AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Chapter # 01
Bank Reconciliation Statement
Bank Reconciliation: is a statement of account which is prepared to bring cash book and
bank statement balances the same.
Steps in preparation of Bank Reconciliation Statement
Step # 01
Compare bank statement with cash book to find out the missing figures from cash book,
and prepare adjusted cash book or updated cash book to adjust the items which are in the
bank statement but not in the cash book.
(The final balance of adjusted cash book is transferred to the balance sheet as bank
balance under current assets).
Step # 02
Compare cash book with bank statement to find out missing figures in bank state and prepare
bank reconciliation in which cheques issued but not presented (called unpresented cheques),
and cheques deposited but not credited (called uncredited cheques) or any other banking
errors are adjusted
Other important Terms
Direct Debit: the direct payment system under which bank is instructed to pay to the
creditors on demand.
Credit Transfer: It is the direct deposit system under which a debtor pays the due amounts
in business bank account electronically.
Standing Order: The regular series of payments by a business, which are instructed to the
bank in advance and the bank acts accordingly on regular basis.
Bank Giro System: It also acts like a credit transfer in which a debtor pays in the business
bank account electronically.
Unpresented Cheques: Cheques issued by the business but it is not presented by the bearer
of the cheque.
Uncredited Cheques: Cheques received from the debtors or customers, and sent to the bank,
but not credited in the business bank account.
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Question # 01
May 2006 P2 Q2 (a)
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Question # 02
May 2011 P23Q2 (c & d)
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Chapter # 2
Bad Debts and Allowances for Doubtful Debts
Bad Debts: are irrecoverable loans. They are the expenses of the business.
Allowances for doubtful debts: are the estimates about the debtors or accounts receivable
which are unlikely to be unpaid in future.
When provision is calculated in the second or following years, they are compared with the
previous year and the transaction is decided according to increase or decrease in provision for
doubtful debt.
Accounting Treatment
Bad Debts
Provision for Bad Debts
Bad Debt Recovered
Bad Debts (Dr)
First Time Created / First
Cash / Bank (Dr)
Accounts Receivable (Cr)
Year
Bad Debt Recovered (Cr)
Income Statement (Profit and
Loss a/c) (Dr)
Allowances for Doubtful Debts
(Cr)
Income Statement (Profit
Second Year (in case of
Bad Debt Recovered (Dr)
and Loss Account) (Dr)
increase)
Income Statement (Cr)
Bad Debts (Cr)
Inc ome Statement (Profit and
Loss a/c) (Dr)
Allowances for Doubtful Debts
(Cr)
Third Year (in case of
decrease)
Allowances for Doubtful Debts
(Dr)
Income Statement (Profit and
Loss a/c) (Cr)
Basis of deciding the allowance for doubtful debts
 Age of receivables
 Past experience of collection with the receivables
 Amount of receivables
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Question # 01
M 09 P2 Q2 (A)
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Question # 02
N11P2Q2
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Chapter # 03
Accounting for Non-Current Assets
Depreciation – is the reduced value of fixed asset; it is a non-cash expense, and part of the
profit and loss account.
Reasons for accounting for depreciation

Wear and tear / asset gets old

Time lapse

Economic Factors such as recession or boom, assets were expensive when bought due
to boom, and cheaper due to recession

Arrival of new models / versions
Methods of Depreciation
Straight Line Method
Using this method, every year the same depreciation is taken against the assets.
However, the depreciation calculation can be as percentage of fixed asset or the following
formula is used:
Cost – Residual / Scrap/ Disposal Value
------------------------------------------------------Useful life of the asset
Diminishing (Reducing) Balance Method
Using this method, in the first year given percentage of depreciation is calculated against the
cost of the fixed asset, and in the following years, the given percentage is calculated against
the net book value of the fixed assets.
Under reducing balance method, in the beginning depreciation will be high and in later years
it falls as amount of net book value decreases.
Revaluation Method
Under this method, the addition of fixed asset is added to the opening value of fixed assets,
and deducted the closing value of fixed assets; the balance is depreciation for the current
year.
Suitability of Method of Depreciation
(1) Straight Line Method: Used for the assets which do not have large variations or every
year a new model or version does not arrive in the market.
(2) Reducing (or diminishing) Balance Method: Used for the assets which have a new
arrivals every year and previous models of such assets lose their value drastically.
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
(3) Revaluation Method: Used for the assets which gets lost very often or they are loosely
used such as loose tools including pliers, or screw drivers.
Accounting Treatment for Depreciation
Income Statement / Profit and Loss a/c (Dr)
Provision for Depreciation (Cr)
Fixed assets’ Disposal
Fixed assets are also disposed off after certain number of years or when the business does not
need the fixed asset any more.
The double entries for disposal are:
1
Double Entry
Amount
Fixed Asset Disposal (Dr)
Amount will be the cost of fixed asset
Fixed Asset (Cr)
2
Provision for Depreciation (Dr)
Fixed Asset Disposal (Cr)
3
Cash / Bank /
Amount will be total depreciation till the
disposal of fixed asset
Amount will be the sale proceed
Accounts Receivable (Dr)
Fixed Asset Disposal (Cr)
4
In case of loss on sale
Amount will be the difference of debit
Income Statement /
and credit sides of disposal account /
Profit and Loss a/c (Dr)
amount of profit or loss on sale of fixed
Fixed Asset Disposal (Cr)
asset.
In case of profit on sale
Part exchange of asset
Fixed Asset Disposal (Dr)
New Asset (dr)
Income Statement /
Bank (cr) remaining value of asset
Profit and Loss a/c (Cr)
Disposal (cr) at agreed value
Calculation of Rate of Depreciation
If you were asked to calculate rate of depreciation (usually in straight line method),
remember the rate will be calculated on the basis of :
 Per annum depreciation
 Depreciable amount (i.e. cost – scrap / disposable value)
Rate of Depreciation = Annual Depreciation / Depreciable amount*100
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Question # 01
N09P2Q2
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Question # 02
M10P2Q2
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Question # 03
N11P2Q1
(d)
Calculate the annual depreciation charge using straight line method
(e)
Prepare the disposal of machinery account if the machinery is sold for $12000 at the
end of four years
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Question # 04
N2011P23Q2 (A)
REQUIRED
(a)
(b)
Prepare the following ledger accounts for the year ended 31 December 2010.
(i)
Motor vehicles account
(ii)
Provision for depreciation of motor vehicles account
(iii)
Motor vehicle disposal account
Prepare an extract from the statement of financial position (balance sheet) for
non-current assets at 31 December 2010.
(c)
Explain why businesses provide for depreciation on their non-current assets.
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Question # 05
May 12P23Q2 (a to d)
REQUIRED
(a)
Calculate the total depreciation for each of the years 2010 and 2011.
(i)
Motor vehicles
(ii)
Equipment
Early in 2012, consideration was given to changing to the reducing (diminishing)
balance method, with the following rates applying to the balance at the end of each
year.
Motor vehicles 25%
Equipment 20%
A full year’s depreciation would be charged irrespective of the date of purchase.
REQUIRED
(b)
Calculate the total depreciation for each of the years 2010 and 2011, using the
Reducing (diminishing) balance method for:
(i)
Motor vehicles
(ii)
Equipment
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
The original profits for the first two years in business were:
2010 $86 000
2011 $94 000
REQUIRED
(c)
Prepare a statement to show the revised profits for the years 2010 and 2011, if
the reducing (diminishing) balance method had been used.
(d)
Explain why it is appropriate to use the reducing (diminishing) balance method for
motor vehicles
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Chapter # 4
Inventory Valuation
The quantity held is normally checked by means of a physical inventory check at the end of
the accounting period
Inventory Valuation Methods
Most common methods used for inventory valuation under IAS2(SSAP9) are listed below:
a) Last in First Out (LIFO)
b) First in First Out (FIFO)
c) Weighted Average Cost (AVCO)
d) Standard Cost
e) Base Cost
f) Replacement Cost
Under SSAP 9 methods (b) to (d) are acceptable whereas IAS2 only accepts (b) and (c)
methods of inventory valuation; however from examination point of view first three are
important
FIFO
 Inventory value is closes to the current market value because the price of most recent
goods is being used
 More realistic to apply when goods are perishable
 FIFO is acceptable to the inland revenue and is also to SSAP9 and IAS2
 Inventories are valued at actual prices paid to the suppliers
 Simple and easy to use
 In the time of rising prices, FIFO will result in lower cost of sales and inflate the
profits
 When goods are returned to suppliers, the cost at which it was purchased is to be
reduced from the inventory balance, but the balance column has no such lot
LIFO
 Relatively simple and easy to operate
 Closing is based on most recent pricing hence more realistic
 Inventories are valued at actual prices paid to supplier
 In rising prices, inventories are valued at lower costs, hence prudence is followed
 In days of rising prices, LIFO calculates higher cost of sales and lower profit
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
 Not acceptable under SSAP9, IAS2 and inland revenue
 Inventory under LIFO is valued at outdated prices which might make balance sheet
less relevant
AVCO
 Most satisfied inventory valuation when regular fluctuation in prices occur
 Acceptable to Inland Revenue, IAS2, and SSAP9
 Use of average pricing make profit comparison of different periods easier and realistic
 Values identical items at the same cost even if they are purchased at different prices
and dates
 Prices for inventory valuation is never the same as price paid for purchases
 Risk of error is inventory valuation increases due to rounding off.
Base Cost: Cost of buffer inventory which is never sold and valued at original cost; not
acceptable by SSAP9 (IAS2) and Inland revenue
Replacement Cost: Cost at which inventory could be replaced. Replacement cost at the
time of each sale must be found which may involve considerable work; not acceptable by
SSAP9 (IAS2) and Inland Revenue
Relationship between inventory valuation and physical flow of goods
Physical flow is FIFO in practice however theoretically any one of the methods could be
used
Exception of inventory movement could be LIFO for some goods e.g. steel inventory
such as TR or girders as they are so bulkier that it is difficult to keep under older
inventories
Liquid products are outflow with mix of old and new arrivals. E.g. Petrol, hence AVCO is
practiced
Basis of inventory valuation
If selling price is used, it will bring current assets high hence against prudence concept
Base cost and replacement cost are not acceptable by Inland, SSAP9 and IAS2
Only valuation basis left with original cost or net realizable value
Inventory Valuation and Accounting Concept
Historical cost concept in accounting states that inventory should be valued at its
original cost and its profit should not be recognized until inventory is sold
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
If one considers sales difficult at profit, then valuation should be based on prudence
concept i.e. lower of cost or NRV
NRV = sales price – cost to bring in saleable condition – any other selling expenses
Lower of cost or net realizable value also follows matching concept, because any fall in
cost of inventory is accounted for in the current year and included in income statement
Also follows Going Concern because inventory will be sold in the normal course of
business unless there is an evidence that the business may soon cease trading
However violates consistency concept because inventory is valued different in different
times.
Inventory valuation when there are number of items
When there are number of inventories with various nature or type then cost or net
realizable basis should be applied separately
Calculation of inventory for Work in Progress
Based on prime cost plus proportion of factory overheads, however selling, distribution,
administration and financial expenses are not included in its valuation
Errors in inventory valuation
Inventory overstated
Type of error
Closing inventory
overstated
Closing inventory
understated
Opening inventory
understated
Opening inventory
overstated
Last year
profit/capital
No effect
Current year
profit
Increase
Current year
assets
Increase
Next year
profit
Decrease
No effect
Decrease
Decrease
Increase
Decrease
Increase
No effect
No effect
Increase
Decrease
No effect
No effect
Goods sent to customers on sale or return basis is an unapproved sale and should not
be included as sales until customer acknowledges; the same should be from business
point of view for unapproved purchases
Inventory Valuation System
Periodic – involves inventory valuation as complete count at a particular date in an
accounting period
Perpetual – involves maintaining records of inventory on a continuous basis. Where a
company adopts a perpetual inventory system, it provides a continuous record of inward and
outward movement of goods.
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Inventory count and the balance sheet date
Inventory count is a process of physically checking and counting the inventory. The
inventory value included in the balance sheet as current asset is normally the result of a
physical inventory count.
Mark-up, and Margin
Mark-up is gross profit as % of cost of sales; Margin is gross profit as % of sales.
Mark-up = Gross profit / cost of sales * 100
Margin = Gross profit / sales * 100
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Question # 1
May 2002 P2 Q2 (a, b, c)
Janice Jersey’s first 6 months of trading showed the following purchases and sales of
inventory
1990
Purchases
January
280@$65 each
February
March
140@$82 each
100@$69 each
April
May
Sales
190@$85 each
220@$72 each
June
200@$90 each
Required
Calculate Janice’s profit for the 6 months ended 30 June 1990 using the following methods of
inventory valuation:
(a) FIFO (First in first out)
(b) LIFO(Last in first out)
(c) AVCO(Weighted Average Cost) to 2 decimal places
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Question#02
May 07 P2 Q2 (a to d)
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Question # 03
M 09 P2 Q2 (B)
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Question # 04
M07P2Q2
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Question # 5
N10P2Q2
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Chapter # 5
Financial Statements of Sole Traders
Income Statement (previously Trading and Profit and Loss Account) has two parts:
(1) Trading Account – includes only the trading activities such as buying and selling. In
trading account part of the income statement, business calculates gross profit / loss.
(2) Profit and Loss Account – includes the other incomes and expenses. In profit and
loss account part of the income statement, business calculates net profit / loss.
Income statement can be prepared in both vertical and horizontal formats:
Horizontal Format
Name of the Business
Income Statement
For the Year Ended --------------------------$
$
Opening Inventory (Stock)
xxx
Revenue (Sales)
Add: Purchases
xxx
Less: Sales Return
Less: Purchase Return
(xxx)
Add: Carriage Inwards
xxx
xxx
(xxx)
Less: Closing
Inventory(Stock)
(xxx)
Cost of Sales
xxx
Gross Profit c/d
xxx
-------------------
----------------xxxx
Net Sales
xxx
-----------------
---------------Less: Expenses:
Gross Profit b/ d
xxx
Salaries
xxx
Rent
xxx
Electricity Bill
xxx
Depreciation
xxx
Commission Received
xxx
Bad Debts
xxx
Discount Received
xxx
Insurance
xxx
Net Profit
xxx
Add: Other Incomes
-----------------
--------------------
-----------------
-------------------
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Name of the business
Balance Sheet
As at ------------------------------------Non-Current (Fixed) Assets
$
Land
xxx Capital
xxx
Building / Premises
xxx Add: Net Profit
xxx
Motor Vehicles
xxx Less: Drawings
xxx
Fixtures and Fitting
xxx
Equipment
xxx
Current Assets
Inventory (Stock)
Capital (Owner’s Equity)
$
Current Liabilities
xxx Accounts Payable (Creditors) xxx
Accounts Receivable (Debtors) xxx Bank Overdraft
Bank
xxx
Cash
xxx
xxx
xxx
xxx
Income Statement and Balance Sheet are prepared with the help of trial balance.
In trial balance, all the assets and expenses will always be debited, and all the incomes and
liabilities will be credited. Hence, find these items on their respective sides in trial balance.
Capital amount given in trial balance is called opening or old capital, which may change by
new investment, earning net profit or sustaining losses, and withdrawing money for personal
use (i.e. drawing). The new capital after adjustments of above items is closing capital.
Capital increases due to incomes, and decreases due to expenses.
New Capital = Old Capital +Net Profit + New Investment – Drawings
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Vertical Format
Name of the Business
Income Statement
For the Year Ended --------------------------$
Revenue (Sales)
xxx
Less: Sales Return
xxx
$
-----------------Net Sales
xxx
Less: Cost of Sales
Opening Inventory (Stock)
xxx
Add: Purchases
xxx
Less: Purchase Return
(xxx)
Add: Carriage Inwards
xxx
Less: Closing Inventory(Stock)
(xxx)
-----------------
(xxx)
-----------------
Gross Profit
xxx
Less: Expenses
Electricity
xxx
Insurance
xxx
Rent
xxx
Bad Debts
xxx
Depreciation on fixed assets
xxx
-----------------
(xxx)
Add: Other Incomes
Commission Received
xxx
Discount Received
xxx
xxx
----------------
--------------
Net Profit
xxx
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Name of the business
Balance Sheet
As at ------------------------------------Non-Current (Fixed) Assets
$
$
Land
xxx
Building / Premises
xxx
Motor Vehicles
xxx
Fixtures and Fitting
xxx
Equipment
xxx
-----------xxx
Current Assets
Inventory (Stock)
xxx
Accounts Receivable (Debtors)
xxx
Bank
xxx
Cash
xxx
------------xxx
Less: Current Liabilities
Bank Overdraft
(xxx)
Accounts payable
(xxx)
------------
Working Capital (or Non-current assets)
Net Assets
xxx
-----------xxx
Financed By
-------------
Capital
xxx
Add: Net Profit
xxx
Less: Drawings
(xxx)
----------xxx
----------
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Adjustments in Final Accounts
Accruals and Prepayments
Accruals: are the expenses or incomes which are due but unpaid or not received.
Accrued incomes are the current assets; and accrued expenses are the current liabilities.
In profit and loss accounts, they should be added to their respective incomes and expenses
considering they belong to current year though unpaid and not yet received.
Prepayments: are the expenses or incomes which are paid or received in advance. Prepaid
Expenses are current assets; prepaid incomes are current liabilities.
They should be deducted from their expenses or incomes under profit and loss accounts as
they do not belong to current year.
General Entries
Prepaid Expenses
Prepaid Incomes
Prepaid Expenses (Dr)
Incomes (Dr)
Expenses (Cr)
Prepaid Incomes (Cr)
Accrued Expenses
Accrued Incomes
Expenses (Dr)
Accrued Income (Dr)
Accrued Expenses (Cr)
Income (Cr)
Prepaid expenses and accrued income are the current assets therefore their opening balances
will be debit; and prepaid incomes and accrued expenses are the current liabilities and their
opening balances will be credit.
You will be required to prepare the expenses and incomes accounts in which you will have
to find out the figures for expenses and revenues, which will be required to be transferred to
the profit and loss account, or the closing balances of prepaid or accrued.
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Question # 01
May 2008 P2 Q1 (A & B)
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Question # 2
May 2010 P21Q1
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Question # 3
P22 Q1 (A & B)
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Question # 04
May 2012 P23 Q2
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Chapter # 6
Departmental Accounts
These accounts are prepared and used by the businesses having range of products or services
divided into various sales departments in which each department has to prepare its own
income statement, however a combined balance sheet is prepared.
There is no problem in allocation of direct incomes and costs such as sales (or turnover),
wages, and material costs as they are already separate for each department.
There are other overheads, or expenses which have to be apportioned among the departments
using particular basis such as:
 Rent
 Telephone bills
 Canteen expenses
 Electricity bills
 Depreciation of fixed assets
The above overheads are not given pre-divided, because they are combined for all the
departments.
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Question # 1
November 2002 P2 Q1 (A & C)
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Question # 2
May 2012 P21 Q1
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Chapter # 8
Control Accounts
Control Accounts are memorandum accounts for debtors and creditors. They are prepared as:
Sales Ledger Control Account – for debtors (or accounts receivable)
Purchases Ledger Control Account – for creditors (or accounts payable)
Sales Ledger Control Account
Source of Information
(Items included)
Opening balances
Total of balances in debtors accounts under
sales ledger
Credit sales
Total of sales day book
Return Inwards
Total of sales return day book
Bad Debts / Bad Debt Recovered
General Journal
Bank and Cash received from debtors
Cash Book (Receipt side)
Discount Allowed
Cash Book (Receipt Side)
Interest Received on over due payments
General Journal
from debtors
Set off / Contra
General Journal
Closing Balance
Total of balances in debtors accounts under
sales ledger
Purchases Ledger Control Account
Source of Information
(Items included)
Opening balances
Total of balances in creditors accounts under
purchases ledger
Credit Purchases
Total of purchases day book
Return Outwards or Purchase Return
Total of purchases return day book
Bank and Cash paid to creditors
Cash Book (Payment side)
Discount Received
Cash Book (Payment Side)
Interest charged by creditors
General Journal
Closing Balance
Total of balances in creditors accounts under
purchases ledger
Set Off: The concept of set off refers to clearing off the due amounts with the creditors who
are business debtors also:
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
To set off, businesses reduce the creditors, and debtors both against each other, the excess
amount is then paid by the party, who had larger due amount.
Double Entry
Set Off: Purchase Ledger (Dr)
Set Off: Sales Ledger (Cr)
Sales Ledger Control Account
$
$
Balance b/d
xxx
Balance b/d
xxx
Credit Sales
xxx
Sales Return
xxx
Dishonoured Cheque
xxx
Bad Debts
xxx
Interest Received
xxx
Discount Allowed
xxx
Balance c/d
xxx
Bank and Cash
xxx
Set off: PL
xxx
Balance c/d
xxx
-------
------
xxx
xxx
====
===
Purchase Ledger Control Account
$
$
Balance b/d
xxx
Balance b/d
xxx
Purchases Return
xxx
Credit Purchases
xxx
Set off: SL
xxx
Interest due
xxx
Discount Received
xxx
Balance c/d
xxx
Bank and Cash
xxx
Balance c/d
xxx
-----xxx
------xxx
===
====
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Uses / Advantages of Control Account
 Control accounts provide a check on the internal accuracy of the ledger accounts
 They identify the ledger or ledgers in which errors have been made when there is
difference on trial balance
 Provide the final balances of debtors or creditors
 Limit the frauds or deception with respect to sales and purchases or cash / cheque
payments or receipts
 Any missing figure such as credit sales or credit purchases can be identified
Limitations/Drawbacks of Control Account
 If control account itself is based on some errors such as posting or entering of data
from day books or ledgers, it might not restrict the errors
 If the system of maintaining day books, ledgers and control accounts are prepared by
the same group or individuals, the frauds might not be restricted
 Control accounts are only limited to debtors and creditors, they do not focus on other
items such as stocks, or accruals.
Amended Control Accounts and Statement of reconciliation of control account to ledger
accounts
There are four types of errors which may occur either in control account or ledger accounts,
which have to be posted to the amended control account and statement of reconciliation to
bring the balances of control accounts and the ledger accounts of individuals
1. If an error occurs in total of day books, then post to the amended control accounts;
2. If the error is in the details of the day books then post to both amended control
accounts and the statement of reconciliation;
3. If the error is from an individual ledgers then post to the statement of reconciliation
only;
4. If the error is from control account then post to the amended control account only;
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Question # 1
N04 P2 Q2
(ii) Statement of reconciliation of sales ledger to sales ledger control account to bring the
balance equal to the amended sales ledger control account
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Question # 2
M08 P2 Q2 (B)
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Question # 3
M10P2Q2
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Question # 4
M11P22Q1
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Question # 5
November 2011 P22Q2 (A)
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Chapter # 9
Accounts for Incomplete Records
The businesses such as unincorporated businesses or the sole traders are run by the
businessmen who might not know the detailed accounting knowledge hence they do not
maintain the double entry system. However, they have scattered information about their
business. They might not know how much profit the business has earned or how much loss it
has sustained. The tax department asks them to submit their returns to calculate the tax
payable, they might not know the profits of the businesses, hence they have to get the
services of some experts in accounting who prepares their books of accounts using the
available scattered information.
Statement of Calculation of Net Profit
In the exam, you are asked to calculate net profit for the business, but not given any
information such as sales, cost of sales, and expenses. However you are provided the
information about opening capital, closing capital, and drawings, or any additional capital
invested. For this purpose, we prepare statement of calculation of net profit
Name of the business
Statement of Calculation of net profit
For the year ended ------------------------------------------------------------------------------------------------------------------------------------------------------------------$
Closing Capital
xxx
Add: Drawings
xxx
Less: New Capital Introduced
(xxx)
Less: Opening Capital
(xxx)
Net Profit / (Loss)
xxx
-----------------------------------------------------------------------------------------------------------Statement of Affairs
It is same as balance sheet, only the title is written as Statement of Affairs. The purpose of the
statement at the opening and closing dates is to find out capitals, because the soletrader
business’ owners do not know how much capital they had in the beginning and how much it
has become now.
Credit and Total sales
In order to calculate credit sales, total debtors account is drawn; it is same as sales ledger
control account.
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Total sales are calculated by adding cash and credit sales
Credit and Total Purchases
In order to calculate credit purchases, total creditors account is drawn; it is same as purchases
ledger control account.
Total purchases are calculated by adding cash and credit purchases
Expenses and Income Accounts
Always prepare expenses and incomes accounts to make adjustments for prepayments and
accruals amounts.
(Refer to above adjustments in final accounts)
Cash and Bank Accounts
This is a great help in identifying the missing figures of cash or bank, if cash and bank
accounts are prepared. Also any payments received from debtors or paid to creditors can also
be found through these accounts.
Two Pieces of information are missing
In order to find out two pieces of information missing in which one can be identified with
assurance and other could be based on estimation based on given information. E.g. in the
question, it is mentioned that the owner has withdrawn some cash amounts or by cheque, but
cannot remember how much. In this case, one figure is easily found based on given
information and the other could be estimated i.e. cash drawings or cheque drawings stating as
balancing figure.
Finding out closing stock or stock lost by fire or theft
Often a question is being asked that the business does not know its closing stock or stock lost
by fire or theft, but business does not know what was the value.
To find out above, we have to use the concept of margin or mark up in which simply mark up
or margin information are provided. One can easily find out cos of sales and assume opening
stock and purchases are given and closing stock or stock lost by theft or fire will be the
amount of difference between cost of sales, and addition of opening stock and purchases.
Concept of margin and mark-up to find out Sales and Cost of Sales
Margin is profit percentage on sales; and Mark-up is profit percentage on cost of sales. If
sales and mark-up are given, and the business wants to find out cost of sales, first convert
mark-up into margin, which is mark-up / mark-up + 100, then multiply margin with sales to
calculate profit and take the difference of sales and profit to calculate the cost of sales;
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
If margin and Cost of sales are given, convert margin into mark-up by margin / 100 – margin
and multiply mark up with cost of sales to calculate the profit, which then added with cost of
sales to calculate sales.
Finally prepare income statement and balance sheet as all the information required is
available.
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Question # 1
M 03 P2 Q1
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Question # 02
N04 P2 Q1 (a to d)
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Question # 3
N07 P2 Q2 (a & b)
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Question # 4
N 08 P2 Q2 (A)
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Question # 05
M 09 P22 Q1 (a & b)
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Question # 6
May 2010 P23 Q1
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Question # 08
November 2010 P22 Q1
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Question # 09
November 2010 P23 Q2 (D, E, F)
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Question # 10
May 2011 P22 Q1
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Question # 11
May 2011 P22 Q2 (A)
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Question # 12
N11 P21 Q1
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Question # 13
May 2012 P23 Q1
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Chapter 10
Accounts of Non-profit organizations
Examples of such businesses could be clubs, charitable institutes, educational institutes, and
NGOs.
Major sources of revenue are:

Subscriptions (membership fee from members)

Donations

Competition Fee

Profit from refreshment or canteen trading activities
Differences between terms used by trading (or profit making), and non-trading (nonprofit making) organizations
Profit –making organizations Non-profit making organizations
(i)
Income statement
Income and Expenditures Account
(ii)
Capital
Accumulated Fund
(iii) Cash Book
Receipt and Payment Accounts
(iv) Net Profit
Surplus of income over expenditure
(v)
Deficit
Net Loss
Life Time Subscription
Some clubs or charitable institutes offer their members life time subscription in which they
calculate the average age of a member and multiply with the annual subscription, which is
then credited to a separate subscription account, which is later debited with the yearly
subscription amounts and transferred to income and expenditure account. The rest one year’s
subscription is taken as current liability and the rest as long term liability.
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Life Subscription Account
$
Income and
$
Bank
Expenditure Account
xxx
Balance c / d
xxx
xxx
------
------
xxx
xxx
------
-----xxx
Balance b/d
Subscription Received Account
$
Balance b/d
(Accrued)
xxx
Income and
Expenditure Account
xxx
Balance c / d
xxx
(Prepaid)
------
$
Balance b/d (prepaid)
xxx
Bank
xxx
Bad Debts
xxx
Balance c / d (Accrued)
xxx
xxx
------
------
xxx
Balance b / d
(Accrued)
-----xxx
xxx
Balance b/d (Prepaid)
Subscription is an income; hence any accrued income is business current asset; whereas any
prepaid income is a business current liability.
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
If donation or gift amounts mention that they are for the purpose of buying a fixed asset, then
they have been capitalized, and should be added to accumulated fund under financed by
section of the balance sheet.
Otherwise they are revenue receipts and must be part of income and expenditure account.
Differences between income and expenditure account, and receipt and payment account
1. Income and expenditure account keeps the records of business income and
expenditures, and calculates the net results either surplus or deficit. Receipt and
payment account maintains the records of cash inflow and outflow of cash amounts
and the final answer will be bank and cash balances.
2. Income and expenditure is accrual and prepayment based and involves all the
adjustments related to income and expenditures. However, receipt and payment
account shows no adjustment but purely money received and paid during the year
regardless for what and which year.
What if rate of depreciation for fixed assets is not given?
Then draw the fixed asset account.
Fixed Asset Account
$
$
Balance b/d
xxx
Disposal
Bank (Additions)
xxx
Depreciation (Balancing
Figure)
xxx
xxx
xxx
------
Balance b / d
Balance c / d
------
xxx
xxx
------
------
xxx
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Question # 01
N03 P2 Q1
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Question # 02
N05P2Q2
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Question # 03
M06P2Q2
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Question # 04
November 2009 P21 Q2
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Question # 05
November 2010 P22 Q2
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Question # 06
M10P23Q1
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Question # 07
M11 P21 Q2
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Question # 08
November 2011 P23 Q2 (B)
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Chapter # 11
Financial Statements of Partnership
Partnership
A business which involves voluntary association of two to twenty people as partners in the
business
Partnership Deed
Also called partnership agreement; all the partners are required to sign a written partnership
agreement before starting partnership business so that in business disputes could be avoided.
A partnership agreement may include the following:
 The amount of capital invested in the business by all the partners
 The nature of work the partnership will carry out
 The profit and loss sharing ratio
 The duration of the partnership
 The arrangement for absence, retirement, and how new partner will be admitted
Advantages of partnership
 More capital than that of sole trader business as there are more than one person as
investor in the business (however in banking partnership, there could be more than 20
partners as investors, because the banking business needs as much capital as possible)
 Responsibility of work, decision making, and burden of unlimited liability can be
shared among the partners
 Motivation for all the partners as greater the hard work and dedication is contributed
by the partners, the more profit is enjoyed by all the partners
Disadvantages of partnership
 Unlimited liability for all the partners, however in limited partnership, all the partners
will have limited liability except one partner who will be responsible for the debts and
losses of the business and he will be the one who will sell all of his property to
compensate the losses
 No separate legal identity which means in partnership also there will be a risk of
discontinuity but not as much as in sole trader ship. If there are two partners, one dies,
business could be at the risk of discontinuity.
 (Businesses with no separate legal identity is called unincorporated business)
 Risk of disagreement among partners on various decision making
 Dishonesty of one particular partner may put every one into loss
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 Limited capital as the partners will only be limited to 20 partners except banking
partnership
Accounting Treatment
Income Statement – It will be same as sole trader accounts except the appropriation
accounts.
Appropriation part of the income statement shows the distribution of profit among the
partners
Name of the Firm
Profit and Loss Appropriation Account
For the year ended -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------$
$
Net Profit
xxx
Add: Interest on Drawings
A
xxx
B
xxx
-------
xxx
-----xxx
Less: Interest on Capital
A
xxx
B
xxx
Salary – A / B
xxx
-------
(xxx)
-------xxx
Profit Share:
A
xxx
B
xxx
-------
xxx
------
----------------------------------------------------------------------------------------------------------------------------------------------
Conditions in Partnership for treatment of capital
If Capital has to be fixed:
(a) Prepare Capital Accounts with no change;
(b) Prepare Current Accounts with postings of appropriation transactions
Double Entries
In Case of incomes of partners such as interest on loan / capital; share of profit, and salary of
partners:
Income Statement (Profit and Loss Appropriation a/c)
Current a/c
(Dr)
(Cr)
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In Case of partners’ expenses such as drawings, and interest on drawings:
Current a/c
(Dr)
Income Statement (Profit and Loss Appropriation a/c)
(Cr)
Partners’ Current account is prepared to maintain the records of partners’ incomes and
expenses. The debit balance of partners’ current account shows a negative balance and
partners have withdrawn more than their incomes; the credit balance of partners’ current
account shows a positive balance means partners have not overdrawn from the business.
Partners’ Current Account
A
Balance b/d
xxx
B
xxx
Drawings
Interest on drawings
A
Balance b/d
B
xxx
xxx
xxx
xxx
xxx
xxx
Interest on capital
xxx
xxx
Salary
Share of Profit
Balance c/d
xxx
xxx
xxx
xxx
----------- ---------
--------
---------
xxx
xxx
xxx
xxx
======
=====
===== =====
Balance b/d
xxx
xxx
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
In case partners’ capital is kept fluctuating, no current account is opened; in this case
all the current account transactions are posted to the capital account
Partners’ Capital Account
A
Balance b/d
xxx
B
xxx
Drawings
Interest on drawings
A
Balance b/d
B
xxx
xxx
xxx
xxx
xxx
xxx
Interest on capital
xxx
xxx
Salary
Share of Profit
Balance c/d
xxx
xxx
xxx
xxx
----------- ---------
--------
---------
xxx
xxx
xxx
xxx
======
=====
===== =====
Balance b/d
xxx
xxx
Important points to be noted
 If no profit or loss ratio is being given, assume equal distribution;
 If interest on loan is not given, assume it is 5%
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Balance Sheet in partnership
It is same as common balance sheet, however financed by will include only current account
balances and capital balance. Current account balances can be either calculated in the
separate current account or in the balance sheet itself.
Balance Sheet (Extract)
-----------------------------------------------------------------------------------------------------------Financed by
Capital Accounts: A
xxx
B
xxx
-------- xxx
A
B
Current Account Balance b / d
xxx
xxx
Add: Interest on Capital
xxx
xxx
Salary
xxx
xxx
Profit Share
xxx
xxx
--------xxx
Less: Interest on drawings
Drawings
Current Account Balance c / d
------xxx
=====
=====
xxx
xxx
xxx
xxx
---------
---------
(xxx)
( xxx)
=====
=====
xxx
xxx
xxx
-------
---------
----xxx
====
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Question # 1
November 2002 P2 Q1 (a)
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Question # 02
May 2004 P2 Q2 (a & c)
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Question # 3
N07P2Q1
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Question # 4
N8P2Q1
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Question # 5
November 2009 P21
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Question # 6
November 2010 P23 Q1 (A)
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Question # 7
M11P2Q1
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Question # 8
M11P23Q2 (A & B)
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Question # 9
November 2011 P23 Q1
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Question # 10
May 2012 P21
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Chapter # 12
Partnership Changes
The changes in the partnership takes place on three following occasion:
1. Admission of a new partner
2. Retirement of an existing partner
3. Changes in profit or loss sharing ratio
Whenever, any of the above changes happen, one partnership ends and the second starts.
Therefore, assets have to be revalued with the following transactions:
Increase in value of asset (dr), and revaluation account (cr)
Revaluation account (dr) and decrease in value of asset (cr)
Increase in liabilities (cr) and revaluation account (dr)
Decrease in liabilities (dr) and revaluation account (cr)
The gain on revaluation account is credited to old partners’ capital accounts with old profit or
loss sharing ratio and loss on revaluation is debited to old partners’ capital accounts with the
old profit and loss sharing ratio.
Concept of good will in partnership
When a new partner enters in the partnership firm, he makes investment but pays the share in
good will. The profit and loss sharing ratio changes in partnership agreement. It involves two
conditions for good will.
Good will account will be opened and good will remain in the books of accounts
Good Will is retained in the books of accounts
Good Will a / c
(Dr)
Old partners’ Capital Account (Cr)
(Division of good will according to the old ratio)
Good will account is opened and good will is written off in the books of accounts
Good Will is created
Good will a / c
(Dr)
Old partners’ capital account ( Cr)
(Division of good will according to the old ratio)
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Good will is written off
Old and new partners’ capital account
(Dr)
Good Will a/c
(Cr)
(Division of good will according to the new ratio)
If the good will was already in the books and revalued like other assets, then revalued amount
will be divided among the old partners in the old ratio; however if the good will is not
required to be part of the books, then the new value of good will should be written off
according to new ratio among new partners.
Profit and loss account changes
When partnership agreement changes, one partnership discontinues and the new one starts; if
the question states, sales divide evenly over the period of month, the gross profit should be
divided over number of months divided in each period. The operational expenses should be
divided either as mentioned or over the number of months.
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Question 1
May 2004 P2 Q2
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Question # 2
May 2005 P2 Q1
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Question # 03
November 2006 P2 Q1
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Question # 4
May 2012 P22 Q2
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Chapter # 14
Financial Statement of Companies
Limited Company Account
Limited Companies – are the types of businesses which offer limited liability for its
shareholders;
Limited Liability – refers to the extent of loss of investment of shareholders, which remain
limited to the money shareholders have invested in the company.
Share – is the smallest unit of total share capital of a limited company.
Types of Shares
Preference Shares – are the shares which earn a limited percentage of dividend; they do not
have voting rights; they are paid dividend subject to profits of the company; and given
preference in payment of dividend.
Types of preference Shares
Cumulative – which get every year’s dividend, if not paid in one particular year, in the
following year two years’ depreciation is paid.
Non – cumulative – vice versa to cumulative – if one year’s dividend is not paid, in the
following year only one year’s depreciation will be paid
Participating – in addition to usual dividend, additional profit is also paid
Ordinary shares – paid dividend after the preference shares; paid fluctuating amount of
dividend; they have ownership and voting rights for directors.
Debentures – are the certificates issued to the individuals or the businesses with the promise
of returning the principal amount of loan and a fixed interest rate regardless company earns
profit or loss.
Debenture holders are loan providers for the company.
Profit and loss appropriation account – it is the part of the profit and loss account in which
the distribution of profit is shown.
It is started from profit after interest.
Corporation Tax – Tax which is charged on the profit of the company. If unpaid, will be
treated as current liability
Dividends – return on investment for the shareholders
Interim Dividend – dividend which is paid middle of the year
Final Dividend – dividend which is paid end of the year (recommended by the directors but
not paid in the same year), hence called proposed dividend
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Proposed Dividend – dividend which is announced by the directors that it will be paid but
not yet paid; this is the liability of the company and should be debited to the profit and loss
appropriation account and credited to the balance sheet under current liabilities.
Reserves – the money or part of profit kept for the payment of dividend in future; for
replacement of fixed assets; or for resolving any other financial problem. Reserves are of two
types i.e. revenue reserves and capital reserves. Revenue reserves are kept in flexible form
and can be used for multipurpose. Revenue reserves are of three types including: General
reserves, asset replacement reserves, and retained profit. Capital reserves are of again three
types i.e. capital redemption reserves, revaluation reserves, and share premium. Capital
reserves are created by debiting the retained profit. Capital reserves are used for issue of
bonus shares (later discussed)
General reserve given in trial balance is last year’s reserve, and recommended reserves are
current year’s reserve. Current year/s reserve will be part of appropriation, while previous
and current year’s reserves both will be transferred to balance sheet
Shareholders’ Fund – finance or capital belongs to shareholders.
Shareholders’ fund = share capital + retained profit + Reserves
Authorized Share Capital – the amount of share capital which limited company is allowed
to raise by issuing certain number of shares
Issued Share Capital – the amount of share capital which actually raised by limited
companies by issuing certain number of shares.
Called Up Share Capital – the amount of share capital that company has asked the
shareholders to pay
Uncalled up share capital – the amount of share capital that company has not yet asked the
shareholders to pay
Share prices – will be in different forms such as face value or par value. It is the price for
which share is actually worth. Market value is the price in the stock exchange. Issued Price is
the price at which share is actually issued. It can be above or below the par or face value. If
above the par or face value, it is called share price at premium, and if below, it is share price
at discount.
Calculation of dividend
If dividend is in percentage then multiply it with the value of shares. If dividend is in per
share form then multiply it with the number of shares.
Value of shares = no of share * share price
No of shares = Value of shares / share price
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Name of the company
Profit and Loss Appropriation Account
For the year ended ------------------------------------------------------------------------------------------------------------------------------------------$
$
Profit after interest
xxx
(Operating profit – interest on loan or debenture)
Add: Retained Profit b/d
xxx
Less: Corporation Tax
(xxx)
---------
Profit after interest and tax
xxx
Less: Dividends:
Preference – Interim
Final
Ordinary - Interim
xxx
xxx
xxx
Final
xxx
Transfer to General Reserve
xxx
--------
( xxx)
----------
Retained Profit for the year
xxx
------------
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AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Name of the company
Balance Sheet (Extract)
As at -----------------------------------
Capital and Reserves:
$
Share Capital:
Authorized Share Capital:
2000 000 ordinary shares of $1 each
5% 75000 preference shares of $1 each
Issued Share Capital:
150000 ordinary shares of $1 each
5% 50000 preference shares of $1 each
Share Premium
General Reserve
Profit and Loss a/c
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Question # 1
May 2004 P2 Q1
The Happy Elephant warehousing company ltd is an old family run business, which is
expanding it operations and has therefore purchased premises to add to its existing rented
warehouses. The following figures are end of the year balances
1999
2000
2001
$000
$000
$000
Fittings at cost
33
40
173
Provision for depreciation on fittings
10
14
31
Depreciation for the year on fittings
3
4
7
Net Sales
450
510
640
Cost of Sales
350
423
577
Trade receivables
18
25
21
Trade payables
36
47
73
Non-current loan (from 1 June 2001)
Cash at bank
68
51
45
Bank Overdraft
52
Inventory
44
49
107
Rent paid
10
11
12
General expenditure
53
60
66
Loan interest due and paid
5
Share Capital
60
60
Proposed dividends
14
14
80
119
AS Accounts Notes and Revision Sheets for Paper 2 by Faisal Durrani 0303-4898049
Retained profits balance of $6000 (cr) was brought forward on 1 September 1998
REQUIRED
(a) Prepare in columnar format, the profit and loss and appropriation accounts for each of
the three years ended 31 August 1999, 2000, and 2001
(b) Prepare in columnar format, Balance Sheets as at 31 August 1999, 2000, and 2001
(c) Identify and comment on four trends shown in the company’s results for the three
years
120