cr25 Apr Credit 1,368 6,820 Cr27 Apr Dividends 400 7,220 Cr29 Apr 10655 1,057 6,163 Cr30 Apr Credit 1,701 7,864 Cr30 Apr Charges 60 7,804 Cr


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Required

(a) Starting with the balance of £3,576, bring F Holme’s Cash Book up to date by postingto it the items you consider appropriate from the bank statement. Balance the CashBook and bring down the new balance on 1 May Year 5.

(b) Prepare a bank reconciliation statement at 30 April Year 5, commencing with thebank statement balance of £7,804.

(LCCIEB)

T/17.3

The following information relates to the business of M Rhodes:

Bank statement at 30 June Year 5

Date Details Debits Credits Balance

£ £ £1 Jun Balance 4,619 Cr5 Jun 10659 230 4,389 Cr5 Jun 10658 176 4,213 Cr8 Jun Counter credits 813 5,026 Cr

11 Jun Standing order – Ajax Insurance 242 4,784 Cr

13 Jun 10660 459 4,325 Cr15 Jun Counter credits 1,121 5,446 Cr15 Jun 10661 150 5,296 Cr19 Jun Standing order – L White 462 5,758 Cr24 Jun Direct debit – Town Council 517 5,241 Cr26 Jun 10663 324 4,917 Cr29 Jun 10665 138 4,779 Cr30 Jun Charges 74 4,705 Cr

Cheque book counterfoils

£1 Jun 10658 A Parry 1761 Jun 10659 C Harris 2307 Jun 10660 L Goddard 459

11 Jun 10661 A Parry 15022 Jun 10662 D Fletcher 37623 Jun 10663 Lines Ltd 32423 Jun 10664 Star & Co 28925 Jun 10665 A Parry 13829 Jun 10666 C Thorpe 247

(continued)


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265

T/17.3 (continued)

Paying-in book counterfoils

£ £8 Jun S Moon 611

G Race 202 81315 Jun Rayne & Co 129

C Mills 325T Orchard 667 1,121

NoteCheques are paid into the bank on the day they are received.

Required

(a) Write up the bank account in the books of M Rhodes starting with a debit balanceof £4,619 on 1 June Year 5. Entries should be in date order.

(b) Prepare a bank reconciliation statement at 30 June Year 5, commencing with the bankstatement balance of £4,705.

(LCCIEB)

T/17.4*

You are required to prepare a bank statement from the details below.

Thomas Snodden banks at Wilmster Bank, 46 High Street, Ledbury, Eastshire LE2 5SR –account number 96015. On 1 September Year 2, he had a balance at the bank of £126.00(Dr).The following were his transactions with the bank during Setpember Year 2:

4 Sep Received cheque from R Grafton for £57.006 Sep Drew cheque no 100567 payable to T Lucas for £95.50

This was debited to Snodden’s account on 11 September9 Sep The bank made a standing order payment to Moody Publishers for £162.00

12 Sep Drew cheque no 100568 payable to N Swift for £73.00This was debited to Snodden’s account on 16 September

14 Sep Received by credit transfer from K Hanson £214.0017 Sep Drew cheque no 100569 payable to T Cavendish for £106.50

This was debited to Snodden’s account on 21 September20 Sep Received cheque from N Speedy for £165.0022 Sep The bank made direct debit payment to Eastwise Electricity for £89.0025 Sep The bank made credit transfer payment to Spacewell Ltd for £105.0027 Sep Received cheque from L Morsewell for £235.0030 Sep The bank charged interest of £17.00

NoteAny cheques received by Thomas Snodden are paid into the bank on the day of receipt. Ineach instance above, the bank credited Snodden’s account on the same day.

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266

T/17.4/A

Wilmster Bank46 High Street

LedburyEastshire LE2 55R

Mr Thomas SnoddenAccount No 96015

Date Particulars Paid out Paid in Balance

Year 2 £ £ £1 Sep Balance b/f 126.00 Cr4 Sep R Grafton 57.00 183.00 Cr9 Sep Standing order –

Moody Publishers 162.00 21.00 Cr11 Sep T Lucas: 100567 95.50 74.50 O/D14 Sep Credit transfer – K Hanson 214.00 139.50 Cr16 Sep N Swift: 100568 73.00 66.50 O/D20 Sep N Speedy 165.00 231.00 Cr21 Sep T Cavendish: 100569 106.50 125.00 Cr22 Sep Direct debit –

Eastwise Electricity 89.00 36.00 Cr25 Sep Credit transfer –

Spacewell Ltd 105.00 69.00 O/D27 Sep L Morsewell 235.00 166.00 Cr30 Sep Interest 17.00 149.00 Cr

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267

T/18.1

Lynn Parton owns a small business. She keeps a Petty Cash Book and uses the imprest system.The imprest is set at £100.

On 1 June Year 7 the petty cash balance was £70.30 and on that date the imprest wasrestored with cash drawn from the business bank account.

During June Year 7, the following amounts were paid from petty cash:

VoucherDetails no Amount

Year 7 £2 Jun Travelling expenses 76 12.304 Jun Stationery 77 4.235 Jun Postage 78 1.756 Jun Cash purchases 79 32.30

10 Jun Postage 80 1.8214 Jun Cleaning expenses 81 7.3718 Jun Stationery 82 9.3422 Jun Cash purchases 82 21.1725 Jun Postage 83 2.3829 Jun Travelling expenses 84 4.54

The imprest amount was restored on 1 July Year 7.

RequiredWrite up the Petty Cash Book from 1 June to 1 July Year 7. You should use the followinganalysis columns:

Travelling Cleaningexpenses Stationery Postage Purchases expenses

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T/18.2

Peter Sharsby uses the petty cash imprest system.The amount of the float is £300. At 1 MarchYear 6, the balance of petty cash in hand was £83.20.

The petty cashier dealt with the following transactions during March Year 6:

Voucherno Amount

Year 6 £1 Mar Drew cash from bank to restore the float3 Mar Stationery 83 15.306 Mar Petrol 84 23.409 Mar J Lane – travel expenses 85 27.50

11 Mar Motor-vehicle repairs 86 51.8014 Mar Refund to debtor, A Lucan 87 32.6016 Mar Postage 88 4.3019 Mar Stationery 89 15.7021 Mar Petrol 90 22.4024 Mar F Coster – train fare 91 19.1027 Mar Postage 92 13.9029 Mar Paid to L Vine, creditor 93 27.80

Required

(a) Enter the above transactions in the Petty Cash Book of Peter Sharsby for March Year 6,and show the balance at the end of the month. Bring down the balance and show theentry to make up the float (from the bank) on 1 April Year 6.

Peter Sharsby uses the following analysis columns:

Motor-vehicle Travelling expenses Postage Stationery expenses Ledger

(b) In relation to the posting of the total of the motor-vehicle expenses analysis column:

(i) show the entry that will be made in the relevant expense account;(ii) in which ledger is that account kept?


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T/18.3*

Ellen Franks keeps her Petty Cash Book on the imprest system. The imprest amount wasset at £250. On 1 July Year 3, the balance of petty cash brought forward was £83.00. The following transactions took place during July Year 3:

Voucherno Amount

Year 3 £1 Jul Drew cash from bank to restore the imprest5 Jul Stationery 69 17.507 Jul Train fare reimbursed 70 23.70

10 Jul Postage 71 12.3012 Jul Received by petty cashier from L Ward,

in payment for a private telephone call 1.9014 Jul Motor-vehicle expenses 72 35.6017 Jul Postage 73 7.2019 Jul T Tarrant – travel expenses 74 28.4022 Jul Petrol 75 11.0024 Jul Payment of amount owing to

K Tutt in the purchases ledger 76 31.0027 Jul Stationery 77 14.3030 Jul Postage 78 7.00

On 1 August Year 3 the float was increased to £300.

Required

(a) Draw up Ellen Franks’ Petty Cash Book using the following analysis columns:

Travel Motor-vehicleexpenses Postage expenses Stationery Ledger

(b) Balance the account at 31 July Year 3, bring down the balance of cash at that date, andshow the amount of cash drawn from the bank for the revised imprest on 1 August Year 3.

(c) Show the Telephone Account in the General Ledger for July Year 3, assuming that theTelephone Account had been paid by direct debit £97.60 on 6 July Year 3.


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T/18.3/A

(a) and (b) PETTY CASH BOOK

Voucher Travel Motor-vReceipts Date Details no Total expenses Postage expenses Stationery Ledger£ Year 3 £ £ £ £ £ £

83.00 1 Jul Balance b/f167.00 1 Jul Bank

5 Jul Stationery 69 17.50 17.507 Jul Train fare 70 23.70 23.70

10 Jul Postage 71 12.30 12.301.90 12 Jul Telephone –

L Ward14 Jul Motor-vehicle

expenses 72 35.60 35.6017 Jul Postage 73 7.20 7.2019 Jul T Tarrant –

travel 74 28.40 28.4022 Jul Petrol 75 11.00 11.0024 Jul K Tutt,

creditor 76 31.00 31.0027 Jul Stationery 77 14.30 14.3030 Jul Postage 78 7.00 7.00

188.00 52.10 26.50 46.60 31.80 31.0031 Jul Balance c/d 63.90

251.90 251.90

63.90 1 Aug Balance b/d236.10 1 Aug Bank

(c) GENERAL LEDGERTelephone

Year 3 £ Year 3 £6 Jul Bank 97.60 12 Jul Petty cash 1.90

NoteThe question does not require the Telephone Account to be balanced.


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T/18.4

Carol Garner maintains an analysed Petty Cash Book on the imprest system. She restoresthe imprest amount to £85 on the first day of each week.The analysis columns in the PettyCash Book are headed:

Wages Postage Travelling Sundries Ledger

At the close of business on Friday, 31 July Year 6, Carol balanced the Petty Cash Book andcarried down the balance of £23.15.The cash held in the petty cash box agreed with thisbalance.

The following transactions took place during the 2 weeks that followed:£

Monday, 3 Aug Imprest restoredPostage 3.80

Tuesday, 4 Aug Window cleaning 4.70Creditor – R Jackson 9.75

Wednesday, 5 Aug Postage 4.26Tea and coffee 1.88Travelling expenses 2.93

Thursday, 6 Aug Wages 45.00Postage 1.94

Friday, 7 Aug Travelling expenses 3.22

Monday, 10 Aug Imprest restoredTravelling expenses 1.41

Tuesday, 11 Aug Advertising 12.00Postage 3.22Travelling expenses 1.94

Thursday, 13 Aug Wages 48.00Postage 4.21

Friday, 14 Aug Stationery 2.48Postage 1.30

Required

(a) Write up Carol Garner’s analysed Petty Cash Book for the 2-week period. Balance thePetty Cash Book and total the analysis columns at the end of each week.

(b) Give 2 reasons why the cash in the petty cash box on Friday, 7 August might not haveagreed with the Petty Cash Book balance.

(LCCIEB)


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T/19.1

State whether each of the following is capital expenditure or revenue expenditure.You onlyhave to write one word, either ‘capital’ or ‘revenue’ in each case.

(1) Purchase of a motor van for use within the business.

(2) Purchase of goods intended for resale in the normal course of business.

(3) Purchase of petrol for the motor van.

(4) Purchase of materials to be used in building an extension to the firm’s business premises.

(5) Payment of insurance on the business premises.

T/19.2

Matthew Dawalla owns a restaurant and the following were some of his transactions duringthe year ended 31 October Year 7:

(1) Purchase of flour for immediate use in the kitchen.

(2) Purchase, in September Year 7, of a motor van for delivery of prepared foods to customers.

(3) Payment for advertising.

(4) Payment for carriage inwards in respect of foodstuffs for the kitchen.

(5) Payment of £6,400 for work done on the restaurant premises. £5,100 was for anextension to the restaurant seating area, while the remainder was for painting and decorating the restaurant.

(6) Payment for heating and lighting.

(7) Purchase, in July Year 7, of new ovens for the kitchen.

(8) Payment for expenses of running the motor van.

RequiredState whether each of the 8 transactions is revenue expenditure, capital expenditure, orboth. If an item is both capital and revenue expenditure, you should state the respectiveamounts.


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T/19.3

JK Distributors Ltd purchases motor vehicles from manufacturers and sells them to othercompanies and to the general public. Jameson Partners is a firm of accountants.

RequiredClassify the following transactions into either capital expenditure or revenue expenditure.

Transactions by JK Distributors Ltd:

(1) Purchase of motor vehicles for resale.

(2) Purchase of a transporter lorry for moving vehicles.

(3) Payments for the building of a showroom extension.

(4) Salaries and commission paid to showroom sales staff.

(5) Purchase of a computer for stock control purposes.

Transactions by Jameson Partners:

(1) Purchase of motor vehicles for use in the business.

(2) Purchase of an office safe.

(3) Rent paid for use of office premises.

(4) Payment of course fees for staff training.

(5) Payment of staff salaries and travelling expenses.


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T/19.4

P Arkan is a builder. He designs and builds superior houses to meet individual customerspecification.

The following invoices were received from suppliers in October Year 4:

£Invoice 1 From Mellow Brick Company:

40,000 high quality bricks 24,800Delivery charge 375

25,175

Invoice 2 From Premier Equipment Company:One earth moving machine 42,7004 replacement tyres for existing machine 890

43,590

Invoice 3 From Excel Office Supplies:One photocopier for use within the firm 1,46010 reams of copier paper 62

1,522

Invoice 4 From Arbor Construction Company:Building an extension to the

cement storage area 12,400Repairs to fencing as instructed:

Fencing panels and other materials 1,475Labour charges 1,060

14,935

RequiredAnalyse the amount of each invoice and apportion it to capital expenditure and revenueexpenditure. Present your answer in a table as follows:

Capital Revenue Totalexpenditure expenditure expenditure

£ £ £

Invoice 1

Invoice 2

Invoice 3

Invoice 4

(LCCIEB)


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T/19.5*

Show the effect of the way each of the following transactions was recorded in the accountsof a retailer of electrical equipment. If there was no effect, state ‘no effect’.

Effect on Gross Net Balance

Transaction profit profit sheet

(1) Purchase of motor vehicle for deliveriesto customers – entered in Purchases Account

(2) Invoice for electricity wrongly entered inWater Supply Account

(3) Payment for repairs to premises entered inPremises Account

(4) Bill for petrol for delivery vehicle entered in Motor Vehicle Account

(5) Invoice for legal services in respect of the purchase of premises entered inOffice Expenses Account

(6) The cost of installing new shop fittings was charged to Wages Account

T/19.5/A

Effect onTransaction Gross profit Net profit Balance sheet

(1) Understated Understated Fixed assetsunderstatedCapital understated

(2) No effect No effect No effect

(3) No effect Overstated Fixed assetsoverstatedCapital overstated

(4) No effect Overstated Fixed assetsoverstatedCapital overstated

(5) No effect Understated Fixed assetsunderstatedCapital understated

(6) No effect Understated Fixed assetsunderstatedCapital understated


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T/19.6*

This question has reference to the information given in T/19.2 (Matthew Dawalla).Matthew Dawalla makes no provision for depreciation in respect of fixed assets purchasedin the last 6 months of any financial year.

Using the format shown below, indicate by means of a tick ( ) which of the TradingAccount, Profit & Loss Account, or balance sheet prepared at 31 October Year 7 would beaffected by each of the transactions. In the case of item (5), also state the amount.

Trading Profit & LossItems Account Account Balance sheet

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

T/19.6/A

Trading Profit & LossItems Account Account Balance sheet

(1)

(2)

(3)

(4)

(5) £1,300 £5,100

(6)

(7)

(8)


276

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T/19.7*

Andrew Smithers has recently prepared the following Trading and Profit & Loss Account:

Andrew SmithersTrading and Profit & Loss Account


£ £Sales 73,200less Cost of goods sold:

Opening stock 3,860Purchases 49,750

53,610less Closing stock 4,200 49,410

Gross profit 23,790

less Expenses:Rent 4,400Wages 18,900General expenses 860 24,160

Net loss (370)

On reviewing his books of account you find that:

(1) The item ‘Purchases’ includes:

● a desktop computer bought for use in the office for £2,200;● a new delivery van bought for use in the business for £7,600;● the purchase of materials for extending the shop premises £2,350.

(2) The sales figure includes the sale of the old delivery van for £1,600.This figure hadbeen shown in the books at £3,400.

(3) The closing stock includes £300 of materials in hand for work on extending the shoppremises.

(4) Rent accrued £400.

(5) The figure for wages includes £2,100 for building work on extending the shop premises.

Andrew Smithers tells you that he wishes to allow £1,500 first-year depreciation on thenew delivery van.

RequiredPrepare a revised Trading and Profit & Loss Account for Andrew Smithers for the yearended 30 September Year 3.


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T/19.7/A

Andrew Smithers(Revised) Trading and Profit & Loss Account


£ £Sales (-1,600) 71,600less Cost of goods sold:

Opening stock 3,860Purchases (-2,200

-7,600-2,350) 37,600

41,460less Closing stock (-300) 3,900 37,560

Gross profit 34,040less Expenses:

Rent (+400) 4,800Wages (-2,100) 16,800General expenses 860Depreciation: £Old van 1,800New van 1,500 3,300 25,760

Net profit 8,280


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T/19.8*

John Bradford ended his first year of trading on 31 DecemberYear 4. He has no knowledgeof book-keeping and accounts but has prepared what he calls his profit statement for theyear:

John BradfordProfit statement at 31 December Year 4

£ £Cash takings from customers 22,664Purchases

Goods for resale 14,173Motor vehicle, bought 1 Jan Yr 4 2,200

16,373Advertising 838Vehicle running costs 1,092Wages paid 2,640Insurances 310Heat and light 429Cash taken for own use 394 22,076

Profit 588

Other information at 31 December Year 4:

(1) Customers invoiced for £1,082 had not yet paid their accounts.(2) Wages accrued due £286.(3) Purchases that had cost £1,730 were still unsold (stock).(4) John Bradford expects the motor vehicle to last 3 years and to have a trade-in value

then of £700.

Required

(a) State what important distinction John Bradford has failed to make in his treatment ofthe motor-vehicle purchase.

(b) Prepare a revised Trading and Profit & Loss Account for John Bradford for the year ended 31 December Year 4.


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T/19.8/A

(a) John Bradford has not made the distinction between capital and revenue expenditure.

(b) John BradfordTrading and Profit & Loss Account


£ £Sales 23,746**less Cost of goods sold:

Purchases 14,173less Closing stock 1,730

12,443

Gross profit 11,303Advertising 838Vehicle running costs 1,092Wages 2,926Insurance 310Heat and light 429Depreciation – van 500 6,095

Net profit 5,208

** Cash takings 22,664add accrued due 1,082 23,746

T/20.1

After trading for some years, Lorna Freele decides to keep a double-entry set of books.At1 May Year 7, records show her financial position to be as follows:

Assets Premises £47,000 Office equipment £11,200Fixtures and fittings £3,800Motor vehicle £9,700 Stock £8,650

Debtors D Crawle £570 F Munster £312 J Tester £423Office cash £107

Liabilities Creditors: A Farmer £318 T North £165 Bank overdraft £1,730

Required

(a) In the journal, show the opening entries to record the assets and liabilities of Lorna Freeleat 1 May Year 7.

(b) Post the figures for assets and liabilities as balances in appropriate ledger accounts.Name the division of the ledger in which each account appears.


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T/20.2*

The following details are available concerning the business of Walter Masson for the yearended 30 June Year 4:

£Stock at 1 Jul Yr 3 4,600Purchases 15,120Returns outwards 140Sales 29,360Returns inwards 410Stock, 30 Jun Yr 4 5,300Office expenses 1,740Wages 7,300Rent, rates, and insurance 3,200

RequiredPrepare closing entries for Walter Masson at 30 June Year 4, showing transfers to the TradingAccount, Profit & Loss Account, and Capital Account relating to the year ended 30 JuneYear 4.

T/20.2/A

Walter MassonJournal

Dr CrYear 4 £ £30 Jun Trading 4,600

Stock 4,600

Book value of stock at1 Jul Yr 3

30 Jun Trading 15,120Purchases 15,120

Purchases for year ended30 Jun Yr 4

30 Jun Trading 410Returns inwards 410

Returns inwards for yearended 30 Jun Yr 4

30 Jun Sales 29,360Trading 29,360

Sales for year ended30 Jun Yr 4

(continued)


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T/20.2/A (continued)

30 Jun Returns outwards 140Trading 140

Returns outwards for yearended 30 Jun Yr 4

30 Jun Stock 5,300Trading 5,300

Value of stock at30 Jun Yr 4

30 Jun Trading 14,670Profit & loss 14,670

Gross profit for the year

30 Jun Profit & loss 1,740Office expenses 1,740

Office expenses for year ended 30 Jun Yr 4

30 Jun Profit & loss 7,300Wages 7,300

Wages for year ended30 Jun Yr 4

30 Jun Profit & loss 3,200Rent, rates, and insurance 3,200

Rent, rates, and insurancefor year ended 30 Jun Yr 4

30 Jun Profit & loss 2,430Capital 2,430

Net profit for year transferred

CommentThe ‘sides’ the individual items (eg purchases) appear on in these journal entries correspondto the transfer entries appearing in the individual accounts concerned.


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T/20.3

At 31 August Year 5, the end of his financial year, B C Holt’s books included the followingbalances:

£Stock at 1 Sep Yr 4 9,580Purchases 58,960Sales 90,440Purchases returns 1,030Sales returns 2,105Carriage inwards 1,760

B C Holt valued his stock at cost, £10,380, at 31 August Year 5.

RequiredIn the books of B C Holt:

(a) Prepare journal entries, without narrations, to transfer the above balances to the TradingAccount for the year ended 31 August Year 5. The closing stock valuation should alsobe journalized.

(b) Prepare the Trading Account for the year ended 31 August Year 5.

(LCCIEB)


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T/20.4*

C Stanton’s financial year ends on 30 June; the following transactions took place duringJune Year 7:

(1) On 1 June, Stanton purchased a new car, for use in the business, for £9,600 from theSmart Vehicle Company. He was allowed £2,200 for his old car and paid the balanceby cheque.

(2) On 1 June, Stanton paid £360 by cheque for car insurance to 31 May Year 8.

(3) On 11 June, he purchased a new computer for £2,685 on credit from E Byte & Son.

(4) On 19 June,T Wilson paid £65 by cheque as the only payment on his debt of £260.Stanton decided to write off the balance as a bad debt.

(5) During the month of June, Stanton had taken goods costing £419 for his own use.

On 30 June Year 7, Stanton decided to make adjustments for the following matters, beforepreparing the final accounts:

(a) Car insurance premium is prepaid.(b) Bank charges amounting to £71 had not been entered in the books.(c) Telephone charges of £124 for the month of June had not been paid.

RequiredPrepare the journal entries to record the above transactions and adjustments, includingbank, in the books of C Stanton.

NoteNarrations are not required.

(LCCIEB)


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T/20.4/A

C StantonJournal

Dr CrYear 7 £ £

1 Jun Motor car 9,600Motor-car disposal 2,200Bank 7,400

1 Jun Insurance 360Bank 360

11 Jun Office machinery 2,685E Byte & Son 2,685

19 Jun Bank 65Bad debts 195T Wilson 260

30 Jun Drawings 419Purchases 419

30 Jun Car insurance (Year 7/8) 330Car insurance (Year 6/7) 330

30 Jun Bank charges 71Bank 71

30 Jun Telephone (Year 6/7) 124Telephone (Year 7/8) 124


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T/20.5*

The following information relates to James Grant, a trader, in respect of the financial yearended 31 December Year 5:

(1) On 8 January, Grant purchased motor van number 5, for £10,800 from RoundstarGarages, according to invoice number K/6807. He paid a deposit of £2,000 by cheque,the balance of the purchase being on credit.

(2) On 12 March, T Hardwicke, a debtor, paid £350 as a first and final instalment on adebt of £1,400.The balance of the debt was written off as irrecoverable.

(3) On 20 June, Grant took from stock, for his own private use, goods which had beenpurchased within the current trading year for £135.

(4) On 15 October, Grant sold motor van number 3 for £4,000, which was paid bycheque. It had been purchased in Year 2 for £8,800.The Provision for Depreciationon the motor van Number 3 Account showed a balance of £5,200.

(5) On 31 December, Grant’s debtors totalled £18,600. He decided to adjust the provisionfor doubtful debts of £650 to 4% of total debtors.

RequiredPrepare journal entries to record the above items, including narrations.

(LCCIEB)


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T/20.5/A

James GrantJournal

Dr CrYear 5 £ £

(1) 8 Jan Motor vehicles 10,800Bank 2,000Roundstar Garages 8,800

Purchase of motor van no 5, ref invoiceno K/7807. Payment by cheque £2,000with balance on credit

(2) 12 Mar Bank 350Bad debts 1,050T Hardwicke 1,400

Payment of 25% of amount due;balance of debt written off

(3) 20 Jun Drawings 135Purchases 135

Goods taken for private use

(4) 15 Oct Disposal 8,800**Motor van 8,800Provision for depreciation

on motor van 5,200Disposal 5,200Bank 4,000Disposal 4,000Disposal 400Profit & loss 400

Sale of motor van no 3, previously purchased in Year 2 for £8,800.

Cheque received £4,000

(5) 31 Dec Pofit & loss 94Provision for doubtful debts 94Increase in provision to 4% of total

debtors of £18,600

**This journal entry has been set out in this way to show the different elements in the disposal. Otherforms of layout may be acceptable.


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T/21.1

In the year ended 31 December Year 9, the following errors occurred in the books of Ching Wong:

(1) Both the Office Expenses Account and Sales Account were overcast by £100.

(2) The purchase of equipment, for use in the business, was debited to the PurchasesAccount.

(3) A sale of goods to B Winlock for £346 was entered in the Sales Day Book as £316.

(4) A purchase of goods from T Lister was posted to T Mister’s Account.

(5) A bill for cleaning had not been entered in the books.

(6) A bill for travelling expenses had been entered in the Telephone Account.

RequiredPrepare a statement as follows and, against each item, state the type of error, eg ‘error ofomission’:

Type of error

(1)

(2)

(3)

(4)

(5)

(6)


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T/21.2

The following accounts appeared in the books of a trader:

Purchases Account

Year 5 £ Year 5 £31 Dec Balance b/d 16,220 31 Dec Balance c/d 18,36031 Dec Bank (new fixed

assets) 2,140

18,360 18,360


Fixed Assets (at cost)

Year 5 £ Year 5 £31 Dec Balance b/d 19,450 31 Dec Balance c/d 20,50031 Dec Bank (goods for

resale) 1,050

20,500 20,500


Required

(a) What type or types of error have been made in these accounts?

(b) Would the correction of these errors increase or decrease the gross profit and, if so, byhow much?

T/21.3

RequiredName each of the following errors:

(1) The proceeds from the sale of some office furniture had been posted from the Cash Book to the credit of the Sales Account.

(2) The proprietor of a business had taken for his own use goods purchased for resale.Thishad not been recorded in the books.

(3) An invoice for £271 for goods sold on credit to N Pinter had been entered in thebooks as £217.

(4) A payment for electricity had been posted from the Cash Book to the debit of theRent Payable Account.


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T/21.4

The following trial balance was prepared incorrectly for K Masters at 31 December Year 8,with some balances entered in the wrong column:

Dr Cr£ £

Motor vehicles 28,500Debtors 19,084Carriage inwards 317Cash at bank and in the office 22,315Rent receivable 4,600Purchases 137,918Sales 183,217Creditors 11,584Drawings 14,600Bad debts written off 560Carriage outwards 687Motor-vehicle running expenses 6,150Discount allowed 765Provision for doubtful debts 930Discount received 580Provision for depreciation on

motor vehicles 4,800Salaries and wages 18,886Sundry expenses 754Lighting and heating 1,566Premises 130,000Capital 176,391

369,054 395,150

RequiredPrepare a correct trial balance for K Masters at 31 December Year 8.

(LCCIEB)


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T/21.5

Laurence Grant failed to agree his trial balance at 30 June Year 5.The following errors werelater discovered:

(1) The Purchases Day Book total of £5,960 had been posted to the Purchases Accountin the General Ledger as £5,690.

(2) The withdrawal by Laurence Grant of £95 in cash for private use had been posted tothe debit of the Office Expenses Account.

(3) The purchase on credit of computer stationery for £135 had been debited to theOffice Equipment Account.

(4) Discount allowed of £157 had been credited to the Discount Received Account.

(5) A cheque for £430 had been correctly debited in the Cash Book but the double entryhad not been completed.

RequiredPrepare a statement showing the effect of these errors upon the trial balance of LaurenceGrant.You should set out your answer as follows:

Cause debit total Cause credit totalto exceed credit total by to exceed debit total by

£ £(1)

(2)

(3)

(4)

(5)

NoteIf there is no effect on the trial balance, you should state ‘no effect’.

(LCCIEB)


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T/22.1

Lynn Webster is a sole trader whose financial year ends on 30 September.At 30 SeptemberYear 5, she failed to agree her trial balance and found the following errors and omission:

(1) The payment by cheque of an invoice for £515 for repairs to the office computer hadbeen recorded in the Cash Book and posted to the Office Equipment Account.

(2) A payment of £390 for advertising had been posted to the Travelling ExpensesAccount.

(3) Lynn Webster had taken goods, bought during the year ended 30 September Year 5 for£186, for her personal use, but no entry had yet been made in the books.

(4) The sale of goods for cash £730 had been entered as a credit to the Cash Account anda debit to the Sales Account.

(5) The payment of wages, £1,560 in cash, to Webster’s employees for building an extension to the firm’s offices, had been entered in the Cash Book and posted to theWages Account.

RequiredPrepare journal entries, including narrations, necessary to deal with the errors in (1), (2),(4), (5) and the omission in (3).

T/22.2

The following errors occurred in the books of Eric Sawyer, a sole trader, in one accountingperiod:

(1) The cost for petrol of £26 was wrongly debited to the Motor Vehicles Account.

(2) The purchase of goods on credit for £86 from T Lawton was recorded in both thePurchases Day Book and the personal account as £68.

(3) The payment of a subscription to a trade association, £60, was wrongly debited tothe Purchases Account.

(4) The total of one month’s discount-received column in the Cash Book, which was£54, was posted to the credit side of the Discount Allowed Account.

(5) The total of the stationery analysis column of the Petty Cash Book for February Year 8,£13.50, was posted to the Postages Account.

(6) A purchase of a new motor van for £10,500 had been debited to Fixtures and Fittings.

RequiredShow the correction of each of the above errors by means of a journal entry.Your entriesshould include narrations.


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T/22.3*

Henry James, a sole trader, extracted a trial balance at 30 September Year 6. It did not agree.On checking the entries in his books, he discovered the following:

(1) A payment of £380 from a debtor, C Bates, had been posted to another debtor’s account in the name of C Yates.

(2) The total of credit sales for March appeared in the Sales Day Book as £5,680 but thishad been posted in the Sales Account as £6,680.

(3) A credit purchase of £100 had been correctly entered in the Purchases Day Book forthe month of September; it had also, however, been wrongly posted as a cash purchase.

(4) Rent of £500 for the month of May had been paid by cheque but no double entryhad been completed in the Rent Account.

(5) A telephone bill paid by cheque, amounting to £230, had been posted in error to theElectricity Account.

(6) A cash sale of £300 had been completely omitted from the books.

(7) The purchase of a motor van costing £7,000 had been posted in error to the PurchasesAccount.

RequiredPrepare the necessary journal entries on 30 September Year 6 to correct the above errorsand omission. Narrations are not required.

T/22.3/A

Henry JamesJournal

Dr CrYear 6 £ £

(1) 30 Sep C Yates 380C Bates 380

(2) 30 Sep Sales 1,000No entry –

(3) 30 Sep Cash/bank 100Purchases 100

(4) 30 Sep Rent 500No entry –

(5) 30 Sep Telephone 230Electricity 230

(6) 30 Sep Cash/bank 300Sales 300

(7) 30 Sep Motor van 7,000Purchases 7,000


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T/22.4*

The following relates to the business of W Lennon:

Trading and Profit & Loss Accountfor the year ended 31 December Year 5

£ £ £Stock at 1 Jan Yr 5 12,600 Sales 138,400

less Returns inwards 670

Purchase 76,300 137,730add Carriage inwards 1,150

77,450less Returns outwards 980

76,470

89,070less Stock at 31 Dec Yr 5 13,200

75,870Gross profit c/d 61,860

137,730 137,730

Discount allowed 640 Gross profit b/d 61,860Motor-vehicle expenses 8,200 Discount received 720Wages 24,300Insurance 1,850Office expenses 2,370

Provision for depreciation:Office equipment 1,120Motor vehicles 8,500 9,620

Net profit 15,600

62,580 62,580


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Balance sheet at 31 December Year 5


Fixed Assets £ £ £Premises 45,000 – 45,000Office equipment 5,600 1,680 3,920Motor vehicles 34,800 12,850 21,950

85,400 14,530 70,870

Current AssetsStock 13,200Debtors 6,300Cash and bank 1,050

20,550

less Amounts due within 1 yearCreditors 4,100 16,450

87,320

Financed by:

Capital – balance at 1 Jan Yr 5 83,920add Net profit 15,600less Drawings 12,200 3,400

87,320

It was later found that the following errors/omissions had been made during the year ended31 December Year 5:

(1) Stock at 31 December Year 5 had been wrongly valued. It should have been valued at£12,900.

(2) A bill, not yet paid, for carriage inwards, £100, for Year 6, had wrongly been chargedto Year 5.

(3) No adjustment had been made for prepayment of insurance, £350, at 31 DecemberYear 5.

(4) £300 paid in wages had been posted wrongly to the Office Expenses Account.

(5) The provision for depreciation of motor vehicles had been wrongly calculated. Itshould have been £8,700.

Required

(a) In a statement, show for each of the 5 errors/omissions the effect upon gross profit, netprofit and the balance sheet of:

(i) the error/omission(ii) correcting the error/omission.

(b) Show, for W Lennon, the revised Trading and Profit & Loss Account and balancesheet after the necessary adjustments have been made.


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T/22.4/A: part (a) only

Effect of correcting forEffect of error/omission the error/omission

(1) Gross profit overstated by £300 Gross profit reduced by £300

Net profit overstatedby £300 Net profit reduced by £300

Balance sheet: Balance sheet:

(2) Gross profit and net profit Gross profit and net profitunderstated by £100 both increased by £100


(3) Net profit understated Net profit increasedby £350 by £350


No further effects No further effects

(5) Net profit overstated Net profit reduced by £200by £200


NoteIt will be clear that the effect of correcting for the error/omission is the reverse of the effectof the error/omission. Both effects would not be included in any examination question.They are both included in this instance to emphasize the difference in the wording of thetwo parts of the answer to (a). Incorrect or unsuitable wording of answers in this topic canresult in a significant loss of marks.


296

Stock overstatedCapital overstated

Sundry creditorsoverstated

Capital understated

Current assetsunderstated

Capital understated

(4) Office expensesoverstated

Wages understated

Fixed assetsoverstated

Capital overstated

by£300

Stock reducedCapital reduced

by £300

by£100

Sundry creditorsreduced

Capital increased

by£100

by£350

Current assetsincreased

Capital increased

by£350

by£350

by

£300Reduced office expensesIncreased wages

by£200

Fixed assets reducedCapital reduced

by

£200

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T/22.5

Helen Sagan, a sole trader, prepared a trial balance at 30 September Year 5, which did notagree.You have found the following errors:

(1) A cash payment for material purchases for £726 had been entered in the Cash Bookas £762.The correct entry had been made in the Purchases Account.

(2) A receipt of £2,320 from a debtor, J Wilson, had been posted to the account of S Williamson.

(3) A purchase, on credit, of a new machine for £5,300 had been debited to the MachineRepair Account. Depreciation is not charged on assets in the year they are purchased.

(4) A cheque payment of £856 to a creditor had been entered in the creditor’s account but had been omitted from the Cash Book.

(5) A cheque payment of £2,000 for rent had been entered in the Cash Book as £200.This incorrect amount had also been entered into the expense account.

(6) An invoice from P Rees for purchases of £240 had been omitted from the ledger.

Required

(a) Prepare journal entries to correct the errors. Narrations are not required.

(b) Prepare a statement, as shown below, and enter the effect on profit of each of the errors,including the amount. If there is no effect enter a tick ( ) in the right hand column.

Effect on profit

Errornumber Overstated £ Understated £ No effect

(1)

(2)

(3)

(4)

(5)

(6)


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T/22.6

This exercise refers to the errors set out in T/22.2.

RequiredState the effect of the correction of each of these errors on the draft net profit of Sawyer.You should set out your answer as follows:

Increase of net profit Reduction of net profit£ £

(1)

(2)

(3)

(4)

(5)

(6)

NoteEnter each amount in the appropriate column. If there is no effect on the net profit, youshould state ‘no effect’.

(LCCIEB)

T/22.7

This exercise refers to T/22.1. Despite having failed to agree her trial balance, Lynn Webstercalculated a provisional profit of £5,670.

RequiredPrepare a statement as shown below and against each of the items (1) – (5) enter the effect,with the amounts, on the provisional profit of correcting for the error/omission. If there isno effect, you should enter a tick ( ) in the column headed ‘no effect’.

Effect of corrections on net profit

Increase £ Reduce £ No effect

(1)

(2)

(3)

(4)

(5)

Underneath your statement, you should state the amount of the revised net profit, after thenecessary adjustments have been made.


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T/23.1*

J Salmon, a sole trader, prepared the following trial balance from her books at 30 June Year 6:

Dr Cr£ £

Motor vehicles at cost 80,000Fixtures and fittings at cost 82,000Purchases and purchases returns 263,500 7,300Sales and sales returns 3,400 370,000Stock (1 Jul Yr 5) 15,700Discounts 2,300 1,600Provision for doubtful debts 600Bad debts 650Debtors and creditors 35,000 27,400Capital 108,000Drawings 28,200Provision for depreciation:

Motor vehicles 23,000Fixtures and fittings 19,000

Rent 12,000Motor-vehicle running expenses 3,360Rates and insurances 3,420Salaries 12,300Cash at bank 10,720Cash in hand 420Lighting and heating 3,930

556,900 556,900

At 30 June Year 6:

(1) Depreciation is to be provided as follows:

Motor vehicles 25% on costFixtures and fittings 10% on cost

(2) Stock was valued at cost £17,400.

(3) The provision for doubtful debts is to be set at 2% of the debtors.

(4) Motor-vehicle running expenses at £510 and lighting and heating at £420 wereaccrued.

(5) The rates and insurances were prepaid by £120.

RequiredPrepare for J Salmon:

(a) a Trading and Profit & Loss Account for the year ended 30 June Year 6

(b) a balance sheet at 30 June Year 6.(LCCIEB)


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T/23.1/A

J SalmonTrading and Profit & Loss Accountfor the year ended 30 June Year 6

£ £ £Stock at 1 Jul Yr 6 15,700 Sales 370,000

less Sales returns 3,400

Purchases 263,500 366,600less Purchases

returns 7,300 256,200

271,900less Stock at 30 June

Yr 6 17,400

Cost of goods sold 254,500Gross profit c/d 112,100

366,600 366,600

Depreciation: Gross profit b/d 112,100Motor vehicles 20,000Fixtures and fittings 8,200 28,200 Discounts received 1,600

Discounts allowed 2,300Bad debts 650Provision for doubtful debts 100Rent 12,000Motor-vehicle running

expenses (3,360 + 510) 3,870Rates and insurances

(3,420 -120) 3,300Salaries 12,300Lighting and heating

(3,930 + 420) 4,350Net profit 46,630

113,700 113,700


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Balance sheet at 30 June Year 6


Fixed Assets £ £ £Motor vehicles 80,000 43,000 37,000Fixtures and fittings 82,000 27,200 54,800

162,000 70,200 91,800

Current AssetsStocks 17,400Debtors 35,000less Provision for

doubtful debts 700 34,300

Prepayments 120Cash at bank 10,720Cash in hand 420

62,960less Amounts due within 1 yearCreditors 27,400Accrued (510 + 420) 930 28,330

Net current assets 34,630

126,430Financed by:

Capital 108,000add Net profit 46,630less Drawings 28,200 18,430

126,430


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T/23.2

Hilda Braquette prepared the following trial balance at 31 October Year 5:

Dr Cr£ £

Stock at 1 Nov Yr 4 6,820Fixtures and fittings at cost 14,000Provision for depreciation of fixtures

and fittings at 1 Nov Yr 4 2,800Bank 3,200Cash in hand 148Debtors and creditors 10,300 6,920Motor vehicles at cost 24,000Provision for depreciation of motorvehicles at 1 Nov Yr 4 7,200

Purchases and sales 75,820 161,360Discounts allowed and received 2,140 1,580Drawings 13,200Motor-vehicle running expenses 5,860Wages 43,972Bad debts 390Provision for doubtful debts 210Returns inwards and outwards 1,180 850Rent 10,400Light and heat 650Insurance 1,080Office expenses 2,100Capital 34,340

215,260 215,260

Additional information at 31 October Year 5:

£ £(1) Stock at cost 8,460

(2) Insurance prepaid 240

(3) Accrued due:

Light and heat 80Office expenses 140 220

(4) Depreciation is provided as follows:Fixtures and fittings – 10% per annum on costMotor vehicles – 20% per annum on cost

(5) Provision for doubtful debts is to be adjusted to 4% of debtors

RequiredFor Hilda Braquette, prepare:

(a) the Trading and Profit & Loss Account for the year ended 31 October Year 5

(b) a balance sheet at 31 October Year 5.(LCCIEB)


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T/23.3

The following trial balance was extracted from the ledger of P Lippis, a sole trader, on 31 March Year 12:

Dr Cr£ £

Business premises at cost 85,000Purchases and sales 39,800 64,650Capital 93,420Stock at 1 Apr Yr 11 8,310Purchases returns 285Fixtures and fittings at cost 12,700Provision for depreciation of fixtures

and fittings 2,540Trade debtors:

R Prince 480K Evitts 1,010J Carr 180Archway Supplies 370

Trade creditors:K Porter 2,210Archway Supplies 4,096

Cash in hand 47Cash at bank 1,093Wages 8,942Advertising 110Heat and light 1,092Insurances 368Other expenses 459Drawings 7,240

167,201 167,201

The following additional information is to be taken into account:

(1) Stock valued at cost on 31 March Year 12, £7,935.(2) Accruals at 31 March Year 12: wages £230; heat and light £98.(3) Prepayment at 31 March Year 12, Insurances £46.(4) Lippis received a bank statement, showing that there was a balance in his favour

on 31 March Year 12, amounting to £1,140.A creditor had not yet presented a chequedrawn by Lippis for £79, and the bank applied bank charges amounting to £32.

(5) Depreciation was to be provided on fixtures and fittings at 10% per annum on cost.(6) Archway Supplies was Lippis’ main supplier. Unusually, Archway purchased goods from

Lippis, and it was agreed that the debtor balance should be a contra against the creditor balance.

RequiredPrepare for P Lippis:

(a) a Trading and Profit & Loss Account for the year ended 31 March Year 12

(b) a balance sheet at 31 March Year 12.(LCCIEB)


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T/23.4

At 31 December Year 3, the end of her first year of trading, Hilda Braquette produced the following list of stock items and asked for your help:

Original Selling StockItem Quantity cost price Comments value

£ £ £(i) 200 2.00 3.00

(ii) 500 5.00 7.50 20 broken – to bethrown away

(iii) 1,200 1.00 1.50 40 damaged – saleableat half price

(iv) 50 3.00 2.50 old stock

(v) 75 4.00 6.00

(vi) 350 3.00 4.50

(vii) 450 2.00 3.00 20 damaged – saleableat half price

RequiredCalculate the stock valuation of each item and total to show the value of Hilda Braquette’sclosing stock at 31 December Year 3.


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T/23.5

The following balances were included in the trial balance of James Hanson at 31 MarchYear 4:

Debit Credit£ £

Purchases and sales 18,620 29,410Returns 238 194Stock at 1 Apr Yr 3 1,146

At 31 March Year 4, James Hanson counted and valued his stock in hand at cost, £1,382.

This included the following 3 items of stock:

Net realizableCost price value

£ £Item 1 120 140Item 2 72 60Item 3 80 45

Required

(a) Prepare a statement, starting with the stock value of £1,382, showing any necessaryadjustments in respect of the 3 items of stock above, to show a new stock valuation at31 March Year 4.

(b) Prepare a Trading Account for James Hanson for the year ended 31 March Year 4.


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T/23.6

The financial year of F Lang, a trader, ends on 31 March. F Lang sells goods at a mark-upof 331/3% on cost price. On 31 March Year 4, the value of his stock at cost was £12,360.On 17 March Year 5, he provisionally valued his stock at £14,220.

Between 18 March Year 5 and the end of that financial year, the following took place:

(1) Lang bought goods to a purchase invoice value of £740.

(2) He returned goods to suppliers that had been invoiced to him at £273.

(3) He sold goods to a selling value of £1,320.

(4) Lang took goods that had cost £195 for his own private use.

Required

(a) Prepare a statement adjusting the value of stock at 31 March Year 5 for entry into theStock Account at cost price.

(b) Calculate the effect of the adjustment of the value of stock on the amount of the grossprofit £94,800 for the year ended 31 March Year 5.

(c) Prepare the Stock Account for the years ended 31 March Years 5 and 6 respectively,assuming that the value of stock at 31 March Year 6 was £15,300.

(LCCIEB)


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T/24.1

The Treasurer of the Southern Jazz Club drew up the following Receipts & PaymentsAccount for the year ended 31 December Year 19:

£ £Balance at bank, Hire of rooms 2,100

1 Jan Yr 19 3,860 Annual subscription toMembers’ subscriptions 3,520 National Jazz Association 150Sale of Festival tickets 1,840 Festival expenses 1,970Sale of food and drink 2,730 Printing and postage 868

Purchase of equipment 1,200Purchase of food and drink 2,480Balance at bank 3,182

11,950 11,950

The following additional information was available:

(1) Members’ subscriptions in arrears at 31 December Year 19 amounted to £50.(2) On 1 January Year 19, the Club owned equipment worth £2,600. It was decided that

the equipment owned at 31 December Year 19 should be depreciated by £700.

RequiredPrepare the Income & Expenditure Account in respect of the Southern Jazz Club for theyear ended 31 December Year 19.



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T/24.2*

Walton Cricket Club had the following Receipts & Payments Account for the year ended31 December Year 8:

Receipts £ Payments £

Balance at bank 2,920 Purchases – refreshments 3,000Subscriptions 8,120 Purchases – equipment 2,460Refreshment takings 5,200 Wages of groundsman 4,180Hire of ground 650 Wages of refreshment staff 1,600Sale of raffle tickets 1,010 Telephone 215

Secretary’s expenses 468Light and heat 366Insurance 450Repairs/renewals 1,272Purchase – raffle prizes 500Balance at bank 3,389

17,900 17,900

The following information was also available:

At 31 December At 31 DecemberYear 7 Year 8

£ £Stock of refreshments 340 560Creditors for refreshments 590 630Subscriptions in arrears – 180Subscriptions in advance – 50Pavilion 8,000 7,000Sports equipment 5,600 7,254Insurance prepaid 50 80

RequiredPrepare, for the Walton Cricket Club, for the year ended 31 December Year 8:

(a) the Refreshments Account

(b) the Income & Expenditure Account.

(LCCIEB)


308

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T/24.2/A

Walton Cricket ClubRefreshments Account


£ £Stock at 1 Jan Yr 8 340 Sales 5,200Purchases (3,000 - 590 + 630) 3,040

3,380less Stock at 31 Dec Yr 8 560

Cost of sales 2,820Wages 1,600Profit on trading 780

5,200 5,200

Income & Expenditure Accountfor the year ended 31 December Year 8

Expenditure £ £ Income £ £

Wages – groundsman 4,180 Profit from refreshments 780Telephone 215 Subscriptions 8,120Secretary’s expenses 468 add Arrears 180Light and heat 366 8,300Repairs and renewals 1,272 less In advance 50 8,250Insurance

(450 + 50 -80) 420 Profit on raffles:Depreciation: Sale of tickets 1,010

Pavilion 1,000 less Cost of prizes 500 510Equipment 806 1,806 Hire of ground 650

Surplus, excess ofincome over expenditure 1,463

10,190 10,190


309

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T/24.3*

The Treasurer of the Belvedere Sports Club prepared the following Receipts & PaymentsAccount for the year ended 30 September Year 11:

Receipts £ Payments £

Balance at bank 3,160 Purchase of refreshments 2,460Sale of raffle tickets 810 Insurance 250Sale of refreshments 4,020 Printing and stationery 165Subscriptions 4,160 Light and heat 235

Repairs to equipment 430Purchase of raffle prizes 390Wages – refreshments staff 1,710Purchase of equipment 2,400Wages – ground staff 1,220Postage 80Balance at bank 2,810

12,150 12,150

Additional information:

30 September 30 SeptemberYear 10 Year 11

£ £Subscriptions in advance 90 60Subscriptions in arrears 100 170Stock of refreshments 1,020 1,310Insurance paid in advance 35 50Light and heat accrued due 30 54Equipment 6,500 8,000

RequiredPrepare, for the Belvedere Sports Club, for the year ended 30 September Year 11:

(a) a Refreshments Trading Account

(b) an Income & Expenditure Account.



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T/24.3/A

Belvedere Sports ClubRefreshments Trading Account


£ £Stock at 1 Oct Yr 10 1,020 Sales 4,020Purchases 2,460

3,480less Stock at 30 Sep Yr 11 1,310

Cost of sales 2,170Wages 1,710Profit on trading 140

4,020 4,020

Income & Expenditure Accountfor the year ended 30 September Year 11

Expenditure £ Income £ £

Insurance (250 + 35 - 50) 235 Profit on refreshments 140Printing and stationery 165 Subscriptions 4,260**Light and heat (235 - 30 + 54) 259 Profit from raffle:Repairs to equipment 430 Sale of tickets 810Wages – ground staff 1,220 less Cost of prizes 390 420Postage 80Depreciation of equipment 900Surplus of income over

expenditure 1,531

4,820 4,820

£ £** Subscriptions: 4,160

add In advance 30 Sep Yr 10 90In arrears 30 Sep Yr 11 170 260

4,420

less In arrears 30 Sep Yr 10 100In advance 30 Sep Yr 11 60 160

4,260


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Appendix 2: Summarized answers to selectedexercises

1.1 (1) Goods +350 Bank -350(2) Cash +290 Goods -290(3) Office furniture +318 D Jackson, Creditor +318(4) Loan,T Walls -1,500 Bank -1,500(5) Bank +965 F Wiles -965(6) Postage +11 Cash -11(7) Bank -617 T Gates -617

1.2 (i) Computer -3,600 Bank +3,600(ii) Computer -3,600 Debtor +3,600(iii) Computer -3,600 Bank +2,000 Debtor +1,600

1.3 Assets £23,660 Capital £16,190 Other liabilities £7,470

1.5 (i) 31 Oct Yr 3: Assets £22,905 Capital £16,045Other liabilities £6,860

(ii) 30 Nov Yr 3: Assets £22,145 Capital £16,045Other liabilities £6,100

2.1 Debited Credited(1) Purchases T Ball(2) Cash Sales(3) Equipment Bank(4) T Ball Returns outwards(5) D Trill Sales(6) Office furniture Creditor,T Doyle

2.2 Debited Credited(1) A Darby Sales(2) Returns inwards A Brittle(3) Bank A Darby(4) T Zuck Returns outwards(5) Creditor, F Lane Bank(6) Returns inwards A Darby

3.1 Debited Credited(1) Purchases Cash(2) Creditor Bank(3) Office equipment Office Services Ltd(4) Rent Cash(5) Cash Sales(6) Bank F Tracey

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3.2 Debited Credited(1) Bank T Ward (loan)(2) J King Sales(3) Telephone Bank(4) Cash Office furniture(5) Insurance Bank(6) Purchases R Veal(7) Returns inwards B Trent

4.1 (a) Cr balance £1,215

4.1 (b) Debit balance – on debtor’s account; representing an asset

4.6 Trial balance totals £31,780

5.3 Gross profit £17,210 Net profit £5,090






£Balance sheet: Fixed assets 162,500

Current assets 40, 894Amounts due in more

than 1 year 26,000Creditors 16,394Capital 161,000

9.2 Multiple choice: (1) (b) and (d)(2) (a) and (c)(3) (b) and (d)

10.1 Balances at 31 Mar Yr 5: Cash £117 Bank £978 (Dr)

Discount Allowed Account Dr £18Discount Received Account Cr £16

10.2 Balances at 31 May Yr 6: Cash £423 Bank £8,259

Discount totals: Discount allowed Dr £80Discount received Cr £71

Appendix 2: Summarized answers

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10.3 Balances of Cash Book before adjustment: Cash £99Bank £383 (Dr)

Balances after adjustment: Cash £99 Bank £200 (Dr)

10.4 (a) Bank balance at 31 May Yr 11: £1,198 (Dr)

(b) Discount Allowed Account Dr £25Discount Received Account Cr £47Both recorded in the General (Nominal) Ledger

11.1 (a) Sales Day Book total for August Year 6 £2,133

11.2 (a) Sales Day Book total for September Year 6 £1,672

11.3 (a) Purchases Day Book total for October Year 8 £1,930

11.4 Balances at 31 Jul Yr 2: Cash £263 Bank £2,129

Discount totals: Dr Discount allowed £60Cr Discount received £30

12.1 (a) (i) Sales Day Book total £1,305(ii) Returns inwards Day Book total £152

12.2 (a) (i) Purchases Day Book total £1,141(ii) Returns Outwards Day Book total £109

12.3 (a) Purchases Day Book total £988Sales Day Book total £1,349Returns Outwards Day Book total £127Returns Inwards Day Book total £174

12.4 (a) Purchases Day Book total £1,436Purchases Returns Day Book total £64Sales Day Book total £1,336

(b) To encourage prompt payment.

12.5 (a) Purchases Day Book total £15,155

14.1 (a) To P/L 31 Dec Yr 5 Balance b/d 1 Jan Yr 6Rates 1,510 Cr 450 DrTelephone 262 Cr 47 CrInsurance 700 Cr 60 DrRent receivable 4,000 Dr 160 DrWages 46,470 Cr 840 Cr


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14.1 (b) M PaineBalance sheet (extract) at 31 December Year 5

£ £Current Assets Amounts due within 1 yearPrepayments: Rates 450 (current liabilities)

Insurance 60 Accruals: Telephone 47Rent receivable 160 Wages 840

670 887

14.2 (a) To P/L 31 Dec Yr 10 Balance b/d 1 Jan Yr 11(i) Rent 4,950 Cr 1,350 Dr(ii) Commission receivable 65,800 Dr 4,700 Dr(iii) Telephone 1,010 Cr 300 Cr

14.2 (b) L ReinholdtBalance sheet (extract) at 31 December Year 10

£ £Current Assets Amounts due within 1 yearRent in advance 1,350 (current liabilities)Commission due 4,700 Telephone – accrual 300

6,050

14.4 (a) To P/L 31 Dec Yr 5 Balance b/d 1 Jan Yr 6Insurance 620 Cr 95 Dr

Stationery 780 Cr 160 Dr{ 45 CrTelephone 572 Cr 56 CrRent payable 3,570 Cr 740 DrRent receivable 900 Dr 150 Dr

14.5 (a) To P/L 30 Jun Yr 5 Balance b/d 1 Jul Yr 5(i) Advertising 360 Cr 190 Cr(ii) Insurance 560 Cr 50 Dr(iii) Office cleaning 1,640 Cr 280 Cr(iv) Rent receivable 2,220 Dr 190 Cr

14.6 (a) To P/L 30 Jun Yr 9 Balance b/d 1 Jul Yr 9Rent receivable 2,630 Dr 740 CrRates 3,300 Cr 840 DrAdvertising 2,400 Cr 580 Dr

Printing/stationery 2,185 Cr 3,100 Dr{ 615 Cr

15.1 Depreciation charge Net book value

(a) £2,100 £8,300

(b) £4,160 £6,240


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15.2 Balances at 1 Jan Yr 8: (ii) Provision for depreciation of motor van £8,356 Cr(iv) Provision for depreciation of fixtures

and fittings £3,440 Cr

15.4 Balances at 1 Jan Yr 8: (ii) Provision for depreciation of computerequipment £4,800 Cr

(iv) Provision for depreciation of motor vehicle £7,120 Cr

15.5 Balances at 1 Jan Yr 6: (1) Provision for depreciation of fixtures and fittings £1,875 Cr

(2) Provision for depreciation of motor vehicle £12,816 Cr

15.6 Balance at 1 Jan Yr 7: (ii) Provision for depreciation of furniture and equipment £3,900 Cr

(v) Disposal of Motor Van Account:debit entry – P/L profit on sale £1,386

16.1 (a) (ii) Provision for doubtful debts: To P/L Account31 Mar Yr 4 £79 Cr31 Mar Yr 5 54 Cr31 Mar Yr 6 78 DrBalance 1 Apr Yr 6 £435 Cr

16.2 (a) (i) (2) Provision for doubtful debts: To P/L Account31 Dec Yr 1 £1,410 Cr31 Dec Yr 2 1,598 Cr31 Dec Yr 3 1,210 DrBalance 1.1.4 £1,798 Cr

16.4 (a) Provision for doubtful debts: To P/L Account31 Dec Yr 8 £152 Cr31 Dec Yr 9 764 Cr31 Dec Yr 10 336 Dr

(b) Journal£ £

Debtor 240Bad debts recovered 240Cash/bank 240Debtor 240

16.5 (iv) Provision for doubtful debts: To P/L Account31 Dec Yr 4 £275 Cr31 Dec Yr 5 245 DrBalance 1 Jan Yr 6 £780 Cr


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17.1 Cash Book (bank) balance: before adjustment £4,549 Drafter adjustment £3,632 Dr

17.2 (a) Cash Book (bank) balance after adjustment £3,966 Dr

17.3 Cash Book (bank) balance after adjustment £3,793 Dr

18.1 Total outlay £97.20 Travelling expenses £16.84 Stationery £13.57Postage £5.95 Purchases £53.47 Cleaning expenses £7.37Balance b/d 1 Jul Yr 7 £2.80 Reimbursement £97.20

18.2 (a) Total outlay £253.80 Motor-vehicle expenses £97.60Postage £18.20 Stationery £31.00 Travelling expenses £46.60Ledger £60.40Balance b/d 1 Apr Yr 6 £46.20 Reimbursement £253.80

(b) (i) To debit of Motor Vehicle Expenses Account (ii) General (Nominal) Ledger

18.4 (a) Week 1: Total outlay £77.48 Wages £45.00 Postage £10.00 Travel £6.15 Sundries £6.58 Ledger £9.75 Reimbursement £77.48

Week 2: Total outlay £74.56 Wages £48.00 Postage £8.73 Travel £3.35 Sundries £14.48

(b) Any 2 from:

● theft from box;● cash in box incorrectly counted;● incorrect amount paid out;● amount paid out without being recorded, ie without a voucher.

19.1 (1) Capital (2) Revenue (3) Revenue (4) Capital (5) Revenue

19.2 (1) Revenue (2) Capital (3) Revenue (4) Revenue(5) £5,100 Capital £1,300 Revenue (6) Revenue (7) Capital (8) Revenue

19.3 JK Distributors Jameson Partners(1) Revenue Capital(2) Capital Capital(3) Capital Revenue(4) Revenue Revenue(5) Capital Revenue


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19.4 Capital Revenue Totalexpenditure expenditure expenditure£ £ £

Invoice 1 25,175 25,175Invoice 2 42,700 890 43,590Invoice 3 1,460 62 1,522Invoice 4 12,400 2,535 14,935

20.3 (b) Gross profit £29,445

21.1 (1) Compensating error (2) Error of principle (3) Error of original entry (4) Error of commission (5) Error of omission (6) Error of commission

21.2 (a) Errors of principle(b) Increase the gross profit by £1,090

21.3 (1) Principle (2) Omission (3) Original entry (4) Commission

21.4 Totals £382,102

21.5 Cause debit total Cause credit totalto exceed credit total to exceed debit total

(1) £270(2) No effect(3) No effect(4) £314(5) £430

22.5 (b)Profit overstated Profit understated No effect

(1)(2)(3) £5,300(4)(5) £1,800(6) £240

22.6 Increase of net profit Reduction of net profit(1) £26(2) £18(3) No effect(4) No effect(5) No effect(6) No effect


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22.7 Increased Reducednet profit net profit No effect

£(1) 515(2)(3) 186(4) 1,460(5) 1,560

3,206 515

£Provisional net profit 5,670add Net adjustment 2,691Adjusted net profit 8,361

23.2 (a) Gross profit £86,850 Net profit £15,456

(b) Balance sheet: Net assets £36,596Closing capital £36,596

23.3 (a) Gross profit £24,760 Net profit £12,205

(b) Balance sheet: Net assets £98,385Closing capital £98,385

23.4 (i) £400 (ii) £2,400 (iii) £1,190 (iv) £125(v) £300 (vi) £1,050 (vii) £890 Total £6,355

23.5 (a) £Pre-adjusted stock value 1,382Item 1 – no changeItem 2 (12)Item 3 (35) (47)Revised stock value 1,335

(b) Gross profit £10,935

£ £23.6 (a) Provisional value 14,220

add Purchases 740less Returns 273 467

14,687less Sales (£1,320 less 25%) 990

13,697less Drawings 195

13,502


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£(b) Pre-adjusted gross profit 94,800

deduct reduction in valueof closing stock(14,220 -13,502) 718

Revised gross profit 94,082

24.1 Deficit (on income/expenditure) £128Closing accumulated fund £6,332


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Appendix 3: Glossary

Account A record of transactions by category (such as purchases) or by person ororganization.

Accumulated fund The capital account of a club or society.

Allowance An amount set against a previous purchase or sale.

Assets Resources or items owned by the business.

Bad debt A debt which is expected never to be paid; that is, an irrecoverable debt.

Balance The amount on one side of an account that exceeds the amount on the otherside ‘to balance’.The book-keeper finds and enters the difference and brings it down.

Balance sheet A form of financial statement.

Bank current account This account is used for the regular banking and withdrawal ofmoney.

Bank deposit account A relatively stable account; withdrawals are usually infrequent.

Bank reconciliation statement A statement that accounts for the difference betweenthe bank statement balance and the adjusted Cash Book balance.

Bank statement A statement issued by a bank showing the customer’s account as recorded by the bank.

Capital The amount of the owner’s financial stake in the business.

Capital expenditure Expenditure that is expected to be of benefit to the firm over thelong term. It is generally incurred on the purchase, alteration, or improvement of fixedassets.

Carriage An expense incurred in, or charge made for, the delivery of goods.

Carriage inwards A payment made for having purchases delivered. It should be added topurchases in the Trading Account.

Carriage outwards A payment to a carrier for delivering goods to customers. It shouldbe shown in the Profit & Loss Account.

Cash discount An allowance for the early settlement of an account.

Cash purchases Goods bought and paid for immediately (in cash or by cheque).

Cash sales Goods sold with immediate payment (in cash or by cheque).

Cheque A written instruction to a bank to make payment.

Cheque clearance the passing of a cheque through the bank system, with payment completed.

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Commission Payment or money received (paid) for carrying out (benefiting from) aservice, for example on sales, or providing (receiving) advice. Commission is commonlycalculated as a percentage.

Compensating error When errors cancel each other out.

Contra Used for entries in the Cash Book where a debit bank entry is matched by a creditcash entry and vice versa.

Cost of goods sold Opening stock plus purchases less closing stock for a given period.

Counter credits Payments into a bank account (a number of cheques, for example) amounting to a stated sum, which are acknowledged by the bank as a credit into theaccount.

Credit note Issued by the seller, granting credit for the return of goods or for deficiencyin supply.

Credit purchases Goods bought, with payment to be made at a later date.

Credit sales Goods sold, with payment to be received by an agreed future date.

Credit transfer A direct means of transferring money through the bank system, initiatedby the paying party.

Creditor A person (or business) to whom money is owed by a business.

Current assets Short-term assets, which are directly involved in the trading activities ofthe firm.

Current liabilities Amounts payable within one year.

Debtor A person (or business) who owes money for goods or services supplied by abusiness.

Deficit An excess of expenditure over income (for a given period).

Depreciation The estimate of the fall in value of fixed assets over a period of time.

Direct debit Credit transfer in reverse: it is the direct transfer of money through thebanking system, initiated by the payee.

Discount allowed A discount granted to a debtor for early payment.

Discount received A discount granted by a creditor for early received payment.

Dishonoured cheque A cheque that the drawer has failed to honour.

Donation A gift of money.

Doubtful debts As in ‘provision for doubtful debts’: debts that may never be recoveredand for which an allowance is made.

Drawer The party who first signs a cheque, that is, on whose bank account the cheque isdrawn.


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Drawings Money, goods, or services withdrawn from the business for the owner’s personalbenefit.

Effective purchase price (or selling price) The list price less trade discount.

Error of commission When a transaction is entered in a wrong account of the sameclass.

Error of principle When a transaction is entered in the wrong class of account.

Expense Outlay or cost.

Expense accrual An amount due in respect of an accounting period that remainsunpaid at the end of that period.

Final accounts Used as a broad term to include the Trading and Profit & Loss Accountand the balance sheet.

Fixed assets Longer-term assets bought for use within the business.

Gross profit An excess of sales income over cost of goods sold.

Horizontal balance sheet Two-sided presentation, with assets on the balance sheet onthe left and capital/liabilities on the right.

Impersonal accounts Accounts concerning things rather than people, such as assets orexpenses.

Imprest system A system in which a fixed float is reimbursed periodically.

Income accrual Income other than sales revenue, outstanding at the end of the periodfor which it was due.

Income prepayment Income received in advance of the due period.

Invoice A document issued on a credit sale, prepared by the seller and sent to the buyer.It gives details of the goods supplied, the amount to be paid and the terms of sale.

Ledger The set of accounts belonging to a business. In a traditional manual system, thesewould be kept in a book or series of books.

Liabilities Amounts owing to persons outside the business.

List price The price of goods before the deduction of a trade discount.

Longer-term liabilities Amounts payable in more than one year.

Net profit Gross profit less other expenses.

Net realizable value Selling price less any costs of getting the goods into a saleablecondition.

Nil balance No balance remaining on a given account.


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Nominal accounts Income and expense accounts.

On account Payment towards an amount owing; a part payment.

Opening entries Journal entries recording the opening balances of a new set of accounts.

Overdrawn account Occurs when more funds have been withdrawn than put into theaccount; that is, a deficit.

Payee The party to whom a payment is due to be made.

Personal accounts Accounts of people or organizations with whom the business deals.

Posting Entering transactions or period totals in accounts from day books (including theCash Book).

Prepayment A payment made in advance of an accounting period or due date.

Prime entry As in ‘books of prime entry’: the point at which a transaction is recordedfor the first time, prior to entry in the ledger.

Private Ledger Normally used for keeping accounts of a highly confidential nature, suchas the Capital Account.

Profit The surplus of income over costs, usually calculated for a given time period.

Provision An accounting allowance for an estimated known or possible fall in the valueof an asset.

Purchases Goods bought on credit or for cash, which are intended to be sold later.

Purchases Ledger Comprised of suppliers’ accounts, that is, ledger creditors.

Real accounts Comprised of assets.

Receipts & Payments Account A summarized version of the Cash Book of a club orsociety.

Reducing balance depreciation A fixed percentage is written off the reduced balanceof the asset each year.

Reimbursement Makes good the total of outlays in a given period.

Returns inwards The return of previously sold goods by the customer, for which anallowance is given.

Returns outwards The return of previously bought goods, to the supplier, who makes an allowance.

Revenue Income.

Revenue expenditure Expenses incurred in running the business and in maintainingfixed assets.


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Running balance The balance on the account is shown, updated, after each transactionentry. A running balance is presented in columnar format.

Sales Ledger Comprised of customers’ accounts, that is, debtors.

Set off One amount set against another, to reduce the amount owed or receivable.

Source document The basis of an entry in the accounting system, such as a sales invoice.

Standing order A direct transfer between bank accounts, involving fixed amounts atregular intervals.

Straight line depreciation A fixed proportion is written off the original cost of the asseteach year.

Terms of sale The conditions for settlement of an account, such as a period of creditallowed or the rate of any cash discount.

Trade discount The amount allowed as a reduction of the list price when goods are soldby one business to another business.

Transaction on credit Taking ownership of an asset now but paying for it at a later date.

Trial balance A periodic check that the total of the debit balances equals the total of thecredit balances.

Unpresented cheque A cheque not yet presented to the bank for payment.

Vertical balance sheet A balance sheet presented to read downwards, like a story.


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Notes

Lesson 11

1 In practice, an invoice may be raised for all sales, both cash and credit. From the auditviewpoint, it is better to have all sales evidenced by an invoice.A retailer is unlikely toenter directly each small sale transaction by debiting the Cash Book and crediting theSales Account.A summarizing method is likely to be used, eg a till roll acting as a daybook.

Lesson 12

1 If the account were to be settled before a return is made, payment would then be madeon the gross figure.

Lesson 19

1 Note that the relevant Financial Reporting Standard allows development expenditureto be capitalized, provided there is substantial belief that future product income will arise as a result of the development expenditure.

Lesson 20

1 In a computerized system, entering purchases of fixed assets into a journal may not benecessary. All purchases can be dealt with through the Sales Journal (or Sales Day Book), with coding to ensure that revenue and capital purchases are properly separated.

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+-LCCI Level 1 - How to Pass Book-Keeping (Recommeded Book) -+

Documents

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straight line

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