Answers to Quick Tests
PART 2: Accounting
Procedures
Unit 2.1 : Capital and revenue expenditure
and receipts
1 a) Capital expenditure is money spent on
non-current assets such as buildings,
machinery, vehicles and other equipment
b) Revenue expenditure is money spent on
day to day running expenses such as salaries
and wages, rent, insurance, advertising,
heat and light, purchase of goods for resale,
raw materials and office supplies.
2 Vijay
Transaction
Sold off surplus furniture for $300
Cash purchases of $1 460
Arranged and received a bank loan for $2 000
Purchased a new oven for $1 700
Bank charges were $25
Paid $300 for the installation of the new oven
Paid $500 in rent for the month
Paid $3 500 in wages to restaurant staff
Cash sales of $4 500
Received $60 interest on business savings
Purchased a supply of paper napkins for $45
Invested a further $1 000 from his personal savings
Paid advertising costs of $175
3
General Journal
c) Capital receipts are non-recurrent receipts
which will benefit the business in the long
term such as owner’s capital paid in to the
business, loan capital borrowed from from
lenders on a long term basis and proceeds
from the sale of non-current assets
d) Revenue receipts are money received from
the day to day activities of the business
such as sales income, sales commission,
rent received and interest or dividends
received from investments.
Expenditure
Receipt
Capital
Revenue Capital
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
Charlie Layiwola
Date
Description
Dr $
3 March
Machinery
15 000
Machinery
2 000
2 000
Bank
Installation of machine
10 Sept
Machinery repair and renewals
1 500
1 500
Bank
Repair of drive belt for machine
10 Sept
Machinery repair and renewals
Bank
Replacement air filter for machine
Cr $
15 000
Bank
Purchase of machine for cash
3 March
Revenue
500
500
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1
4 Megan
5 Malik Motors
$
Capital receipts:
Initial investment
5 000
Bank loan
1 500
Sale of furniture
35
Total capital expenditure
$6 535
Revenue receipts:
Cash sales
Sales commission
Interest on savings
Total revenue expenditure
$
Capital expenditure:
Lift purchased
3 300
Delivery of lift
250
Lift installation
980
Total capital expenditure
$4 530
Revenue expenditure:
Safety clothing
Floor repair and repainting
Rewiring
Oils and lubricants
Additional insurance premium
Total revenue expenditure
750
45
5
$800
245
630
1 200
125
220
$2 420
6 Santia
a)
●●
The new computer and printer are
capital expenditure on computer
equipment and the debit should be to
Computer equipment and not to
Computer expenses
●●
The replacement printer cartridges and
paper are revenue expenditure and
should be debited to Computer expenses
account and not to the Computer
equipment non-current asset account
●●
The insurance on the vehicle is a
revenue expenditure and should be
debited to Vehicle insurance expense
rather than to the non-current Vehicle
asset account
●●
The proceeds from the sale of office
furniture is a capital receipt and should
be credited to the Asset disposal account
and not to Sales revenue
b)
Effect on profit
Effect on assets
Increase
Decrease
Increase
Decrease
$
$
$
$
Date
Description
4 April
Computer expenses should be
Computer equipment
11 April
Vehicle should be
Vehicle insurance expense
1 200
1 200
23 April
Computer equipment should be
Computer expenses
60
60
30 April
Sales should be
Asset disposal account
3 000
No effect
3 000
No effect
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No effect
No effect
2
c)
General Journal
Santia
Date
Description
Dr $
4 April
Computer equipment
3 000
3 000
Bank
Purchase of new computer and printer
11 April
1 200
Vehicle insurance expense
1 200
Bank
Vehicle insurance renewed
23 April
60
Computer expenses
60
Bank
Purchase of ink cartridges and paper for printer
30 April
200
Cash
200
Asset disposal account
Proceeds of sale of surplus office furniture
d)
Profit will be understated if the following
recording errors are made:
(i) a capital expenditure is recorded as a
revenue expenditure;
(ii)a revenue receipt is recorded as a capital
receipt.
Profit will be overstated if the following
recording errors are made:
Cr $
(ii)a capital receipt is recorded as a revenue
receipt.
Incorrect measurement of profits may lead
users of the financial statements to form an
incorrect opinion of the business
performance. This, in turn, may lead to
them making decisions about the business
which might turn out to be unwise.
(i) a revenue expenditure is recorded as a
capital expenditure;
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3
Unit 2.2 : Accounting for depreciation
1
a) Depreciation recognizes that there is
depletion or consumption of a non-current
asset as it is used in the business over an
extended period of time. Systematic and
periodic measurement of this depreciation
ensures proper matching of the original
cost of the asset to the periods benefitting
from its use.
b) Any three from:
●● Ordinary wear and tear because of
continual use
●● Physical diminishing of, for example an
oil well or mine as the minerals are
extracted.
●● Technological change and obsolescence
●● Time limits for use. For example a patent
or lease may only remain in force for a
limited time.
●● A business may change in size or nature
and need to replace an asset with one
more suitable to its activity.
2
a) The straight line method of depreciation is
used where the depletion is expected to be
consistent over time and results in an equal
amount being apportioned to each period.
To calculate the periodic expense, the cost
of the asset, less any estimated scrap or
residual value, is divided by the estimated
number of periods it will be in use.
Alternatively a percentage of cost may be
used to reflect the estimated period of use.
For example, 25% of cost is one quarter of
cost and therefore implies a useful life of
4 years.
b) The reducing balance method assumes that
the depletion happens faster in the earlier
years of use. A percentage rate is chosen
and applied, not to the cost (other than in
the first period) but to the reducing net
book value, so as to reduce the value of the
asset to the estimated disposal value at the
end of its useful life.
c) In the revaluation method, the assets are
revalued at the beginning and end of each
accounting year. The annual depreciation
charge is the difference between
these values.
3
The revaluation method is normally only used
for a non-current asset that consists of a large
number of relatively low-value items for
which there are no detailed individual records,
such as for tableware in a restaurant or hand
tools in a large construction business.
4
a) Accumulated depreciation is the total
amount of all the separate, periodic
amounts of depreciation that have been
built up over the time the asset has been
in use.
b) The net book value of an asset at any point
in time is calculated as the original cost of
the asset, less the accumulated depreciation
up to the point where the calculation is
done. It does not necessarily represent the
market value of the asset at that time.
c) The residual value of an asset (sometimes
referred to as the scrap value) is the
estimated amount which will be received
when the asset is disposed of at the end of
its useful life in the business.
d) The useful life of a non-current asset is the
estimated time over which it will be used in
any particular business. It does not imply
that at that point the asset becomes
unusable, since it may well be sold on to
someone who has a use for it.
5
A business could dispose of a non-current
asset by:
●●
Selling it
●●
Scrapping it
●●
Transferring it to the owner(s) for their
personal use.
6
Land exists forever and does not diminish or
deplete. It is therefore considered to be nondepreciable.
7
a) The cost of the machinery is fixed at the
point of purchase and, in the absence of
any additions or disposals, the balance on
the account will therefore remain
unchanged from one period to the next.
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4
b) The accumulated depreciation is building
up at a constant rate of $5 000 per annum,
which means that the straight line basis of
depreciation is being used.
8 Shafia
$5 000 is 10%, or one tenth, of the cost of
$50 000, so the estimated life of the asset is
10 years.
c) The balance of accumulated depreciation
carried down at 31 December 2013 is
$10 000, as shown on the ‘Provision for
Depreciation of Machinery‘ account.
d) The net book value of the machinery to be
shown in the statement of financial
position at 31 December 2013 is –
Cost 50 000
less Accumulated depreciation 10 000
NET BOOK VALUE
$40 000
a)
Equipment:
$
Cost
Depreciation for 2012 @ 25%
Net book value – 30 June 2012
Depreciation for 2013 @ 25%
Net book value – 30 June 2013
14 000
3 500
10 500
2 625
7 875
Furniture:
Cost
5 000
Depreciation for 2012 @ $1 000 pa 1 000
Net book value – 30 June 2012
4 000
Depreciation for 2013 @ $1 000 pa 1 000
Net book value – 30 June 2013 3 000
Tableware:
Original cost
Depreciation for 2012
Valuation on 1 July 2012
Additions in 2013 at cost
Depreciation for 2013
4 000
600
3 400
800
4 200
600
Net book value – 30 June 2013
3 600
b)
Non-current assets
At cost
Accumulated
depreciation
Net book
value
$
$
$
Equipment
14 000
6 125
7 875
Furniture
5 000
2 000
3 000
Tableware
4 800
1 200
3 600
9 Numa
General Ledger
Numa
Computer equipment
Dr
1 Oct 2010 Bank
1 Oct 2011 Balance b/d
1 Oct 2012 Balance b/d
1 Oct 2013 Balance b/d
Cr
$
6 000
6 000
6 000
6 000
30 Sept 2011Balance c/d
30 Sept 2012Balance c/d
30 Sept 2013Balance c/d
18 Nov 2013 Disposal account
$
6 000
6 000
6 000
6 000
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5
General Ledger
Accumulated depreciation – computer equipment
Numa
Dr
Cr
30 Sept 2011 Balance c/d
$
3 000
30 Sept 2012 Balance c/d
4 500
4 500
30 Sept 2013 Balance c/d
18 Nov 2013 Disposal account
5 250
5 250
5 250
30 Sept 2011 Depreciation
1 Oct 2011
Balance b/d
30 Sept 2012 Depreciation
1 Oct 2012
Balance b/d
30 Sept 2013 Depreciation
1 Oct 2013
Balance b/d
$
3 000
3 000
1 500
4 500
4 500
750
5 250
5 250
18 Nov 2013
8 000
Disposal account
General Ledger
Numa
Disposal account – computer equipment
Dr
Cr
$
18 Nov 2013 Computer equip
6 000
(cost)
30 Sept 2014 Profit to income
650
statement 6 650
18 Nov 2013 Computer equip
(acc dep’n)
18 Nov 2013 Bank
General Ledger
$
5 250
1 400
6 650
Numa
Office furniture account
Dr
Cr
1 Oct 2010 Bank
1 Oct 2011 Balance b/d
1 Oct 2012 Balance b/d
1 Oct 2013 Balance b/d
$
8 000
8 000
8 000
8 000
30 Sept 2011 Balance c/d
30 Sept 2012 Balance c/d
30 Sept 2013 Balance c/d
18 Nov 2013 Disposal account
$
8 000
8 000
8 000
8 000
Office furniture – straight line depreciation:
(Cost – residual value) / useful life
($8 000 − $2 000) / 3 = $6 000 / 3 = $2 000 per annum
General Ledger
Numa
Accumulated depreciation – office furniture
Dr
Cr
30 Sept 2011 Balance c/d
$
2 000
30 Sept 2012 Balance c/d
4 000
4 000
30 Sept 2013 Balance c/d
18 Nov 2013 Disposal account
6 000
6 000
6 000
30 Sept 2011 Depreciation
1 Oct 2011
Balance b/d
30 Sept 2012 Depreciation
1 Oct 2012
Balance b/d
30 Sept 2013 Depreciation
1 Oct 2013
Balance b/d
$
2 000
2 000
2 000
4 000
4 000
2 000
6 000
6 000
18 Nov 2013 Disposal account
8 000
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6
General Ledger
Numa
Disposal account – office furniture
Dr
Cr
18 Nov 2013 Office furniture
(cost)
$
8 000
8 000
18 Nov 2013 Office furniture
(acc dep’n)
18 Nov 2013 Bank
30 Sept 2014 Loss to income
statement
$
6 000
1 100
900
8 000
Unit 2.3 : Correction of errors
1 Samuel
a)
Trial balance at 31 March
Dr $
Capital
Purchases
Sales
Cash in bank
Non-current assets at cost
Total expenses
Drawings
Bank loan
b) Suspense account
Cr $
6 500
30 000
65 000
2 500
14 000
13 800
12 000
72 300
4 200
76 500
5 000
76 500
b)
General Ledger
Samuel
Suspense account
Dr
Cr
31 Mar Trial balance difference
c)
d)
$
4 200
$
$
Sales
65 000
Purchases
30 000
Total expenses 13 800
Draft profit
$43 800
General Journal
Samuel
Date
Description
Dr $
31 Mar
Sales
Drawings
2 020
2 360
Vehicle repairs
Suspense account
_____
4 380
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Cr $
180
4 200
4 380
7
e)
General Ledger
Samuel
Suspense account
Dr
Cr
31 Mar Trial balance difference
31 Mar Vehicle repairs
f)
$
4 200
180
4 380
31 Mar Drawings
31 Mar Sales
$
2 360
2 020
4 380
$
Draft profit
43 800
Less: Sales
2 020
Miscasting
Vehicle repairs
180
Transposition error
2 200
Revised profit
$41 600
2 Miranda
a) i) This is an error of Omission
ii) This is an error of Commission
iii)This is an error of Principle
iv)This is an error of Complete Reversal
b)
General Journal
Miranda
Date
Description
Dr $
30 April
Purchases
2 000
2 000
Purchase ledger – A Morston
Correction of omitted purchases
30 April
Sales ledger – T Cley
650
650
Sales ledger – C Trey
Correction of sale misposted to wrong customer
30 April
Vehicle expenses
500
500
Vehicle (asset account)
Correction of expenses misposted to asset account
30 April
Purchase ledger – P Stanton
Discounts received
Discounts allowed
Reversal of incorrect posting of discount received
c)
Cr $
380
190
190
$
Draft profit 14 670
Add: Correction of discount received
380
15 050
Less: Missing purchases
2 000
Misposted vehicle expense
500
2 500
Revised profit $12 550
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8
3 Elena
a)
Trial balance at 30 September
Dr $
Capital
Purchases
Sales
Cash in bank
Non-current assets at cost
Trade receivables
Trade payables
Expenses
Drawings
b) Suspense account
Cr $
76 000
120 000
210 000
3 400
88 000
23 800
19 800
45 500
24 000
301 300
7 900
76 500
309 200
b)
General Ledger
Elena
Suspense account
Dr
30 Sep Trial balance difference
Cr
$
7 900
$
c)
$
$
Sales 210 000
Purchases
120 000
Expenses
45 500 165 500
Draft profit $44 500
d)
Elena
Draft statement of financial position as at 30 September
Assets:
Non-current assets
88 000
Trade receivables
23 800
Suspense account
7 900
119 700
Less
Liabilities:
Net assets
Trade payables
Cash in bank
19 800
3 400
23 200
$96 500
Capital :
Add: Draft profit for year
Less: Drawings
76 000
44 500
(24 000)
$96 500
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9
e)
General Ledger
Elena
Suspense account
Dr
30 Sep Trial balance difference
30 Sep Cash in bank
Cr
$
7 900
2 200
10 100
30 Sep Purchases
30 Sep Balance c/d
$
5 000
5 100
10 100
f)
Draft profit 44 500
Less: Purchases
5 000
Bad debt
2 000
Depreciation 8 400
15 400
Add: Prepaid expense
4 600
10 800
Revised profit $33 700
g)
Elena
Revised statement of financial position as at 30 September
Assets:
Less
Liabilities:
Non-current assets
Trade receivables
Prepayments
Suspense account
79 600
21 800
4 600
5 100
111 100
Trade payables
Cash in bank
19 800
5 600
25 400
Net assets
$85 700
Capital :
76 000
33 700
(24 000)
$85 700
Add: Draft profit for year
Less: Drawings
Unit 2.4 : Control accounts
1
a)The purchases ledger control account is
used to check the accuracy of the totals for
all the entries for transactions posted to trade
payable accounts in the purchases ledger.
b)The sales ledger control account is used
to check the accuracy of the totals for all
the entries for transactions posted to trade
receivable accounts for credit sales in the
sales ledger.
2
●●
Control accounts are used to check the
arithmetical accuracy of the accounts they
control in the sales and purchases ledger.
Accounts will only need to be checked for
errors when the total of closing balances
extracted from a ledger differs from the
closing balance on the control account for
that ledger for the same month.
●●
Control accounts can be used to calculate
the values of total trade receivables and
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10
total trade payables to include in the trial
balance and financial statements of the
business at the end of an accounting period
●●
●●
Control accounts can also be used to
identify and prevent any fraudulent entries
being made to ledger accounts by a member
of staff to cover up any money or goods
they or others are stealing from the
business. This is because the balances on
control accounts can reveal errors and
discrepancies and can be prepared quickly
and easily from totals from the books of
prime entry by a senior manager or another
accountant.
If the trial balance does not balance, control
accounts can be used to locate single-sided
errors that may be present in ledger
accounts.
3
Book of prime entry
Credit purchases
Purchase returns
Discounts received
Refunds received
Interest charged on
overdue accounts
4
Purchase journal (or
day book))
Purchase returns
journal
Cash book
Cash book
General journal
Book of prime entry
Credit sales
Sales journal (or
day book))
Sales returns journal
Cash book
Cash book
General journal
Sales returns
Discounts allowed
Refunds issued
Interest charged on
overdue accounts
Bad debts written off General journal
Dishonoured
Cash book
cheques
5 Aran
a) & b) i)
General Ledger
Aran
Purchases ledger control account
Dr
Cr
1 Jan Balance b/d
31 Jan Purchase returns
31 Jan Bank
31 Jan Discounts received
31 Jan Refunds from suppliers
31 Jan Contra entries
31 Jan Balance c/d
1 Feb Balance b/d
$
7 000
11 220
43 000
1 080
6 900
2 500
52 900
124 600
3 500
1 Jan Balance b/d
31 Jan Purchases
31 Jan Balance c/d
1 Feb
Balance b/d
$
55 100
66 000
3 500
124 600
52 900
a) & b) ii)
General Ledger
Aran
Sales Ledger control account
Dr
1 Jan
31 Jan
31 Jan
31 Jan
31 Jan
1 Feb
Cr
Balance b/d
Sales
Dishonoured cheques
Interest on overdue a/cs
Balance c/d
$
75 000
140 000
5 600
1 400
8 600
Balance b/d
230 600
70 900
1 Jan
31 Jan
31 Jan
31 Jan
31 Jan
31 Jan
31 Jan
31 Jan
Balance b/d
Sales returns
Bank
Discounts allowed
Refunds to customers
Bad debts written off
Contra entries
Balance c/d
1 Feb
Balance b/d
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$
5 700
9 200
130 000
3 100
5 000
4 200
2 500
70 900
230 600
8 600
11
6
7
A purchases ledger control account can show a
debit (as well as credit) balance if the business
has prepaid or overpaid some suppliers or
returned goods for which they have already
paid.
A sales ledger control account can show a
credit (as well as debit) balance if some credit
customers have prepaid or overpaid their
accounts or returned goods already paid for.
Contra entries are made to the purchases and
sales ledgers when a business transacts with
another business organisation as both a
customer and supplier and then sets off the
balances on its receivable and payable accounts
with that organisation against each other to
find the net balance to be paid or received.
A contra entry will affect the balances on trade
payables and on trade receivables so it must be
recorded in both the purchases ledger control
account and the sales ledger control account.
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12