Financial Accounting
Sample Paper 1
Questions & Suggested solutions
Financial Accounting Sample Paper 1 Page 1 of 26 NOTES TO USERS ABOUT SAMPLE PAPERS
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Financial Accounting Sample Paper 1 Page 2 of 26 Accounting Technicians Ireland
Year 1 FINANCIAL ACCOUNTING Sample Paper 1 EXAM DURATION THREE HOURS INSTRUCTION TO CANDIDATES PLEASE READ CAREFULLY In this examination paper the £/€ symbol may be understood and used by candidates in Northern
Ireland to indicate the UK pound sterling and by candidates in the Republic of Ireland to
indicate the Euro.
Answer ALL THREE questions from Section A. Answer ANY TWO of the three questions from Section B. If more than TWO questions are answered in section B, then only the first two questions, in the order filed, will be corrected. Candidates should allocate their time carefully. All workings should be shown. All figures should be labelled as appropriate e.g. €s, units etc. Answers should be illustrated with examples, where appropriate. Financial Accounting Sample Paper 1 Page 3 of 26 SECTION A
Answer ALL THREE QUESTIONS (Compulsory) in this Section
QUESTION 1 (compulsory)
The following trial balance was extracted from the books of M. Doherty, a sole
trader, on 31 December 2009:
Fixtures & fittings at cost
Accumulated depreciation on fixtures & fittings
Motor vehicles
Accumulated depreciation on motor vehicles
Inventories as at 1/1/2009
Receivables and payables
Bank
Prepayments 31/12/09
Accruals 31/12/09
Term loan
Purchases and sales
Sales and purchases returns
Discounts allowed and received
Carriage outwards
Insurance
Rent
Interest
Wages and salaries
Allowances for receivables 1/1/09
Irrecoverable debts
Drawings
Capital
€
420,000
112,560
74,450
98,030
7,800
546,500
21,400
18,400
21,000
33,700
55,000
15,520
74,200
7,210
36,540
1,542,310
€
58,800
47,900
101,200
17,800
14,200
210,000
879,000
11,650
19,640
4,900
177,220
1,542,310
The following information, which has not been accounted for above, is also
available:
1. Inventory as at 31 December 2009 was valued at cost at €83,500. This
figure includes inventory items that cost €12,800. Post year end these
inventory items were sold for €10,650 after incurring costs to sell of €970.
2. An item of fixtures & fittings was sold during the year for €16,980. The
cost of the fixtures & fittings sold was €32,450 and depreciation of
€19,460 had been charged as at 1/1/2009.
3. Depreciation is to be provided for as follows:
i.
Fixtures & fittings
4% straight line
ii.
Motor vehicles
15% reducing balance
The depreciation policy is to charge a full year’s depreciation in the year of
acquisition and none in the year of sale.
4. A review of receivables balances as at the year end identified €11,500 of
receivables that should be written off as irrecoverable.
5. The allowance for receivables is to be adjusted for 7% of the remaining
receivable balances.
Financial Accounting Sample Paper 1 Page 4 of 26 You are required to prepare:
i.
ii.
The Statement of Profit & Loss for the year ended 31 December 2009;
12 Marks
The statement of financial position as at that date.
8 Marks
Total 20 Marks
Financial Accounting Sample Paper 1 Page 5 of 26 Question 2 (compulsory)
a) Outline the situations were incomplete record techniques will be required
to produce a set of financial statements.
3 Marks
b) On 1 January 2009, P. Jones a sole trader owned a business, that had the
following assets and liabilities:
Motor vehicles
Accumulated depreciation on motor vehicles
Premises
Receivables
Allowances for receivables
Payables
Accruals
Inventory
Prepayments
Bank overdraft
Cash on hand
Term loan
€
124,125
21,030
450,000
119,250
2,100
96,000
9,750
33,400
780
11,415
110
210,000
You are required to:
i.
Calculate the proprietor’s capital as at 1 January 2009.
7 Marks
ii.
In brief, outline your understanding of why the incomplete record
technique used in part (i) will give the proprietors opening capital.
2 Marks
c) Despite being advised on the importance of maintaining proper books and
records P. Jones failed to do so in the year to 31 December 2009. He is
able to provide you with the following information:
Opening receivables debit balance
Closing receivables debit balance
Closing receivables credit balance
Amounts received from customers
Discounts allowed to customers
Irrecoverable debts written off
Interest charged to receivables
payment
for
slow
€
119,250
224,320
1,560
754,100
12,450
2,970
4,110
Based upon the information provided, you are required to calculate P.
Jones’s credit sales for the year to 31 December 2009. P. Jones is able to
tell you that all goods are sold on credit.
8 Marks
Total 20 Marks
Financial Accounting Sample Paper 1 Page 6 of 26 QUESTION 3 (compulsory) – Complete Any Four Parts
Part A
W. Willow is a sole trader. His business has decreased in recent years and as a
result he rents out two floors in his building that are excess to his current
requirements. Details for the year ended 31 December 2013 are as follows:
Rent paid in advance
31 December 2013
€/£
?
1 January 2013
€/£
8,000
Rent is paid to W. Willow bi monthly in advance. Rent for the year ended 30
September 2013 was charged at €/£4,000 per month, due to economic pressure
rent was reduced to €/£3,200 per month from 1 October 2013 thereafter.
€/£44,000 was received from the tenant during 2013.
You are required to prepare the rent T account for W. Willow for the year ended
31 December 2013.
5 Marks
Part B
Outline your understanding of the concepts of mark-up and margin.
3 Marks
A. Ash is a sole trader who sells one product. The selling price of the product is
€/£15. A. Ash currently enjoys a margin of 15% on the product.
Calculate the cost price of the product at the current margin of 15%.
2 Marks
Part C
Outline your understanding of the imprest system as it relates to petty cash.
2 Marks
Given the following information, calculate the cash replenishment required for the
month of December 2013.
Imprest cash float
Sundry postage
Taxi receipts
Stationary
Retirement gift
Depreciation on motor vehicles posted to the journal
Sundry cleaning costs
Financial Accounting Sample Paper 1 €/£
475
40
41
53
100
1,120
110
3 Marks
Page 7 of 26 Part D
The following information is available for L. Lawn a Not-for Profit tennis club.
Subscriptions in arrears
Subscriptions in advance
31 December 2013
€/£
10,580
6,305
1 January 2013
€/£
12,540
7,100
During the year subscriptions of €/£95,620 were received from members.
You are required to prepare the subscriptions T account for L. Lawn for the year
ended 31 December 2013.
5 Marks
Part E
B. Birch is a sole trader with the following information in relation his load
account:
Loan balance 1/1/13
Loan draw down on 1/5/13
Loan repayment 1/10/13
€
54,500
12,000
8,000
Interest on the loan was constant throughout the year at 5%. During the year to
31 December 2013 loan interest of €2,500 was paid. There was no opening
prepayment or accrual in relation to loan interest.
You are required to:
Prepare the interest account of B. Birch as it would appear in the nominal ledger
for the year ended 31 December 2013. Show clearly your workings on the
calculation of the interest charge for the year to 31 December 2013.
5 Marks
Part F
Outline your understanding of the accruals concept. With the aid of a relevant
example outline how the accruals concept impacts upon the preparation of a set
of financial statements.
5 Marks
Total 20 Marks
Financial Accounting Sample Paper 1 Page 8 of 26 SECTION B
Answer TWO of the THREE Questions in Section B
QUESTION 4
Mr A Mathews, a client of your firm, has provided you with the following bank
statement and bank account details in respect of the month ended 31 December
2009.
STATEMENT OF ACCOUNT - YOUR BANK LTD
Statement date - 31 December 2009.
Account No 123456
Date
Particulars
01-Dec-09 Balance forward
01-Dec-09 Cheque 1233
01-Dec-09 Lodgement
03-Dec-09 Cheque 1234
05-Dec-09 Direct Debit ESB
06-Dec-09 Credit Transfer VAT Refund
07-Dec-09 Cheque 1235
10-Dec-09 Lodgement
15-Dec-09 Cheque 1236
18-Dec-09 Credit Transfer Receivables Payment
20-Dec-09 Bank Charges for qtr ended Sept 09
21-Dec-09 Cheque 1237
21-Dec-09 Cheque 1238
22-Dec-09 Lodgement
23-Dec-09 Standing Order Leasing
Debit
5,000
6,600
1,350
2,820
25,488
660
3,885
9,645
4,500
Credit
Balance
61,526 Cr
56,526 Cr
6,000 62,526 Cr
55,926 Cr
54,576 Cr
4,800 59,376 Cr
56,556 Cr
5,550 62,106 Cr
36,618 Cr
11,550 48,168 Cr
47,508 Cr
43,623 Cr
33,978 Cr
1,500 35,478 Cr
30,978 Cr
The books and records of A Mathews show the followings transactions through the
bank account for the month of December 2009:
Date
Receipts
2/12/09
Balance
9/12/09
Lodgement
23/12/09 Lodgement
28/12/09 Lodgement
€
Date
Payments
62,526 1/12/09
2/12/09
5,400 5/12/09
12/12/09
14/12/09
19/12/09
20/12/09
1,500 24/12/09
24/12/09
12,900 28/12/09
31/12/09
Direct debit ESB
Cheque 1234
Cheque 1235
Cheque 1236
Bank charges
Cheque 1237
Cheque 1238
Cheque 1239
Cheque 1240
Cheque 1242
Balance
82,326
1/1/2010 Balance
€
1,350
6,060
2,820
14,688
660
3,885
9,645
12,921
4,233
6,291
19,773
82,326
19,773
Financial Accounting Sample Paper 1 Page 9 of 26 You are required to:
a) Outline in brief why the regular preparation of bank reconciliations is
important.
3 Marks
b) Write up the adjustments that are necessary to correct the bank account
in A Mathew’s books.
10 Marks
c) Prepare the bank reconciliation statement for A Mathews as at 31
December 2009.
7 Marks
Total 20 Marks
Financial Accounting Sample Paper 1 Page 10 of 26 QUESTION 5
a) When an individual decides to start a business, that business can be
organised in one of three ways. Provide a definition of each of these
business types.
6 Marks
b) Outline your understanding of the term limited liability.
2 Marks
c) Each business type, referred to in part a, has associated advantages and
disadvantages. For each of these business types provide two advantage
and two disadvantages.
12 Marks
Total 20 Marks
Financial Accounting Sample Paper 1 Page 11 of 26 QUESTION 6
A former colleague, B. Malone, recently started a business. While the first few
months of trading have proved successful, B Malone now realises that she knows
very little about financial accounting and has approached you for advice in
relation to the accounting issues outlined below:
a) An brief explanation of the function of the following books of prime entry
and how the books of prime entry fit into the overall accounting process:
I
ii
iii
Sales day book;
The cheque payments book;
The journal.
5 Marks
b) With the aid of appropriate examples, explain the difference between
capital and revenue expenditure and how such expenditure is treated in
the financial statements of a business.
5 Marks
c) An explanation of carriage inwards and why it is added to purchases in the
Statement of Profit & Loss.
3 Marks
d) B. Malone has provided you with the following information in relation to
VAT for the period since she began trading. She is unclear how much her
VAT liability is at present. You decide to prepare the VAT account in order
to calculate the VAT liability.
i
ii
iii
iv
VAT
VAT
VAT
VAT
on
on
on
on
sales €48,750;
sales returns €1,200;
purchases €26,700;
purchases returns €120.
Financial Accounting Sample Paper 1 7 Marks
Total 20Marks
Page 12 of 26 Financial Accounting
Sample Paper 1 – Suggested Solutions
Financial Accounting Sample Paper 1 Page 13 of 26 Solution One
M. Doherty
Statement of Profit & Loss for the year ended 31 December 2009
€
€
879,000
(21,400)
857,600
Sales
Sales returns
Net sales
Cost of sales
Opening inventory
Purchases
Purchases returns
74,450
546,500
(11,650)
609,300
(80,380)
Less closing inventory
Cost of sales
(528,920)
328,680
Gross Profit
19,640
Discount received
Less Expenses
Carriage outwards
Rent
Insurance
Interest
Wages and salaries
Discount allowed
Depreciation of fixtures & fittings
Depreciation of motor vehicles
Irrecoverable debts
Increase in the allowances for receivables
Profit on sale of FA
Total expenses
21,000
55,000
33,700
15,520
74,200
18,400
15,502
9,699
18,710
1,157
(3,990)
(258,898)
89,422
Net Profit
Financial Accounting Sample Paper 1 Page 14 of 26 M. Doherty
Statement of Financial Position as at 31 December 2009
2009
€
Non-current assets
Fixtures and fittings
Motor Vehicles
387,550
112,560
Current assets
Closing inventory
Receivables
Prepayments
2009
€
(54,842)
(57,599)
80,380
80,473
7,800
Total Assets
Equity and Liabilities
Capital
Capital
Profit for 2009
Accumulated profits
2009
€
332,708
54,961
387,669
168,653
556,322
177,220
89,422
266,642
Drawings
(36,540)
Non-current liabilities
Term Loan
230,102
210,000
Current liabilities
Payables
Bank overdraft
Accruals
101,200
820
14,200
116,220
556,322
Total Equity and Liabilities
Workings 1
€
83,500
(3,120)
80,380
Closing inventory as per question:
Less write down of inventory
Write down of inventory
Cost
Sales value
Costs to sell
NRV of inventory
Difference between cost and NRV
12,800
10,650
(970)
9,680
3,120
Financial Accounting Sample Paper 1 Page 15 of 26 Workings 2
€
32,450
(19,460)
12,990
16,980
3,990
Cost of F&F sold
NBV
Sales proceeds
Profit on sale
Workings 3
€
420,000
(32,450)
387,550
15,502
Cost of F&F as at 1/1/09
Disposals
Depreciation 4% SL
€
112,560
(47,900)
64,660
9,699
Cost of MV as at 1/1/09
Accumulated depreciation
Depreciation 15% RBM
Workings 4
€
7,210
11,500
18,710
Irrecoverable debts as per TB
Additional ID as per notes
Workings 5
€
98,030
(11,500)
86,530
6,057
(4,900)
1,157
Receivables as per TB
Irrecoverable debts as per W4
Allowances for receivables 7%
Opening allowances for receivables
Increase allowances for receivables
Financial Accounting Sample Paper 1 Page 16 of 26 Solution Two
Part A
Incomplete records techniques will be required to produce a set of financial
statements when a sole trader, for whatever reason, has not maintained proper
books and records. Also in some cases a sole trader will maintain proper books
and records but these have been destroyed due to a fire, flood or computer virus
etc. In such situations some figures are likely to be missing and incomplete
record techniques will be required to arrive at the missing figures.
Part B
i.
2009
€
Assets
Motor Vehicles
Accumulated depreciation motor vehicles
Premises
Receivables
Allowances for receivables
Inventories
Prepayments
Cash on hand
2009
€
124,125
(21,030)
450,000
119,250
(2,100)
33,400
780
110
704,535
Liabilities
Payables
Accruals
Bank overdraft
Term loan
96,000
9,750
11,415
210,000
Proprietors capital
327,165
377,370
ii.
The incomplete records technique used above relies upon the statement of
financial position balancing. The statement of financial position will always
balance because the debit entries will always equal the credit entries. This is the
case due to the dual aspect concept. The dual aspect concept states that every
transaction should have a two sided effect, one debit, one credit and these must
have the same value. The dual aspect concepts ensures that at any point in time
the assets of an entity equal the owner’s capital and outsider’s liabilities. In the
question above all the assets of the sole trader were known and all of the
liabilities with the exception of the proprietor’s capital were known. Therefore the
difference between the total assets and the total liabilities must equal the
proprietor’s capital.
Financial Accounting Sample Paper 1 Page 17 of 26 Part C
Details
Receivables Control Account
€
Details
Opening Balance
Interest charged
Credit sales
Amounts received from
119,250 receivables
4,110 Discounts allowed
868,920 Irrecoverable debts
Closing balance
1,560 Closing balance
993,840
Opening Balance
224,320 Closing balance
Financial Accounting Sample Paper 1 €
754,100
12,450
2,970
224,320
993,840
1,560
Page 18 of 26 Solution Three
Part A
2013
31/12/2013
Rent Receivable Account
€/£
Income Statement
45,600 01/01/13
Balance c/d
6,400
2013
Balance b/d
Bank
€/£
8,000
44,000
Balance b/d
52,000
6,400
52,000
01/01/14
Part B
Mark-up and margin are measures that businesses use to set and manage prices
to maximise profitability. Mark-up is the amount added to the cost of a product or
service to arrive at a price, thus the mark-up percentage is the margin divided by
the cost price and expressed as a percentage. The gross margin is the difference
between cost and the selling price, thus the gross margin percentage is the
margin divided by the sales price and expressed as a percentage.
€/£
15
(2.25)
12.75
Sales price with 15% margin
Margin at 15%
Cost of product
Part C
Under the imprest system a cash float is set for pretty cash – say €/£475. As
cash is paid out of petty cash it is replaced with receipts for the items purchased.
At all times remaining petty cash plus receipts in the petty cash tin will equal the
cash float. At the end of the month funds from the bank account are transferred
into petty cash to bring the balance of cash back up to the float. At this point the
expenses associated with the receipts are posted to the ledgers of the business.
Cash replenishment required for the month of December 2013:
€/£
Imprest cash float
475
Sundry postage
Taxi receipts
Stationary
Retirement gift
Sundry cleaning costs
Cash balance at month end
Cash replenishment required
(40)
(41)
(53)
(100)
(110)
131
344
Financial Accounting Sample Paper 1 Page 19 of 26 Part D
01/01/13
2013
31/12/2013
01/01/14
Subscriptions Account
€/£
Balance b/d (arrears)
12,540
01/01/13
Inc & Exp Account
94,455
2013
Balance c/d
6,305 31/12/2013
113,300
Balance b/d (arrears)
10,580
01/01/14
€/£
7,100
95,620
10,580
113,300
6,305
Balance b/d (advance)
Bank
Balance c/d
Balance b/d (advance)
Part E
Loan Balance
€
54,500
*
5%
=
=
66,500
*
5%
=
58,500
*
5%
Statement of Profit & Loss Charge
2013
31/12/13
Bank
Balance c/d
€
2,725
3,325
2,925
*
*
*
Interest Account
€
2,500 31/12/13
524
4/12
5/12
3/12
=
=
=
€
908
1,385
731
3,024
€
3,024
I/S charge
3,024
3,024
1/1/14
Balance b/d
524
Part E
Income is recognised in the financial statements as it is earned, not when the
cash is received. Expenditure is recognised as it is incurred, not when it is paid
for. When income is incurred over time (e.g. rental/interest income) or
expenditures are time-based (e.g. rent payments), the income and expenditure
recognised in the Statement of Profit and Loss should relate to the time period,
not to the receipts and payments of cash. The accruals concept gives rise to
accruals and prepayment in the accounts of businesses.
A practical application of the accruals concept is outlined below where expenses
are matched to the revenues that they helped to generate. For example in the
calculating the gross profit figure.
Gross profit is equal to sales minus cost of sales. In calculating the cost of sales
figure we are interested only in the cost of the inventory sold during the
accounting year. This is calculated by adding the inventory the business had at
the beginning of the accounting period (opening inventory) to the net purchases
of inventory made during the year, minus the inventory the business did not sell
during the accounting period (closing inventory). Closing inventory is not included
in the calculation of gross profit as it is still unsold at the end of the accounting
period, it did not contribute to the sales revenue generated during the accounting
period in question.
Only the cost of inventory sold during the year is matched to the sales revenue
generated during the year. Closing inventory in included as a current asset in the
Statement of Financial Position.
Financial Accounting Sample Paper 1 Page 20 of 26 Solution Four
Part A
The regular preparation of bank reconciliations is important for the following
reasons:
i.
ii.
Identification of errors, such errors may have been made either by
the bank, the company or both;
Items such as bank interest, charges, standing orders, direct debits
and dishonoured cheques. These will be known by the bank but not
identified by a business until it receives the bank statement and
prepares the bank reconciliation.
Part B
31/12/09
6/12/09
Bank Account
€
Balance
18/12/09
31/12/09
Balance b/d
10/12/09
4,800
15/12/09
150
23/12/09
11,550
31/12/09
Balance c/d
19,773
Vat Refund Omitted
Short Count in
Lodgment
CT from Receivables
Omitted
€
Cheque 1234 under
posted
Cheque 1236 under
posted
Standing Order
Omitted
3/12/09
36,273
20,433
540
10,800
4,500
20,433
36,273
Part C
Bank Reconciliation as at 31 December 2009
€
Balance per bank
30,978
Add outstanding Lodgment
Less O/S Cheques
1239
1240
1242
12,900
12,921
4,233
6,291
Balance
(23,445)
20,433
Financial Accounting Sample Paper 1 Page 21 of 26 Solution Five
Part A
A business can be organised as a sole trader, partnership or company.
A sole trader business is the simplest business type, it is a business that is owned
and operated by one person. However a sole trader business may employ more
than one person. In the eyes of the law the sole trader personally and the sole
trader’s business are one and the same and therefore a sole trader is fully
personally responsible for any losses that the business might incur.
A partnership business is one that is owned and controlled by at least two people.
Most partnerships have between two and twenty partners but there are examples
of partnerships, for example partnerships of accountants that have up to 50
partners. The operations of a partnership business tend to be more formalised and
most partnership businesses will operate under partnership agreements. These
agreements set down how important areas within the business are to be run and
managed. For example, the duties of each partner and the ratio in which they share
profits. In the absence of such an agreement the provisions of the Partnership Act
1890 apply.
A limited company is a business that is owned by its shareholders, run by its
directors and enjoys limited liability. Limited companies can either be private or
public. A private limited company does not sell shares to the public whereas a
public limited company does. Due to the large membership of limited companies
they tend to be large and in many cases have a multinational aspect.
Part B
Limited liability applies when a business and its owners are considered to be
separate and distinct in the eyes of the law. This means that an investor in a
business with limited liability can only lose the money that they have invested in
the business and no more. Limited companies enjoy limited liability, in the main
sole traders and partners in a partnership do not. Limited liability encourages
investor to invest money in a business as it limits the down side potential to a
certain level. This may be one of the reasons why limited companies tend to be
larger than sole trader and partnership businesses.
Part C
For a sole trader business the advantage and disadvantages are as follows:
Advantages
•
•
The sole trader has total control over the business and enjoys all of the
profits;
A sole trader business is cheap and easy to set up. There are very few forms
to fill out and the sole trader generally will only need to open a bank account
and inform the tax authorities.
Disadvantages
•
•
•
A sole trader has unlimited liability and therefore will be personally
responsible for any debts that the business generates;
Sole traders can find it difficult to raise long term finance as banks tend not
to want to lend them large sums and there are no other investors in the
business who can invest capital;
Sole traders tend to be small in size and therefore the business will usually
not grow to a sufficient size where it will enjoy economies of scale.
For a partnership business the advantage and disadvantages are as follows:
Advantages
•
•
Spreads the risk across more people than a sole trader business. Therefore
if the business was to get into financial difficulty there are more people to
spread the debt between;
Additional partners can bring resources, customers and skills into the
business, allowing partnership businesses to grow larger than sole trader
businesses.
Disadvantages
•
•
Profits have to be shared among the various partners;
There can be disagreement over the direction of the business. Any partner
within a partnership has less control over the running of the business than a
sole trader.
For a limited company the advantage and disadvantages are as follows:
Advantages
•
Limited companies due to their size tend to find it easier than sole traders
and partnerships to raise finance and as a result tend to be large. Many
enjoy economies of scale as a result of this;
23 •
The shareholders in a limited company enjoy limited liability. This means
that they are not personally responsible for any debts that the company
may generate. If a limited company runs into financial difficulty the
shareholders may lose their original investment but no more.
Disadvantages
• Limited companies can be costly and complicated to set up as there is
significantly more documentation to prepare than is the case for either a
sole trader or partnership business;
• Certain financial information must be made available to all users of financial
information. That is, it must be public information. This could potentially
affect the competitiveness of the company as potential sensitive information
has to be released to the public and is freely available to competitors.
(Other relevant advantages and disadvantages exist for each business type and
marks will be awarded for all relevant answers).
24 Solution Six
Part A
i.
ii.
iii.
The sales day book records credit sales.
The cheque payments book is part of the cash book which records all
transactions through the bank. The cheque payments book as the
name suggests records payments made by cheque.
The journal records all transactions that are not recorded in any
other book of prime entry. Examples included non regular
transactions for example the month end depreciation and accruals
journals.
The primary purpose of financial accounting is to record, summarise and classify
information that arises from the transactions that a business enters into. However if
the ledgers were updated each time a transaction occurred, the ledgers would
quickly become cluttered and errors may be made. Therefore when a transaction
occurs it is entered into the books of prime entry. Entry of a transaction into the
books of prime entry does not record the double entry required for that transaction.
However the books of prime entry do form the source for double entries for the
ledger accounts. From the ledgers the trial balance and finally the financial
statements are prepared.
Part B
Revenue expenditure is expenditure that is incurred for the purpose of running the
business. That is, this expenditure is on items which are short term in nature, (will
last for less than one year). Such items of expenditure are recorded in the
Statement of Profit & Loss and therefore impact on the profitability of a business.
Examples include: wages, purchases of inventory for resale and light and heat.
Capital expenditure is expenditure on items that tend not to be purchased for
resale but are used within the business to help generate profits. Such expenditure
tends to be long term in nature, that is, the item purchased tends to last for longer
than one year. Such items are recorded on the statement of financial position.
Examples of such expenditure are the acquisition of non current assets and the
repayment of loans.
Part C
Carriage inwards is the term commonly given to the transportation costs associated
with the purchase of goods. Such costs cover the cost to transport goods from the
supplier’s premises to the business’s own premises.
25 In some situations the supplier will bear these costs and as such the cost is part of
the purchase price charged to the business. In order situations the transport cost
will not be included in the purchase price but will be quoted separately. In order to
ensure that cost of sales and hence gross profit are consistently calculated in both
of the above scenarios carriage inwards when separately quoted is added to the
cost of purchases in the cost of sales section in the Statement of Profit & Loss.
Part D
Vat Control Account
VAT on purchases
VAT on sales returns
Balance c/d
€
26,700
1,200
VAT on sales
VAT on purchases
returns
20,970
48,870
Balance b/d
B. Malone has a VAT liability of €20,970
26 €
48,750
120
48,870
20,970