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How to Pass
Book-keeping
FIRST LEVEL
Teacher’s Guide
Keith F Bird
MSc BSc (Econ) ACIS
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First published 1999
© LCCI CET 1999
British Library Cataloguing-in-Publication Data
Bird, Keith F
How to Pass Book-keeping, First Level – 2nd ed.
Teacher’s guide
1. Book-keeping – Study and teaching
I.Title
657.2’0071
ISBN 1 86247 060 X
All rights reserved; no part of this publication may be reproduced, stored
in a retrieval system, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise without the prior written
permission of the Publisher. This book may not be lent, resold, hired out, or
otherwise disposed of by way of trade in any form of binding or cover, other
than that in which it is published, without the prior consent of the Publisher.
10
9
8
7
6
5
4
3
2
1
Typeset by the London Chamber of Commerce and Industry
Examinations Board
Printed and bound in Hong Kong by Peninsula Publishers
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Page v
Contents
About the author
Acknowledgements
Introduction
Cross-references to How to Pass Book-keeping,
First Level (student’s book)
Lesson
1
The accounting equation
Transactions through ‘double entry’
2
Purchases, sales, and returns
3
Expenses: profit or loss
4
Balancing accounts: the trial balance
5
Trading and Profit & Loss Accounts
6
The balance sheet
7
Final accounts: more features
8
The division of the ledger
9
Bank facilities
Cash Book: 2 columns
10
Cash Book: 3 columns – cash discount
11
Purchases and Sales Day Books
12
Returns Day Books
13
Accruals and prepayments – expenses
14
Accruals and prepayments – income
15
Depreciation of fixed assets
16
Bad debts and provision for doubtful debts
17
Bank reconciliation statements
18
Petty Cash Book – imprest system
19
Capital and revenue expenditure
20
The journal
21
Errors in the accounts 1
22
Errors in the accounts 2
23
Final accounts and adjustments further considered
Stock valuation
24
Club and society accounts
25
The presentation of answers
Page
vii
vii
viii
x
1
11
19
23
27
32
36
44
49
60
70
78
88
99
105
120
132
141
151
158
168
174
178
188
198
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Page vi
Contents
Appendix 1: Exercises, some worked solutions, and support
material
Appendix 2: Summarized answers to selected exercises
Appendix 3: Glossary
Notes
vi
201
312
321
326
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About the author
Keith Bird has had over 35 years’ experience lecturing in business studies in further and
higher education and has taught professional courses at all levels. He is the author of the
student’s book How to Pass Book-keeping, First Level, published by the London Chamber of
Commerce and Industry Examinations Board (LCCIEB). He has also written several study
manuals that have been published for professional courses.
Keith Bird’s association with the LCCIEB extends over 25 years and, for much of that time,
he has served as a Chief Examiner in First Level Book-keeping and Second Level
Book-keeping and Accounts.
Acknowledgements
In the preparation of this book, my thanks are due to Derek Skidmore MSc, FCCA,
ACMA, co-author of How to Pass Book-keeping and Accounts, Second Level, for his review of
the draft of the book and for his helpful suggestions. My thanks are also due to the staff of
the LCCIEB Publishing Department for preparing this text for publication.
vii
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Page viii
Introduction
The How to Pass Book-keeping, First Level:Teacher’s Guide is closely geared to the LCCIEB
First Level Book-keeping Extended Syllabus. It is intended for a teaching course that
extends over 60 hours.There are 24 lessons concerning book-keeping, each of 2 1/4 hours’
duration. The remaining teaching time should be used for Lesson 25, which covers the
important topic of presenting examination answers, together with revision and
pre-examination preparation.
The book is addressed to the teacher. It indicates the importance of particular topics and
subject points and provides hints about how to present material. The Teacher’s Guide is
intended to complement the student’s book How to Pass Book-keeping, First Level. At the
same time, with a few exceptions, the explanations, examples, and exercises are ‘free standing’,
providing the teacher with a store of additional teaching resource. The Teacher’s Guide
should be used in combination with the student’s book and, for this purpose,
cross-references between the two books are provided on page x. Individual cross-references
are also given at certain points within the text.
The approach adopted in the Teacher’s Guide is that of keeping in mind the question ‘Why?’
At each stage, the stress should be on developing the student’s understanding of the need
for, and effect of, the various book-keeping entries, as well as of the subject as a whole. Only
by this means can inappropriate examination answers be prevented and a sound basis be
provided for applying knowledge in the business world and/or for further accounting
studies.
As the book progresses, the material becomes more difficult. The early stages of the book
assume that the student has only a limited knowledge of business and accounts. Gradually,
more elements, features, and terms are introduced that sometimes require the modification
of methods for recording transactions already learnt. For example, at first, transactions are
recorded in the ledger only. With the introduction of day books, the system of recording
transactions changes. The time spent on the ‘ledger only’ entries is not, however, wasted
because it enables the student to appreciate the relationship between the ledger and the day
books. Inevitably, some students will come to the course with some knowledge or
awareness of aspects of book-keeping and, understandably, they might question why a
particular matter is not taken account of at a certain stage.This situation might apply in the
case of the depreciation of fixed assets, which is not dealt with until Lesson 15. The
progressive nature of the course is discussed at the beginning of Lesson 2. At that stage,
the teacher might find it helpful to explain to the class that different features are to be
included as the course develops.
The text includes numerous examples, together with short reinforcement exercises.
Appendix 1 contains exercises for Lessons 1–24 and support material. Certain of the
exercises are immediately followed by worked solutions; they are marked with an asterisk
(*) both in the Appendix and in the main part of the book. The exercises are suitable for
photocopying as required.Appendix 2 contains summarized answers, where appropriate, to
questions for which solutions are not provided. These summarized answers include the
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Page ix
Introduction
results of certain calculations, key account entries, and other significant figures such as gross
profit, net profit, asset totals, and trial balance totals. Other answers or parts of answers, too
detailed for inclusion, such as account or journal entries, may be established by reference
to the text of the book as well as by reference to the fully worked solutions in Appendix 1.
It is advisable to make full use of the Glossary.
ix
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Page x
Cross-references to How to Pass Book-keeping,
First Level (student’s book)
Teacher’s Guide
Page
Lesson
1
1
The accounting equation
Transactions through ‘double entry’
10
2
Purchases, sales, and returns
17
3
Expenses: profit or loss
21
4
Balancing accounts: the trial balance
25
5
Trading and Profit & Loss Accounts
30
6
The balance sheet
33
7
Final accounts: more features
43
8
The division of the ledger
Vertical layout of the balance sheet
49
9
Bank facilities
Cash Book: 2 columns
56
10
Cash Book: 3 columns – cash discount
65
11
Purchases and Sales Day Books
73
12
Returns Day Books
83
13
Accruals and prepayments – expenses
94
14
Accruals and prepayments – income
99
15
Depreciation of fixed assets
113
16
Bad debts and provision for
doubtful debts
124
17
Bank reconciliation statements
132
18
Petty Cash Book – imprest system
142
19
Capital and revenue expenditure
148
20
The journal
157
21
Errors in the accounts 1
(types of error)
163
22
Errors in the accounts 2
(adjusting for errors; the effects
of errors)
167
23
Final accounts and adjustments
further considered
Stock valuation
177
24
Club and society accounts
187
25
The presentation of answers
x
How to Pass Book-keeping,
First Level
Chapter
Page
1
1
2
9
3
15
4
22
5
30
6
38
7
49
8
54
9
66
8
60
10
73
11
79
12
85
13
96
14
104
15
120
15
120
16
133
17
18
19
20
21
152
164
180
189
201
22
210
22
210
23
23
24
Appendices
1, 2, and 3
231
237
246
272–84
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Lesson 1: The accounting equation
Transactions through ‘double entry’
Topic summary
●
●
●
●
●
●
The need for accounting records
The information that needs to be recorded
The means of obtaining resources, ie assets: ownership v. external sources of funds
The business as an entity
The dual effect of a business transaction
Double-entry recording of transactions
Extended Syllabus references
1.1
1.2
1.3
1.4
2.1
2.2
2.3
2.4
Explanation and use of the terms debtor, creditor, asset, liability, capital
The accounting equation: assets = capital + liabilities and its expression in the
balance sheet
The effect upon the accounting equation of basic business transactions (including
the single-side transaction, eg use of bank balance to buy fixed assets)
The effect upon the accounting equation of the dual-type transaction, ie where
the effect upon one side of the equation is matched by a combination of 2 (or
possibly more) effects on the other side
Purpose of the use of debit and credit for the recording of transactions
The preparation of T-type accounts
Specifying a transaction/entry within an account, ie date together with, normally,
the name of the ‘other’ account/day book involved in that particular transaction/
entry
Completion of debit and credit entries recording individual transactions
The underlying purpose of this lesson is to develop recognition of the need for, and
purpose of, recording business transactions and their effects. Understanding the two-fold
aspect of any transaction (benefit and detriment, and plus and minus) is essential for a grasp
of double-entry book-keeping.
In the earlier stages of the lesson – especially in meeting the aims of Steps 1 to 3 – much
can be done by using the question-and-answer method with the class, including a brief
discussion of the students’ responses. The varied backgrounds and experiences of class
members should be drawn on whenever possible. Always relate the discussion to a
particular aim, listing points on the whiteboard or overhead projector as appropriate.
1
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The accounting equation
Step 1
Aim: to develop an appreciation of the need for business records of account
Following a brief introductory ‘chat’ with the class, ask the students to form pairs and to
discuss and write down answers to the question:‘Why does a business need to keep records
of account?’
At this stage, the students are likely to give broadly based answers, such as:
●
●
●
●
●
●
●
to
to
to
to
to
to
to
run (more) effectively and efficiently;
know what money is coming in and going out;
know what the business is earning and spending;
control the business: to make adjustments as necessary;
make decisions about the future;
provide information for making decisions about the future;
deal with the tax authorities.
Step 2
Aim: to recognize the key areas of information that need to be recorded
From the answers to the questions in Step 1, identify areas of information that will be
required; for example:
Cash: availability and movements
Amounts owed by the business
Amounts owed to the business
The possessions - ‘assets’
Amount of money invested in the business
Purchases
Sales
Expenses
Profit
Capital
Step 3
Aim: to recognize the resources needed and, broadly, the means of obtaining them:
proprietor versus external sources
While the students remain in pairs,
1 Ask them to imagine that they are establishing a business, such as a shop or factory.
Ask them to write down the resources that they would need.
2
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The accounting equation
2 As the students suggest the resources, list these on the whiteboard in two categories,
those that are:
(a) measurable in money terms, eg cash, premises, machines, and motor vehicles; and
(b) less measurable, eg skills, contacts, and experience.
Show that category (a) is recorded in the accounts as assets. Category (b) is less easily
recorded, but may be, for example, as skills as part of wage payments. It will be dealt
with at a later stage.
Explain how the assets might be obtained. Show that, in establishing a business, a proprietor
might:
(a) treat his or her own motor vehicle to be for use within the business;
(b) put his or her money into the business, so that assets can be bought;
(c) borrow money, ie obtain a loan.
Emphasize that (a) + (b) = capital, ie the proprietor’s stake; and that (c) = liability.
Step 4
Aim: to understand the business as an entity and to appreciate the ‘accounting equation’
1 Explain to the students that a business is an entity that is distinct from its owner. As a
result, the accounts are to be kept for the business and they are separate from the owner’s
accounts.You may illustrate the concept like this:
invests in
Business
accounts
Personal
accounts
withdraws from
2 Explain, with reference to Step 3, that the money a proprietor invests to set up and run
a business is usually supplemented by borrowed money. The means of financing a
business may be expressed as ‘the accounting equation’:
eg
Assets = capital + liability (eg a loan)
Assets £15,000 = capital £12,000 + liability £3,000
Alternatively, the equation may be expressed as:
eg
Assets less liabilities = capital
Assets £15,000 less £3,000 = £12,000
3
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The accounting equation
3 Ask the students to work through the following exercise, inserting the missing figure in
each of the columns.
(1)
(2)
(3)
(4)
(5)
Assets
£
2,430
Capital
£
1,920
3,060
2,500
6,530
5,830
Liabilities
£
1,040
780
0
4,120
Step 5
Aim: to understand the effect of business transactions; their double aspect
1 Show that the financial position of a business at any point in time – the accounting
equation – can be expressed in the form of a balance sheet, eg:
F Lim
Balance sheet at 1 March Year 3
£
Office furniture
Motor vehicle
Cash at bank
800
5,300
1,900
8,000
Capital
Loan from J Black
£
7,000
1,000
8,000
2 Explain the term ‘business transaction’.
Show, using the following example, the effect of transactions, stage by stage, upon a
balance sheet. It is important not to confuse the students with transaction moves that
are too rapid. Ensure they fully understand the effect of each transaction before you
move onto the next.
The transactions (which are defined in brackets) of F Lim in Year 3 are as follows:
(a) On 2 March, a typewriter (classed as office equipment) is bought by drawing a
cheque on the bank for £150.
(Purchase of an asset, with payment by cheque.)
(b) On 4 March, goods are bought from T Smith on credit for £500.
(Purchase of an asset on credit.)
(c) On 9 March, Lim sells some of the goods that had cost £200 for the same amount,
receiving a cheque in exchange.
(Sale of asset, with immediate payment.)
4
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The accounting equation
(d) On 12 March, Lim sells some goods that had cost £200 to K Woolf ‘on credit’
for the same amount.
(Sale of asset on credit.)
(e) On 16 March, Lim sends a cheque for £300 towards the amount owing to T Smith.
(Payment of an amount owing.)
(f) On 21 March, Lim receives a cheque for £200 from his debtor, K Woolf.
(Receipt of money from a debtor.)
3 Use the following example to show the effect of transaction (a) on F Lim’s balance sheet:
F Lim
Balance sheet at 2 March Year 3
£
£
Office furniture
800
Office equipment (+ 150) 150
Motor vehicle
5,300
Cash at bank (- 150)
1,750
Capital
Loan from J Black
8,000
7,000
1,000
8,000
This example shows that only the assets have changed.
4 Use the following example to show the effect of transaction (b) on the balance sheet:
F Lim
Balance sheet at 4 March Year 3
£
Office furniture
Office equipment
Motor vehicle
Goods
Cash at bank
800
150
5,300
500
1,750
Capital
Loan from J Black
Creditor – T Smith
8,500
£
7,000
1,000
500
8,500
This balance sheet shows that both the assets and liabilities have increased.
5 Use the following example to show the effect on the balance sheet after transaction (c):
F Lim
Balance sheet at 9 March Year 3
£
Office furniture
Office equipment
Motor vehicle
Goods (- 200)
Cash at bank (+ 200)
800
150
5,300
300
1,950
Capital
Loan from J Black
Creditor – T Smith
8,500
£
7,000
1,000
500
8,500
Here, there has been a switch between two assets.
5
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The accounting equation
6 Use the following to show the effect after transaction (d):
F Lim
Balance sheet at 12 March Year 3
£
Office furniture
800
Office equipment
150
Motor vehicle
5,300
Goods (-200)
100
Debtor – K Woolf (+ 200) 200
Cash at bank
1,950
Capital
Loan from J Black
Creditor – T Smith
8,500
£
7,000
1,000
500
8,500
From this balance sheet, a change of assets can be seen.
7 Use the following to show the effect after transaction (e):
F Lim
Balance sheet at 16 March Year 3
£
Office furniture
Office equipment
Motor vehicle
Goods
Debtor – K Woolf
Cash at bank (- 300)
800
150
5,300
100
200
1,650
£
Capital
7,000
Loan from J Black
1,000
Creditor – T Smith (-300)
200
8,200
8,200
From this balance sheet, a reduction in assets matched by a reduction in liabilities can
be seen.
8 Use the following to show the effect after transaction (f ):
F Lim
Balance sheet at 21 March Year 3
£
Office furniture
Office equipment
Motor vehicle
Goods
Cash at bank (+ 200)
800
150
5,300
100
1,850
8,200
Capital
Loan from J Black
Creditor – T Smith
£
7,000
1000
200
8,200
Here, there is a change of assets: an increase in bank and the removal of the debtor
balance from the balance sheet.
6
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The accounting equation
9 A list of terms and their definitions follows. Explain the terms to the students.
credit sales
goods sold with payment to be received by an agreed future date
debtor
a person or organization to whom goods have been sold on credit and
from whom money is due
creditor
a person or organization from whom goods have been bought on
credit and to whom money is owed
on account
payment towards an amount owing; part payment
It is vital that students understand the meaning of terms as they are used. For the
following lessons, reference should be made to the Glossary on pages 321–5.
10 Explain that a transaction may involve a combination of assets or liabilities. For example,
a motor vehicle is bought for £6,000.The purchase is paid for by:
(a) drawing on the bank account; and
(b) a loan from Birclays Finance Limited.
Consequently:
£
+ 6,000
- 2,000
Assets
Liabilities
Motor vehicle
Bank
Birclays Finance Limited
4,000
£
+ 4,000
4,000
11 Emphasize the equation:
assets = capital + liabilities
12 Give the students each a copy of exercises T/1.1, T/1.2, and T/1.3 in the Appendix
(page 201) and ask them to work through them.
Step 6
Aim: to be able to record transactions through double entry
1 Explain the necessity of keeping separate accounts for information and control needs.
Updating the balance sheet each time a transaction occurs takes up too much time;
keeping separate accounts is a quicker and clearer method of updating records.
7
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The accounting equation
2 Explain that the two-sided form of recording accounts (which has long been in use) is
to be followed:
Left-hand side
= debit side
(or Dr)
Right-hand side
= credit side
(or Cr)
3 Set out the rules for double entry, which are as follows, on the overhead projector or
whiteboard:
Assets
an increase
a decrease
debit
credit
Liabilities
an increase
a decrease
credit
debit
Capital
an increase
a decrease
credit
debit
Alternatively, you may show the following layout:
Asset account
increases
+
decreases
Liability account
decreases
-
increases
+
Capital account
decreases
-
increases
+
4 Emphasize that the purpose of debit and credit is to allow for the two-fold effect of
each transaction. Always ensure that, for each transaction, students understand the logic
of the entries. By making sure that the logic is clear, the account entries will have meaning, helping the students to avoid making mistakes.
5 Explain the form of entries for T-type accounts thoroughly. Illustrate the following layout
on the whiteboard or overhead projector:
Dr
Date
Cr
Details
£
Date
Details
£
The ‘details’ column should always show the name of the matching account (ie where
the double entry is completed) eg:
8
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The accounting equation
Bank
Year 6
1 Jul
Capital
£
10,000
Capital
Year 6
1 Jul
Bank
£
10,000
6 Work through the exercise below with the students. For each transaction:
(a) emphasize the transaction effect;
(b) stress how the double entry is achieved.
Exercise
(i) Gladys Lane sets up in business on 1 July Year 6 by placing £10,000 into a new
business bank account.
(ii) On 4 July Year 6, she buys office equipment, paying £400 by cheque.
(iii) On 7 July Year 6, she buys goods from Landau Limited for £360 on credit.
(iv) On 26 July Year 6, Gladys Lane pays the amount owing to Landau Limited by
cheque.
Solution
Bank
Year 6
1 Jul
Capital
£
10,000
Year 6
4 Jul
26 Jul
Office equipment
Landau Ltd
£
400
360
Capital
Year 6
1 Jul
Bank
£
10,000
Goods
£
360
Office equipment
Year 6
4 Jul
Bank
£
400
Goods
Year 6
7 Jul
Landau Ltd
£
360
Landau Limited
Year 6
26 Jul
Bank
£
360
Year 6
7 Jul
9
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The accounting equation
7 Emphasize that entries in accounts should not be cramped together, but should be
clearly spaced without being too far apart.
8 Remind the students that, in making the entries, they need to:
(a) record the date correctly; and
(b) correctly enter the name of the related account in the ‘details’ column.
9 Stress that, in the examination, marks may be lost if account entries are poor.An example
of an avoidable error is writing the word ‘Cheque’ instead of ‘Bank’ for the name of the
matching account, when ‘Cheque’ is not the name of the account.
10 Ask the students to work through exercises T/1.4 and T/1.5 in the Appendix (page 202).
10
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Page 11
Lesson 2: Purchases, sales, and returns
Topic summary
●
●
●
●
The various meanings of the term ‘purchases’
Account entries for purchases and sales transactions
The return of goods: allowances
Account entries for returns inwards and outwards
Extended Syllabus references
5.1
5.2
5.3
5.4
5.5
5.6
The various possible accounting meanings of the term purchases
The effects on (double-entry) accounts of purchases of goods:
5.2.1 for cash
5.2.2 on credit
The effects on (double-entry) accounts of the sale of goods/services:
5.3.1 for cash
5.3.2 on credit
The process of the return of goods previously bought or sold (or alternatively of
an allowance being made in lieu of actual return of goods)
Use of the term Returns, both inwards and outwards; the alternative terms in use
The effects on (double-entry) accounts of the return of goods (or of an allowance
being made for the defective supply of goods/services)
The approach adopted in the students’ book, How to Pass Book-keeping, First Level, is to
explain the reasons for particular book-keeping methods and to build up understanding of
the subject progressively. This approach may mean using a simplified method on a certain
matter at one stage to avoid introducing too many points at once. Later, that simplified
method might need to be modified as more features are covered. This approach applies
because this session deals with the entries concerning purchases and sales.
Step 1
Aim: to recognize the various meanings of the term ‘purchases’
1 Explain that the term ‘goods’ is used for goods bought as part of trade, for selling in
due course. The buying and selling of office furniture, motor vehicles, etc, for use in
the business, is not included under goods: they are shown separately.
11
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Purchases, sales, and returns
2 Goods are now to be divided into:
●
●
purchases; and
sales
with a separate account for each.This division gives more information and helps to keep
control of the business.
3 Describe the various meanings of the term ‘purchases’, that they are:
(a) goods bought to sell, ie as part of trading;
(b) goods bought to use in the manufacture and/or retailing of other goods.
Stress that just the word ‘purchases’ or the words ‘bought goods’ are referring to a part
of trading.
4 You may also give the students the alternative terms below.
(a) Purchases ‘for cash’ which are bought with immediate payment.The payment may
be in cash or it may be by drawing on a bank account.
(b) Purchases ‘on credit’ which are bought with payment to be made at a later date.
Step 2
Aim: to be able to record in double-entry form the purchase and the sale of goods for
cash and on credit
1 Purchase of goods for cash
Show the students the following example to illustrate the account entries made for the
purchase of goods for cash.
Example
In the account entries given below, goods were bought on 15 March Year 3 for £295
and paid for by cheque, which can be understood as immediate payment.
Purchases
Year 3
15 Mar Bank
£
295
Bank
Year 3
15 Mar Purchases
12
£
295
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Purchases, sales, and returns
This involves:
●
●
addition to purchases = debit
deduction from bank = credit
2 Purchase of goods on credit
Show the students the following example to illustrate the account entries made for the
purchase of goods on credit.
Example
In the account entries that follow, goods were bought on credit, at 19 March Year 3,
from L Johnson for £614.
Purchases
Year 3
19 Mar L Johnson
£
614
L Johnson
Year 3
19 Mar Purchases
£
614
A liability has arisen, so a credit entry is made in the account for Johnson, who is a
‘creditor’.
3 Work through the following exercise with the students.
Exercise
Year 7
3 Mar
12 Mar
30 Mar
Purchased goods by cheque £915
Purchased goods from T Watling on credit £736
Paid by cheque the amount due to T Watling
Enter these transactions, as shown below, carefully reviewing each double entry before
moving on to the next one.
Purchases
Year 7
3 Mar Bank
12 Mar T Watling
£
915
736
Bank
Year 7
3 Mar Purchases
30 Mar T Watling
£
915
736
(continued)
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Purchases, sales, and returns
T Watling
Year 7
30 Mar Bank
£
736
Year 7
12 Mar Purchases
£
736
4 Sales
Any sale of goods is entered in a separate Sales Account.The account includes both cash
sales and credit sales. Remember to point out that the account only includes the sale of
goods that the firm trades in.
5 Sales for cash
Show the students the following example to illustrate the account entries made for sales
for cash.
Example
At 21 March Year 3, goods were sold for £312 cash.
Sales
Year 3
21 Mar Cash
£
312
Cash
Year 3
21 Mar Sales
£
312
Emphasize that the entry in the Sales Account corresponds to what, so far, has been
entered in the Goods Account, ie a credit entry.
Note
The Cash Account is for recording the receipt and payment of bank notes or coins.
Transfers between the Bank Account and the Cash Account are made periodically.
6 Sales on credit
Show the students the following example to illustrate the account entries made for sales
on credit.
Example
At 23 March Year 3, goods were sold to L Fell on credit for £260.
Sales
Year 3
23 Mar L Fell
Year 3
23 Mar Sales
14
£
260
£
260
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Purchases, sales, and returns
7 To reinforce the students’ understanding, show the following summary of the entries
below for a credit sale (preferably on the overhead projector):
(a) When a credit sale is made, the book-keeper should:
● debit the customer’s (debtor’s) account; and
● credit the Sales Account.
(b) When payment is received from the debtor, the book-keeper should:
● debit the Bank Account or Cash Account (depending on how the debtor pays,
whether by cheque or cash); and
● credit the debtor’s account.
Note
Point out that the Purchases Account and the Sales Account have now replaced the Goods
Account.
8 Ask the students to work through the exercise below.
Exercise
Year 7
6 Mar
15 Mar
31 Mar
Sold goods for cash £327
Sold goods to J Bean on credit £512
Received cheque from J Bean in payment of the amount due
The transactions should be entered by the students as shown below. Review the
transactions one by one (see below), ensuring that the concept of double entry is fully
understood.
Sales
Year 7
6 Mar Cash
15 Mar J Bean
£
327
512
Cash
Year 7
6 Mar Sales
£
327
J Bean
Year 7
15 Mar Sales
£
512
Year 7
31 Mar Bank
£
512
Bank
Year 7
31 Mar J Bean
£
512
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Purchases, sales, and returns
Step 3
Aim: to understand the nature of ‘returns’ and to be able to make the required
book-keeping entries
1 Explain that purchased goods are sometimes returned to the supplier. Ask why this
might be so.
2 Explain that an allowance is made by the supplier, ie that the amount of the return is
set against the purchase amount.
3 Show that the returns are recorded in a separate account, called the Returns Outwards
Account, using this example:
At 24 March Year 3, goods are returned to L Johnson for which £70 is allowed.
Returns outwards
Year 3
24 Mar L Johnson
£
70
L Johnson
Year 3
24 Mar Returns outwards
£
70
Year 3
19 Mar Purchases
£
614
4 Explain that the £70 credit in the Returns Outwards Account offsets the £614
previously shown on the debit of purchases. Ask the students to explain the two entries
in Johnson’s account.
5 Explain that the opposite can occur: ie goods that have been sold may be returned by
a customer, for which an allowance is given. For example, on 27 March Year 3, L Fell
returns the goods sold to him on 23 March.
This occurrence is the reverse of a sale, so it is termed ‘returns inwards’. Ask the students
to show the two entries for the returns inwards.Their accounts should look like the one
below.
Returns inwards
Year 3
27 Mar L Fell
£
260
L Fell
Year 3
23 Mar Sales
16
£
260
Year 3
27 Mar Returns inwards
£
260
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Purchases, sales, and returns
6 Hand out copies of, or show on the overhead projector, exercise T/2.1 in the Appendix
(page 203). Ask the students to work through the exercise.
7 Review student answers, drawing attention to items (c) and (f ), in T/2.1, which involve
assets for use in the business. Neither of these will be recorded in the Purchases
Account.
8 Hand out copies of, or show on the overhead projector, exercise T/2.2 in the Appendix
(page 203). Ask the students to work through the exercise.
Step 4
Aim: to strengthen understanding of lesson content
Below are a series of questions that you should ask the students, together with the answers.
1 Question (a)
What is the difference in wording between the two returns examples?
Answers
●
●
The example 24 March specifically states that an allowance is made and the amount.
The example 27 March merely states that the goods previously sold are returned.
If a question is worded as it is above, the students should assume that the amount of the
original sale is fully allowed.
2 Question (b)
What is the reason for keeping separate returns accounts instead of making the entries
in the Purchases or Sales Accounts?
Answer
The reason is to have separate totals for returns, otherwise the information would be
‘hidden’ in the Purchases or Sales Account.
3 Question (c)
What might be the various reasons for the return of goods?
Answers
The goods might be returned because:
●
●
●
●
the wrong articles were sent;
they were damaged in transit;
they are not what was shown in the catalogue;
parts do not fit.
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Purchases, sales, and returns
4 Question (d)
When might an allowance be given although the goods are not returned?
Answers
When the goods:
●
●
are difficult to repack or transport; or
are costly to send back.
Stress that, provided an allowance is given, the book-keeping effect is the same as if the
goods are actually returned.
5 Check that the students know the alternative names for the accounts, that they may be
called:
●
●
returns outwards or purchases returns;
returns inwards or sales returns.
6 Hand out copies of, or show on the overhead projector, exercises T/2.3 and T/2.4 in
the Appendix (pages 203 and 204). Ask the students to work through them.
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Lesson 3: Expenses: profit or loss
Topic summary
●
●
●
●
The nature and types of ‘expense’
Combination-type transactions: account entries
Recording the withdrawal of profit by ‘drawings’
Profit as the difference between opening and closing capital
Extended Syllabus references
18.1 Profit (or loss) as the difference between opening and closing capital balances;
allowing for any drawings or the introduction of additional capital
18.2 The meaning of the term drawings; the various forms of drawings
18.3 The book-keeping entries for drawings
18.4 The possible effect of drawings upon the amount of capital
This lesson is diverse in its content. All the topics are ones that can feature as elements
in examination questions. With careful explanation and the familiarity that follows from
practice, these subject areas need not be a cause of major difficulty.
Step 1
Aim: to appreciate the nature and types of business expense and the book-keeping
entries required
1 Suggest to the class a small business situation and ask what types of expense would be
incurred, such as:
●
●
●
employee wages;
rent of the premises; and
advertising.
Point out that the aim of setting up a business is to make a profit, ie a surplus:
sales less expenses = profit
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Expenses: profit or loss
2 When you explain about recording expenses in the accounts, develop the concept of
‘paying as you go’. Illustrate the concept by contrasting, for example, renting premises
and purchasing a building, which ties up money.
3 Liken expenses such as rent to very temporary assets; for instance, a purchased asset is
debited to the asset account; similarly, an expense account is debited.
4 Explain that it is necessary to have several expense accounts, eg insurance, wages,
office cleaning, office expenses, heating and lighting. One account for each category
of expenditure helps to provide more information and improve control.
The following example illustrates the basic account entries relating to an expense item:
Example
At 28 March Year 3, insurance on a motor vehicle, costing £110 for the next 6 months,
is paid by cheque.
Insurance
Year 3
28 Mar Bank
£
110
Bank
Year 3
28 Mar Insurance
£
110
This can be explained as:
Cr = reduction of an asset (bank)
Dr = acquisition of a (temporary) asset, ie insurance ‘cover’ for a fixed period of time.
5 Copy and hand out or show exercises T/3.1 and T/3.2 in the Appendix (page 204) on
the overhead projector. Ask the students to work through them.
Step 2
Aim: to be familiar with combination-type transactions and to be able to make
appropriate book-keeping entries
1 In Lesson 1, Step 5, reference was made to the possibility of a transaction involving a
combination of assets and/or a combination of liabilities. In a combination-type
transaction, the effect on one account side will be matched by a combination of two
(or possibly more) effects on the other side. Use the following example to illustrate a
combination-type transaction.
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Expenses: profit or loss
Example
At 14 April Year 6, a motor vehicle was purchased for £6,800 from Lagonda Garages. A
payment of £2,000 was made by cheque and the balance on credit.
Assets
£
+ 6,800
- 2,000
Liabilities
Increased by amount of
motor vehicle
Bank balance is reduced
Creditor – Lagonda Garages
+ 4,800
£
+ 4,800
+ 4,800
The accounts will appear as follows:
Motor Vehicle
Year 6
14 Apr
£
Bank and Lagonda
Garages
6,800
Bank
Year 6
14 Apr
Motor vehicle
£
2,000
Motor vehicle
£
4,800
Lagonda Garages
Year 6
14 Apr
2 Copy and hand out or show exercise T/3.3 in the Appendix (page 205) on the overhead
projector. Ask the students to work through the exercise.
Step 3
Aim: to appreciate the meaning of proprietor drawings and the account entries required
1 If the owner takes money out of the business for private use this results in a reduction
of capital. Explain that the owner may draw out money in anticipation of the profits for
the year, ie to pay for personal living expenses. If the owner’s withdrawals are more than
the business’s profits, then capital is reduced.
2 Drawings are recorded in a separate account, further enabling the accounts to provide
as much information as possible. Use the example overleaf to demonstrate this point.
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Expenses: profit or loss
Example
At 6 April Year 3, Joe Seng, the owner, withdrew £170 in cash for his own use.
Cash
Year 3
6 Apr
Drawings
£
170
Drawings
Year 3
6 Apr
£
170
Cash
3 Explain that, at the end of the year, the Drawings Account will be closed off to the
Capital Account.
4 Point out that several drawings might be made over the course of the year and that the
drawings could take forms other than cash. For example, the owner may take some of
the business’s goods for personal use.
Step 4
Aim: to recognize that profit or loss may be calculated through differences in capital
1 The profit of a business for a given year might be obtained as follows:
profit for the year
=
number of transactions
x profit on each
transaction
less
expenses
for the year
or as
profit
=
capital at end of the year less capital at start of the year
or increase of capital over the year
Alternatively, give the students the following formula:
start-of-year
capital
plus
profit*
(or loss)
=
end-of-year
capital
*or profit after deduction of drawings
2 Hand out copies of, or show on the overhead projector, exercise T/3.4 in the Appendix
(page 205). Ask the students to work through the exercise.
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Page 23
Lesson 4: Balancing accounts: the trial balance
Topic summary
●
●
●
The balancing of accounts
Running balance account format
The preparation of a trial balance
Extended Syllabus references
3.1 The meaning of the term account balance
3.2 Balancing the T-type ledger account, including:
3.2.1 bringing the balance down for the start of the next accounting period
3.2.2 dealing with the nil balance
3.3 The significance of any particular account balance, eg a credit balance on a
creditor account, a debit balance on an expense account
3.4 The significance of the term running balance account
3.5 The preparation of accounts in running balance form
3.7 The procedure for other end-of-period balancing, and ruling off, of accounts
11.1 The purpose of the trial balance
11.2 The preparation of a trial balance from a list of account balances
This lesson deals with the practical matter of the layout of accounts, including an
alternative format. It is worthwhile giving time to this topic: marks may be lost in the
examination if accounts are presented poorly.
The lesson also discusses a straightforward method of checking that all double entries have
been completed satisfactorily.This checking is done by the preparation of a trial balance.
Step 1
Aim: to be able to balance accounts and to recognize the significance of individual balances
1 Show that the balance on an account is the amount by which one side is greater than
the other:
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Balancing accounts: the trial balance
X expense account
Dr
Year 3
Entries totalling
£
680
Year 3
Entries totalling
Cr
£
600
Here, there is a debit (Dr) balance of £80. The full balancing of this account at
31 March Year 3 is as follows:
X expense account
Year 3
£
Entries
Year 3
£
Entries
680
31 Mar Balance c/d
680
1 Apr
Balance b/d
600
80
680
80
The balance is first carried down (c/d) and then brought down (b/d), which should
always be done and not merely entered on one side.To fail to bring down the balance
is to break the double-entry rule.
2 Ask the students to write out and then balance the following creditor account:
K Jacques
Year 5
7 May Returns outwards
28 May Bank
£
50
570
Year 5
3 May Purchases
21 May Purchases
£
620
415
3 Explain a ‘nil’ balance:
F Wiles
Year 6
4 July Sales
£
370
Year 6
12 July Returns inwards
29 July Bank
370
£
40
330
370
Or a variation on the nil balance:
T Stone
Year 6
9 Aug
£
470
Year 6
26 Aug Bank
£
470
Point out that no totals are required in this instance; just two lines under the figures.
4 Hand out copies of, or show on the overhead projector, exercises T/4.1 and T/4.2 in
the Appendix (page 206). Ask the students to work through them.
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Balancing accounts: the trial balance
Step 2
Aim: to appreciate and to be able to apply the running-balance format
1 Emphasize that, so far, the format used for the accounts has been two-sided, ie:
Left-hand side
debits
(Dr)
Right-hand side
credits
(Cr)
Balances are calculated at the end of a fixed period – usually monthly for debtors and
creditors; annually in some other cases; and so on.This layout does not reveal the balance
easily or quickly. However, the running-balance format, which is a three-column layout,
shows the balance after each transaction is entered. It is used by banks in the (monthly)
statements they issue to customers.
2 An example of an account in running-balance format is included in the Appendix (see
T/4.3, page 207). Point out that this example is not a specimen of the statements issued
by banks. It is an example of the bank account as kept by the customer of the bank.
3 Explain the format, emphasizing that as each transaction is entered the balance on the
account is brought up to date. Stress that the notation, either ‘Dr’ or ‘Cr’, must be shown
beside the balance figure.
4 Ask the students to show T/4.3 as a two-sided layout, ie the format previously used in
this course.Then compare running-balance format with the two-sided layout.
5 Ask the students to work through the exercise below.
Exercise
Required
Using the information in T/4.2 (page 206), prepare debtor and creditor accounts in
running-balance format.
Step 3
Aim: to be able to prepare a trial balance
1 Work through exercise T/4.4 in the Appendix (page 207) with the students, following
the instructions below.
(a) Enter the transactions in appropriate accounts.
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Balancing accounts: the trial balance
(b) Check with the class that the total of the debit entries equals the total of the
credit entries.The total should be £27,220.
(c) Next ask the students to enter in pencil, in the margin, the balance on each account
– either debit or credit.
(d) Now list these balances; the total of the debit balances should agree with the total
of the credit balances. A trial balance has been produced.
2 Explain that the trial balance is used to check that double entry has been done correctly.
If the totals of the two sides of the trial balance are in agreement, then entries have been
made accurately. It does not, however, prove that. For example, transactions could have
been omitted entirely.This limitation will be considered further in Lesson 21 (see entry
11.5 in the Extended Syllabus).
3 Hand out copies of, or show on the overhead projector, exercises T/4.5 and T/4.6 in
the Appendix (page 208). Ask the students to work through them.
4 Show the class the following account, which is an example of a candidate’s solution to
an examination question:
F Leonard
Year 5
10 Apr
Returns outwards
£
30
Year 5
6 Apr
10 Apr
Purchases
Returns outwards
£
418
30
In this case, a candidate has entered the transaction twice – a common mistake. One
entry cancels the other for returns outwards.The examiner can only conclude that the
candidate does not know how to deal with returns outwards. As a result, no marks will
be given for either entry for 10 April.
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Lesson 5: Trading and Profit & Loss Accounts
Topic summary
●
●
Structure of income, cost, and profit
The preparation of Trading and Profit & Loss Accounts
Extended Syllabus references
3.6 The transfer of a balance at period end to Trading Account or Profit & Loss
Account, as appropriate
19.1 The Trading and Profit & Loss Accounts as part of the double-entry system
19.2 The basic structure of income, costs, and profit in a business
19.5 The calculation of costs of goods sold
19.7 The difference between trading income and other income
19.8 The difference between gross profit and net profit
19.12 The double entries for expense amounts between the Profit & Loss Account
and the individual expense accounts
This lesson reviews the structure of income, cost, and profit, and their relationship to one
another. It also deals with the concluding stage of a period’s activities, which involves
establishing either a profit or a loss. Establishing a profit or loss and showing how they are
reached are achieved through ‘final accounts’, a broadly used book-keeping term that
covers, in part, the Trading and Profit & Loss Account.
Step 1
Aim: to be able to prepare a Trading and Profit & Loss Account
1 Explain the different classes of profit, that they are:
●
●
gross profit – the excess of sales income over cost of goods sold; and
net profit – gross profit less other costs.
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Trading and Profit & Loss Accounts
2 Draw the students attention to the structure of income, costs, and profit as it is shown
in Figure 5.1. ‘Other income’ is the income arising from sources other than normal
trading activities, eg interest earned on money lent or rent receivable.The composition
of total income is as follows:
total income = income from sales + other income
(‘trading income’)
Cost of
goods
sold
Income
from
sales
=
sales
revenue
Other income
Gross
profit
Running
expenses
Net profit
Figure 5.1 The structure of income, costs, and profit
3 Ask the students to work through 2 small exercises on the structure of costs, see T/5.1*
in the Appendix (page 209).
Step 2
Aim: to be able to prepare a Trading and Profit & Loss Account
1 To show the students how to prepare a Trading and Profit & Loss Account, give them
each a copy of the trial balance of T Avis at 31 December Year 5 to work through.The
trial balance is labelled T/5.2 in the Appendix (page 210). Work through the example
of T Avis with the students as set out below.
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Trading and Profit & Loss Accounts
2 The first stage of working through the trial balance involves preparing a Trading
Account. Preparing a Trading Account requires a calculation of the cost of goods sold,
which is:
purchases
less closing stock
both stated at
cost price
The closing stock has yet to be brought into the accounts. There is no opening stock
in this instance because Year 5 was the first year of trading for T Avis.
3 The significant accounts at this stage are the Purchases and Sales Accounts.These would
appear as follows:
Purchases
Year 5
Sundries
£
5,160
Sales
Year 5
Sundries
£
6,320
4 Stress the word ‘account’ in Trading and Profit & Loss Account: it is part of the doubleentry system. For every entry made in the account, there must be a corresponding entry
elsewhere in the account system.
5 Prepare the following Trading and Profit & Loss Account with the class, using the data
in T/5.2 in the Appendix (page 210):
T Avis
Trading and Profit & Loss Account
for the year ended 31 December Year 5
Purchases
Gross profit c/d
£
5,160
3,260
8,420
Sales
Stock at 31 December Year 5
£
6,320
2,100
8,420
Gross profit b/d
3,260
6 Show the double-entry effect in the Purchases and Sales Accounts:
Purchases
Year 5
Sundries
£
5,160
Year 5
31 Dec
Trading
£
5,160
Sundries
£
6,320
Sales
Year 5
31 Dec
Trading
£
6,320
Year 5
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Trading and Profit & Loss Accounts
7 The entry for stock (at 31 December Year 5) requires careful explanation. So far, only a
credit entry has been made.To complete the double entry, a new account is opened:
Stock
Year 5
31 Dec
£
2,100
Trading
8 It has been stated that purchases less closing stock equals the cost of goods sold. To
reflect this fact, it is usual to deduct stock on the debit side in the Trading Account
instead of entering the stock on the credit side. The effect on gross profit is the same.
Therefore, the Trading Account, together with the Profit & Loss Account, becomes:
T Avis
Trading and Profit & Loss Account
for the year ended 31 December Year 5
£
5,160
2,100
3,060
3,260
6,320
Purchases
less Stock, 31 December Year 5
Cost of goods sold
Gross profit c/d
Rent payable
Office expenses
Lighting and heating
Net profit
700
360
420
2,230
3,710
£
6,320
Sales
6,320
Gross profit b/d
Rent receivable
3,260
450
3,710
9 While compiling the above Profit & Loss Account, the expense and income accounts
are closed off as follows:
Rent Payable
Year 5
Sundries
£
700
Year 5
31 Dec
Profit and loss
£
700
Office Expenses
Year 5
Sundries
£
360
Year 5
31 Dec
Profit and loss
£
360
Lighting and Heating
Year 5
Sundries
£
420
Year 5
31 Dec
Profit and loss
£
420
Sundries
£
450
Rent Receivable
Year 5
31 Dec
30
Profit and loss
£
450
Year 5
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Trading and Profit & Loss Accounts
The double entry for gross profit is the credit to the Profit & Loss Account. The
double entry for net profit is a credit to the Capital Account: ie profit increases capital.
10 The Drawings Account is closed off to Capital Account.
Capital
Year 5
31 Dec
31 Dec
£
Drawings
Balance c/d
800
5,430
Year 5
1 Jan Bank
31 Dec Profit and loss:
net profit
6,230
Year 6
1 Jan
Balance b/d
£
4,000
2,230
6,230
5,430
Drawings
Year 5
Sundries
£
800
Year 5
31 Dec Capital
£
800
Note
Many examination answers show closing stock as a credit entry in the Trading Account,
instead of as a deduction on the left-hand side. As a consequence of this error, students
lose a mark because they fail to show the cost of goods sold.
11 Copy and hand out or show exercises T/5.3 and T/5.4 in the Appendix (pages 211 and
212) on the overhead projector. Ask the students to work through them. Both exercises
involve businesses in their first year of trading. Because the businesses are new, there is
no opening stock, a topic that is dealt with in Lesson 7. Explain that the usual practice
is to value closing stock at its cost price.This method is considered further in Lesson 23.
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Lesson 6: The balance sheet
Topic summary
●
●
●
The main elements of the balance sheet and its overall purpose
The distinction between fixed assets and current assets, and between longer-term
liabilities and amounts due within 1 year (current liabilities)
The effective grouping of assets and liabilities within the balance sheet
Extended Syllabus references
20.1 The function of the balance sheet and, in particular, the recognition that it stands
outside the double-entry system
20.2 The significance and use of the terms fixed assets and current assets
20.3 The difference between longer-term liabilities and amounts payable within 12 months
(current liabilities); the naming of accounts which might appear under each of
these headings
20.4 The preparation of a balance sheet in effective format
20.5 The appropriate grouping of items within the balance sheet:
20.5.1 fixed assets
20.5.2 current assets
20.5.3 capital (or proprietor’s interest)
20.5.4 longer-term liabilities
20.5.5 amounts payable within 12 months (current liabilities)
Two aspects of study concerning the balance sheet require attention. First, the students need
to be able to appreciate the meaning of the contents of a balance sheet. Second, they should
be able to prepare one that is meaningful, ie easily understood by the reader.
Step 1
Aim: to appreciate the main elements of the balance sheet and its overall purpose
1 Refer to the trial balance of T Avis at 31 December Year 5 (see page 210). If it has
not already been done, the accounts of those items that have already been closed off
(eg transferred to Profit & Loss Account) should be ticked. Those left are Capital and
Drawings, together with the Asset and Liability Accounts. These accounts and the
closing stock are shown in the following balance sheet.
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The balance sheet
T Avis
Balance sheet at 31 December Year 5
Assets
Fixtures and fittings
£
Motor vehicle
Stock of goods
Debtors
Cash at bank
Cash in office
1,600
2,100
750
1,040
50
6,340
800
Capital
Placed in bank
account
add Net profit
less Drawings
Liability
Creditors
£
£
4,000
2,230
800
1,430
5,430
910
6,340
2 Draw out the purpose of the balance sheet; that it is to show the financial position of
the business at the date the books are made up.
3 Compare the balance sheet with the Trading and Profit & Loss Account, which is a
record of performance over a past fixed period (usually a year).
4 Explain that the two sides of the balance sheet should agree in total if the double-entry
rule has been followed fully.
Note
The accounts that have been entered in the balance sheet have not been closed off,
ie the balances remain on the accounts. The balance sheet is only a list of balances, it is a
‘statement’. It is not itself part of the double-entry system.
Step 2
Aim: to be able to group effectively the items on a balance sheet
1 Explain why it is necessary to group balance sheet items. Grouping the items:
●
●
●
gives meaning to the balance sheet, showing that it is comprised of significant elements
and is not just an array of items;
shows long-term versus short-term liabilities;
shows different timescales among assets, some of which can be quickly turned into
cash (‘liquidity’); others represent money tied up, possibly for many years.
2 In discussing this, refer to the balance sheet above. Using the question-and-answer
method, review the terms ‘fixed assets’ and ‘current assets’.Ask the students for examples
of each.
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The balance sheet
3 Stress that the recognized sequence of listing assets begins with the most permanent and
ends with those most easily turned into cash. Demonstrate the sequence as shown
below.
Fixed Assets
Land and buildings
Fixtures and fittings
Machinery
Motor vehicles
Current Assets
from
highly
fixed
to less
fixed
Stock
Debtors
Bank
Cash
increasing
liquidity
Other assets will be introduced in due course.
4 Explain that, with fixed assets, the more permanent the assets are likely to be, the more
‘fixed’ they are considered to be, eg compare land and buildings with motor vehicles.
The more ‘liquid’ an asset, the more easily it can be turned into cash: eg compare the
bank balance with stock.
5 Review the normal sequence for capital and liabilities on the right-hand side of the
balance sheet.The sequence appears as follows:
●
●
●
capital;
longer-term liabilities: ie amounts payable in more than 1 year, such as a 2-year
loan (2 years to repayment from the date of the balance sheet);
amounts due within 1 year (or ‘current liabilities’), eg creditors, bank overdraft, or
short-term bank loan.
6 Present the balance sheet of T Avis, grouping and arranging the items in the way shown
below.
T Avis
Balance sheet at 31 December Year 5
Fixed Assets
£
Fixtures and fittings
Motor vehicle
Current Assets
Stock
Debtors
Bank
Cash
34
2,100
750
1,040
50
£
Capital
£
800
1,600
2,400
Placed in bank account
add Net profit
less Drawings
2,230
800
Amount due within 1 year
(current liabilities)
Creditors
3,940
6,340
£
4,000
1,430
5,430
910
6,340
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The balance sheet
7 Stress the importance of a good balance-sheet layout. The items need to be suitably
grouped and also in a suitable sequence within each group. Marks are lost when a
balance sheet is presented poorly.
8 Hand out copies of, or show on the overhead projector, exercises T/6.1*, T/6.2*,
T/6.3*, and T/6.4* in the Appendix (pages 212–15).Ask the students to work through
them.
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Lesson 7: Final accounts: more features
Topic summary
●
●
●
●
Period-end entries for returns inwards and outwards
The different forms of carriage and how they are recorded in final accounts
Opening and closing stock figures in the Stock Account and final accounts
The review and application of the end-of-year procedure
Extended Syllabus references
3.6
3.7
19.3
19.6
19.9
19.10
19.11
19.13
The transfer of a balance at period end to Trading Account and Profit & Loss
Account, as appropriate
The procedure for other end-of-period balancing, and ruling off, of accounts
Showing returns inwards and returns outwards suitably deducted to reveal net
sales and net purchases respectively
Showing the make-up of ‘cost of goods sold’
The function of the Stock Account and the double-entry relationship between
the Trading Account and the Stock Account
End-of-period transfer of balances from the General Ledger to the Trading
Account (Purchases Account, Sales Account, Returns Outwards Account,
Returns Inwards Account)
The difference between carriage inwards and carrriage outwards and recording
them in the Trading Account and Profit & Loss Account respectively
Showing income and expenses within the final accounts, with related items
being suitably brought together
This lesson is concerned with some very practical and detailed matters that appear, from
the answers elicited in examinations, to be given limited attention during the course of
study. Carriage, in particular, would seem to be neglected. The Stock Account is also a
major point of weakness. Candidates are usually able to record opening and closing stocks
in the Trading Account – although not always in the most favourable position in the Trading
Account. However, candidates may have difficulty in correctly recording the Stock Account
itself.
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Final accounts: more features
Step 1
Aim: to be able to show period-end entries for returns inwards and outwards
1 Remind the students that the Goods Account is divided into Purchases, Sales, Returns
Outwards, and Returns Inwards Accounts. This type of division has not yet been
brought fully into the Trading Account.
Example
A trader in Year 3 has total returns outwards and returns inwards of £450 and £610
respectively.The Returns Accounts might appear as follows:
Returns Outwards
Year 3
31 Dec Trading
£
450
Year 3
Sundries
£
450
Returns Inwards
Year 3
£
610
Sundries
Year 3
31 Dec Trading
£
610
With the debit transfer (to the Trading Account) entry in the Returns Outwards
Account, the matching entry would be expected to appear to the credit of the Trading
Account. However, the entry does not appear as a credit, but as a deduction – from
purchases – on the debit side. Conversely, returns inwards appears as a deduction – from
sales – on the credit side of the Trading Account. The aim of showing returns as
deductions is to provide a neater and more informative picture of what has happened.
This might be seen in a Trading Account as follows:
J Blunt
Trading Account
for the year ended 31 December Year 3
Purchases
less Returns outwards
less Stock at 31 Dec Year 3
Cost of goods sold
Gross profit
£
10,300
540
9,760
2,100
7,660
12,980
20,640
Sales
less Returns inwards
£
21,400
760
20,640
20,640
Point out that £9,760 is the sum of the net purchases and that £20,640 is the sum of
the net sales.
Inform the students that the layout shown for returns in J Blunt’s Trading Account will
always be followed from now onwards.
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Final accounts: more features
2 Ask the students to work through the exercise below.
Exercise
Required
Prepare a Trading Account for F Waldron for the year ended 31 December Year 5 from
the following details:
Purchases
Sales
Returns inwards
Returns outwards
Stock at 31 Dec Year 5
£
17,300
37,850
1,320
870
3,200
Solution
F Waldron
Trading Account
for the year ended 31 December Year 5
Purchases
less Returns outwards
less Stock at 31 Dec Year 5
Cost of goods sold
Gross profit
£
17,300
870
16,430
3,200
13,230
23,300
36,530
Sales
less Returns outwards
£
37,850
1,320
36,530
36,530
Step 2
Aim: to appreciate the different forms of carriage as an expense and how they are
recorded in final accounts
1 Explain carefully the nature of carriage; that carriage is an expense incurred in, or
charge made for, the delivery of goods.
2 Make the distinction clear between carriage inwards and carriage outwards:
(a) Carriage inwards
Carriage on goods coming into the firm, ie on purchases. Instead of paying an
inclusive price for purchases that covers carriage, a separate charge is made.
Therefore, carriage is added to the cost of purchases and is included in the Trading
Account.
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Final accounts: more features
(b) Carriage outwards
Carriage on goods going out of the firm, ie on sales. It is regarded as a cost of
distributing goods to customers and is entered as a separate item in the Profit &
Loss Account.
The layout of purchases including adjustments (using different figures) is as follows:
Purchases
add Carriage inwards
less Returns outwards
less Closing stock
Cost of goods sold
£
12,800
430
13,230
520
12,710
1,980
10,730
The adjustments for purchases and sales may be summarized as follows:
Net sales = Sales less returns inwards
Net purchases = Purchase plus carriage inwards less returns outwards
3 Hand out copies of, or show on the overhead projector, exercise T/7.1 in the Appendix
(page 216). Ask the students to work through the exercise.
Step 3
Aim: to be able to record opening and closing stock figures in the Stock Account and
final accounts
1 So far, these studies have been limited to the first year of trading, ie there has been no
opening-stock figure. From the second year, there will be 2 stock figures: for example,
the closing stock at 31 December Year 5 becomes the opening stock at 1 January Year 6.
2 Use the situation of T Avis as an example again (see T/7.2 in the Appendix, page 216).
T Avis has prepared a trial balance at the end of his second year of trading.Work through
the Trading and Profit & Loss Account, and the balance sheet, with the class.
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Final accounts: more features
T Avis
Trading and Profit & Loss Account
for the year ended 31 December Year 6
£
Stock at 1 Jan Year 6
Purchases
£
2,100
9,260
add Carriage inwards
£
13,050
480
12,570
Sales
less Returns inwards
430
9,690
less Returns outwards
340
less Stock at 31 Dec Year 6
Cost of goods sold
Gross profit c/d
9,350
11,450
2,450
9,000
3,570
12,570
Rent payable
Office expenses
Lighting and heating
Carriage outwards
Net profit
1,100
590
610
380
1,340
4,020
12,570
Gross profit b/d
Rent receivable
3,570
450
4,020
Balance sheet at 31 December Year 6
£
£
Fixed Assets
Fixtures and fittings
Motor vehicle
Current Assets
Stock
Debtors
Bank
Cash
£
Capital
Balance at 1 Jan Year 6
add Net profit
less drawings
900
1,600
2,500
2,450
1,170
1,230
70
£
5,430
1,340
1,100
Amount due within 1 year
Creditors
240
5,670
1,750
4,920
7,420
7,420
3 Show the Stock Account for T Avis for his first and second years as follows:
Stock
40
Year 5
31 Dec
Trading
£
2,100
Year 5
31 Dec Balance c/d
£
2,100
Year 6
1 Jan
31 Dec
Balance b/d
Trading
2,100
2,450
Year 6
31 Dec Trading
31 Dec Balance c/d
2,100
2,450
Year 7
1 Jan
Balance b/d
2,450
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Final accounts: more features
4 Explain that the Stock Account is used only to carry the figure for the balance of stock
from one year to the next. No transactions are entered into this account. It is a
‘holding’ account only.
5 Draw attention to the entry at 31 December Year 5 (encircled).This entry is frequently
entered at 1 January Year 6. The correct way to enter it is as 31 December Year 5
initially and then to carry it down, as shown above.
6 Ask the students to work through the following exercise:
Exercise
Stock at 31 Mar Year 6
Stock at 31 Mar Year 7
£31,680
£34,270
Required
Show the Stock Account for the period 31 March Year 6 to 1 April Year 7.
Note
The stock at 1 April Year 6 is the same as the stock at 31 March Year 6.
Solution
Stock
Year 6
31 Mar Trading
£
31,680
Year 6
31 Mar Balance c/d
£
31,680
Balance b/d
31,680
Year 7
31 Mar Trading
31,680
Year 7
31 Mar Trading
1 Apr Balance b/d
34,270
34,270
31 Mar Balance c/d
34,270
1 Apr
7 Copy and hand out or show exercises T/7.3 and T/7.4 in the Appendix (page 217) on
the overhead projector. Ask the students to work through them.
Step 4
Aim: to review and to be able to apply the end-of-year procedure
1 Review the end-of-year procedure by showing Figure 7.1 (overleaf) on the overhead
projector. See also T/7.5 in the Appendix (page 218).
2 Draw the students’ attention to points (a) to (c) overleaf, which are highlighted by
Figure 7.1.
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Final accounts: more features
(a) The accounts for which balances are recorded in the balance sheet have not been
‘closed off ’. They retain their balances, ready for the next trading period or year.
The balance sheet is merely a list of items and is not part of the double entry.
(b) Transferring a balance, eg for purchases or insurance, into the Trading Account or
Profit & Loss Account is part of double entry. Each amount is being carried in the
final accounts instead of in the ledger account. The various amounts are
channelled through the final accounts to establish a net profit (or net loss).
(c) The net profit, to complete the double entry, is credited to the Capital Account
(debit the Profit & Loss Account and credit the Capital Account) and so the process
re-emerges in the ledger accounts.
Purchases
Sales
Returns outwards
Returns inwards
Opening stock
Closing stock
account balances
transferred to
(b)
Trading Account
Gross profit to
Profit & Loss Account
(b)
Expense accounts
Other income
accounts
account
balances
transferred to
(b)
Profit & Loss Account
Net profit to
Capital Account
(c)
(a)
Drawings Account
Capital Account
Cash/bank accounts
Debtor/creditor accounts
Asset accounts
Balanced, ie
balances c/d
on each account
(a)
Balance sheet
Figure 7.1 The end-of-year procedure
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Final accounts: more features
3 The preparation of final accounts is an important element of the First Level
Book-keeping Syllabus. It is therefore important that students become practised at
systematically answering final accounts questions at an early stage. Encourage the
students to adopt the following method when answering such examination questions:
(i) to read through the question to get an overall understanding, especially noting the
‘required’ part of the question;
(ii) to go through the trial balance (or any alternative list of balances) and to place next
to each item a code representing the final account in which it appears;
(iii) to tick each item or figure as it is recorded in the final account concerned.
4 Illustrate this method of answering final accounts by applying it to the trial balance of
T Avis at 31 December Year 6 (see below). Leave the codes out and ask the students to
enter them alongside the items in the trial balance.
T Avis
Trial balance at 31 December Year 6
Purchases
Sales
Carriage inwards
Debtors
Creditors
Rent payable
Office expenses
Lighting and heating
Rent receivable
Returns inwards
Returns outwards
Carriage outwards
Fixtures and fittings
Motor vehicle
Cash at bank
Cash in office
Stock at 1 January Year 6
Drawings
Capital
Dr
£
9,260
Cr
£
13,050
430
1,170
1,750
1,100
590
610
450
480
340
380
900
1,600
1,230
70
2,100
1,100
21,020
5,430
21,020
T
T
T
BS
BS
P/L
P/L
P/L
P/L
T
T
P/L
BS
BS
BS
BS
T
BS
BS
(exp)
(exp)
(exp)
(inc)
(exp)
Key:
BS balance sheet
T Trading Account
P/L (exp) Profit & Loss Account (expenditure)
P/L (inc) Profit & Loss Account (income)
Note
Stock at 31 December Year 6 was valued at £2,450 T, BS.
5 Hand out copies of, or show on the overhead projector, exercise T/7.6 in the Appendix
(page 219). Ask the students to work through the exercise.
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Page 44
Lesson 8: The division of the ledger
Topic summary
●
●
●
●
The reasons for dividing the ledger and recognizing the usual divisions
The different types of ledger account
The possible subdivisions of the ledger
Producing a balance sheet with a vertical format
Extended Syllabus references
4.1 The function of the ledger
4.2 The various possible reasons for subdividing the ledger
4.3 How the ledger might be subdivided, eg Sales Ledger, Purchases Ledger, Cash
Book, General Ledger
4.4 Alternative names for the different ledgers, eg Debtors Ledger, Creditors Ledger,
Nominal Ledger
4.5 The possible use of a Private Ledger
4.6 The naming of (ie classification of ) the different types of ledger account and
explaining the accounts within it
4.7 The distinction between personal, real, and nominal accounts
4.8 How the Sales Ledger might be subdivided
4.9 From a list of accounts, or from transaction details, the naming of the ledger(s) in
which each would be recorded
The ledger is the set of accounts of business.These accounts may be kept in a book or series
of books (as in a manual system) or on computer disc. Dividing the ledger and classifying
accounts commonly give students difficulty. Careful explanation and plenty of practice can
help students to achieve success in this topic.
Step 1
Aim: to appreciate the reasons for dividing the ledger and to recognize the usual divisions
1 Outline the possible or likely divisions of the ledger. Encourage the students to identify
the possible advantages of a division, and the reasons for the division, by asking them
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The division of the ledger
questions. For example, you could ask the students what advantages there could be to
having a separate ledger for customers (ie debtors).The possible divisions of the ledger
may be as shown below.
Accounts
(a) customers’ personal accounts,
ie Debtor Accounts
(b) suppliers’ personal accounts,
ie Creditor Accounts
(c) the receiving and paying
out of money
(d) the remaining accounts
(unless a Private Ledger exists)
(e) accounts requiring confidentiality,
eg Capital Account
To be found in the following ledger
Sales Ledger
(or Debtor Ledger)
Purchases Ledger
(or Bought Ledger or Creditor Ledger)
Cash Book (developed in Lesson 9)
General Ledger (or Nominal Ledger)
Private Ledger
Draw the students’ attention to the alternative names for the ledgers that are given in
brackets.
Point out that not all firms have a Private Ledger.The purpose of a Private Ledger is to
maintain confidentiality, with access limited to only a few members of staff.
2 Explain that the reasons for dividing the ledger are that:
• smaller units are managed more easily;
• the division provides useful information because parts of the ledger are specialized;
• it helps to keep control of the various accounts.
3 Ask the students to work through the exercise below.
Exercise
Required
State into which ledger each of the following items should be posted:
(i)
(ii)
(iii)
(iv)
D Light – Customer Account
Fixtures and Fittings Account
F Masters – Supplier of Goods Account
Wages Account.
Solution
(i)
(ii)
(iii)
(iv)
Sales Ledger (or Debtor Ledger)
General Ledger (or Nominal Ledger)
Purchases Ledger (or Bought or Creditor Ledger)
General Ledger (or Nominal Ledger).
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The division of the ledger
Step 2
Aim: to be able to distinguish between the different types of ledger account
1 Point out that distinguishing between types of account is commonly referred to as the
‘classification of accounts’, which is the arrangement of accounts into distinct classes.
ACCOUNTS
Impersonal
(of things rather than
of people)
Personal
Capital
Debtors
Creditors
Real
Drawings
Asset accounts
(including
cash and bank)
Nominal
Income and
expense
accounts
Figure 8.1 The classification of accounts
2 Hand out copies of, or show on the overhead projector, exercises T/8.1* and T/8.2* in
the Appendix (pages 220 and 221). Ask the students to work through them.
3 Draw the students’ attention to the difference between:
(a) the Sales Ledger
the ledger containing debtor accounts
and
the Sales Account
(b) the Nominal Ledger
the account in the General Ledger which records the income
receivable from the sale of goods, whether for cash or on credit
an alternative name for the General Ledger
and
the Nominal Account a name for the various income and expense accounts
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The division of the ledger
Step 3
Aim: to recognize the various possible subdivisions of the ledger
1 Review the possible sub-divisions of the ledger. Use the students’ experience to review
this topic by asking them questions. For example, you could ask the students why the
Sales Ledger might be divided according to sales territories/areas and what advantages
might result from this. Suggest that those who are in employment try to find out how
the ledger is divided or subdivided within the organizations they work for.
A large Sales Ledger might be subdivided for any of the reasons stated in point 2 on
page 45. The ways in which the Sales Ledger can be divided are:
(a)
(b)
(c)
(d)
(e)
alphabetically – by the customers’ names;
numerically – in which each customer is allotted a number;
geographically (or territorially) – by area or region, eg by sales territories;
on a product basis – by product categories;
by type of customer, eg trade customers, as distinct from private individuals, or
according to the level of credit allowed.
2 Hand out copies of, or show on the overhead projector, exercise T/8.3* in the
Appendix (page 221). Ask the students to work through the exercise.
Step 4
Aim: to be able to produce a balance sheet with a vertical format
1 Stress that a vertical format is not required for the First Level Book-keeping
examination. Explain, however, that a vertical layout offers more scope for presentation,
especially when more detail needs to be included concerning fixed assets. More space
is provided by this layout, which can greatly help candidates.
2 The balance sheet of T Avis at 31 December Year 6 is presented overleaf in vertical
format. See also T/8.4 in the Appendix (page 222).
3 Point out that it is usual to deduct ‘Amounts due within 1 year’ (current liabilities) from
current assets to obtain ‘net current assets’.
Note
Knowledge of ‘working capital’ (net current assets) is not required by the First Level
syllabus.Therefore, students who omit the words ‘net current assets’ will not be penalized.
However, encourage the students to lay out their work well.
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The division of the ledger
T Avis
Balance sheet at 31 December Year 6
£
Fixed Assets
Fixtures and fittings
Motor vehicle
Current Assets
Stock
Debtors
Bank
Cash
less Amounts due within 1 year
Creditors
Net current assets
£
900
1,600
2,500
2,450
1,170
1,230
70
4,920
1,750
3,170
5,670
Financed by:
Capital – balance at 1 Jan Year 6
add Net profit
less Drawings
5,430
1,340
1,100
240
5,670
4 Hand out copies of, or show on the overhead projector, exercise T/8.5* in the
Appendix (page 223). Ask the students to work through the exercise. Remind the
students to apply the examination method outlined in Lesson 7 (page 43).
5 Explain that after the total amount of fixed assets and net current assets has been
established, the ‘Amount due in more than 1 year’ is deducted.This way of positioning
entries is preferred by the LCCIEB to the alternative of placing longer-term liabilities
as an addition underneath capital.
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Lesson 9: Bank facilities
Cash Book: 2 columns
Topic summary
●
●
●
●
Basic matters concerning methods of payment and cash and bank records
The use of a 2-column Cash Book
The significance of a bank overdraft and its effect on the Bank Account
The book-keeping relationship between the Bank Current Account and the Bank
Deposit Account
Extended Syllabus references
7.1
7.2
7.3
7.4
7.5
7.6
The main types of bank account and their key features
The key aspects of the following methods of payment and receipt of money, and
the differences between them:
7.2.1 cash
7.2.2 cheque
7.2.3 credit transfer
7.2.4 standing order
7.2.5 direct debit
Significance of the term bank overdraft: how an overdraft might arise
The differences between:
7.4.1 interest receivable (by the customer) on a bank account
7.4.2 interest payable on a bank loan or overdraft
7.4.3 bank charges as charged by a bank for operating an account
Naming of and use of the following abbreviations:
7.5.1 DD or D/D – direct debit
7.5.2 CT or C/T – credit transfer
7.5.3 STO or S/O – standing order
7.5.4 Div – dividend
Significance of the following terms:
7.6.1 bank paying-in book
7.6.2 banker’s order
7.6.3 cheque book counterfoils/stubs
7.6.4 counter credits
7.6.5 drawer
7.6.6 drawee
7.6.7 remittance
(continued)
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Bank facilities Cash Book: 2 columns
Extended Syllabus references (continued)
8.4
8.6
Transfers between the cash and bank accounts (contra entries)
The variations of entry arising on and from the sale of goods for cash, eg the
immediate banking of cash as against the delayed banking of cash
8.7 The book-keeping entries required on the transfer of funds between the Bank
Current Account and the Bank Deposit Account
8.17 The periodic balancing of the Cash Book, bringing the balance down for the
start of the next period
A detailed knowledge of bank facilities is not required for the LCCIEB First Level
Book-keeping examination.There is, however, a need to know:
•
•
•
•
the nature of 2 types of bank account: the Current Account and the Deposit Account;
the main methods of payment through a bank, eg cheque or credit transfer;
the process of cheque clearance (in outline);
how the bank account affects the Cash Book.
Reconciliation between the bank statement and the Cash Book is dealt with in Lesson 17
(page 132).
You can obtain literature from a bank, that describes the accounts that are available, and
methods of payment, together with specimen paying-in slips, for example.
Step 1
Aim: to be able to apply knowledge of bank facilities to answering basic questions on
methods of payment and cash and bank records
Many students will be aware of bank facilities and may have first-hand experience of
holding a bank account. This knowledge can be drawn upon by asking the students
questions at appropriate points in the lesson. For example, you could ask them about the
type of bank accounts they have, and if any features vary from those of the 2 basic types of
account.You could also ask what factors might delay the clearance of a cheque.
1 Bank accounts
Ensure that students are aware of the 2 main types of bank account: the Current
Account and the Deposit Account. Review the key features of each:
Deposit Account
50
normally for earning interest on the balance; withdrawals are
infrequent
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Bank facilities Cash Book: 2 columns
Current Account
a ‘working account’ for regular banking and withdrawal of money;
generally interest is earned on the balance only if the balance is
kept above a certain minimum
2 Cheques
The students should be told the following about cheques:
• what their purpose is;
• who the parties to a cheque are.
Illustrate this information about cheques by displaying Figure 9.1 on the overhead
projector.
instructs
Bank
to pay to
Drawer
Payee
or to drawer himself
Figure 9.1 The interaction of the parties to a cheque
Note The delay in clearance will increase if P Sempster (the payee) delays paying the cheque into his account.
In the simplified form of cheque shown below:
●
●
●
T Royle is the drawer, ie the party making payment;
Albion Bank,York east is the drawee, ie the party upon whom the cheque is drawn
and where T Royle has his bank account;
P Sempster is the payee, ie the party to whom the cheque is payable.
7 May Year 4
Albion Bank plc
York East branch
Pay
P Sempster
Three hundred and
and thirty pence
sixty pounds
£360-30
T Royle
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Bank facilities Cash Book: 2 columns
Explaining what the different cheque numbers are will be useful in making cash-book
entries and, later on, in preparing bank-reconciliation statements (see the student’s book
How to Pass Book-keeping, First Level, pages 74–5).
3 Paying-in slip
Tell students that the paying-in slip is used for paying cash or cheques into a bank
account. It is often referred to in questions requiring the preparation of a Cash Book.
4 Cheque clearance
Explain what cheque clearance is. A cheque is cleared when the drawee bank has
indicated that it will pay the amount stated on the cheque. Emphasize that there is a
time delay before the 2 accounts involved (drawer’s and drawee’s) are adjusted. For
example, in the journey of a drawn cheque illustrated in Figure 9.2, a cheque is drawn
by T Royle (an account holder at Albion Bank,York East branch) payable to P Semster
(who holds an account at Derbyshire Bank, Chester branch) – also in the Appendix:
T/9.1 (page 225).
Year 4
T Royle (drawer)
7 May
cheque
sent to
P Sempster (payee)
receives cheque
8 May
T Royle credits
bank account
P Sempster debits
bank account
pays cheque into
account with
Derbyshire Bank
Chester branch
9 May
10 May
cheque
sent to
Derbyshire Bank
clearance centre
sent (with other
cheques) to
10 May
Albion Bank
clearance centre
11 May
Albion Bank
York East branch
Figure 9.2 The journey of a ‘drawn’ cheque
52
charged against
account of T Royle
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Bank facilities Cash Book: 2 columns
5 Other payment methods
The 3 methods of which candidates need to be aware are:
(a) credit transfer
used for:
(i) single settlement, eg payment of one bill; or
(ii) multiple settlement, eg one instruction to the bank to make a
number of payments to different accounts (of persons or
organizations).
(b) standing order
for regular payments:
• of fixed amounts;
• at stated dates;
• to certain persons or firms.
(c) direct debit
‘credit transfer in reverse’: initiated by the creditor, although with
the written agreement of the debtor:
• for either fixed or variable amounts;
• when the time intervals between payments vary.
6 Counter credits
This term literally means the recognition of credit at the bank counter. It relates to
payments into a bank account. Counter credits may cover a number of cheques, etc
amounting to the sum stated.
7 Explain the following terms:
• interest receivable (by the customer) on a bank account – normally only if the
balance is above a certain minimum;
• interest payable on a bank loan or overdraft; and
• bank commission (charges), which are charged by a bank for operating an account.
Note
Explain the terms:
bank loan
an amount made available for an agreed period; interest is charged on
the full amount of the loan regardless of how much is drawn.
bank overdraft
an overdraft occurs when withdrawals exceed deposits; it may be with
or without prior agreement with the bank; interest is charged from
day to day on the varying balance.
8 Give each student a copy of the multiple-choice questions (T/9.2 in the Appendix,
page 226). Ask the students to work through them.
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Bank facilities Cash Book: 2 columns
Step 2
Aim: to be able to prepare a 2-column Cash Book
Answers to examination questions requiring the preparation of a Cash Book are often
weak.The weakness may, in part, be due to candidates’ unfamiliarity with presenting their
work in columnar form.
1 Explain that, in a 2-column Cash Book, related accounts, cash and bank, are merely
positioned beside each other. Practice in answering questions requiring columnar form
should solve any difficulty the students might have.
2 Show the students cash and bank accounts, as they have been introduced so far on the
overhead projector, eg:
Cash
Year 2
1 Sep Balance b/d
7 Sep Sales
26 Sep R Layburn
1 Oct
Balance b/d
£
43
116
51
Year 2
5 Sep
11 Sep
19 Sep
30 Sep
Cleaning
K Mills
Postage
Balance c/d
£
18
37
19
136
210
Year 2
4 Sep
16 Sep
20 Sep
28 Sep
30 Sep
Rent
T Laite
Insurance
V Barnes
Balance c/d
£
240
176
215
167
718
1,416
210
136
Bank
Year 2
1 Sep
8 Sep
12 Sep
25 Sep
Balance b/d
T Wells
Office furniture
J Telby
£
726
315
290
85
1,416
1 Oct
Balance b/d
718
3 Show the 2 accounts combined. Make sure you enter the items in correct date order.
Carefully tick () the original items as they are entered in the newly presented Cash
Book.
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Bank facilities Cash Book: 2 columns
CASH BOOK
Year 2
1 Sep
7 Sep
8 Sep
12 Sep
25 Sep
26 Sep
1 Oct
Balances b/d
Sales
T Wells
Office furniture
J Telby
R Layburn
Balance b/d
Cash Bank
£
£
43
726
116
315
290
85
51
210
1,416
136
718
Year 2
4 Sep
5 Sep
11 Sep
16 Sep
19 Sep
20 Sep
28 Sep
30 Sep
Rent
Cleaning
K Mills
T Laite
Postage
Insurance
V Barnes
Balance c/d
Cash Bank
£
£
240
18
37
176
19
215
67
136
718
210 1,416
Stress the importance of entering the items in date order.
4 Hand out copies of, or show on the overhead projector, exercise T/9.3* in the
Appendix (page 227). Ask the students to work through the exercise.
5 Ask the students why it is necessary to keep a separate record in the Cash Book.There
are two answers:
(a) A golden rule in accounting is to separate, if possible, the handling of, or dealing
with, money from other aspects. This action lessens the chance of an employee
taking advantage of the system.
(b) The volume of work in dealing with the receipt and payment of money might also
justify a separate record.
6 Ask the students why it is necessary to keep cash and bank accounts together in
columnar format.The answer is that they are so closely related that transfer sometimes
takes place between them.
7 Explain that the transfer of cash into the bank would result in:
●
●
cash reduced – credit cash
bank increased – debit bank.
8 Illustrate how the transfer of cash into the bank would appear in the Cash Book:
CASH BOOK
Year 4
12 Feb
Cash
£
Cash C
Bank
£
270
Year 4
12 Feb
Bank C
Cash
£
270
Bank
£
The ‘C’ means contra, which is used where a double entry is complete within the Cash
Book.
55
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Bank facilities Cash Book: 2 columns
9 Cash might also be taken out of the bank. Show the Cash Book as it would appear
when money is withdrawn from the bank account to increase office cash:
CASH BOOK
Year 4
15 Mar Bank C
Cash
£
120
Bank
£
Year 4
15 Mar Cash C
Cash
£
Bank
£
120
10 Hand out copies of, or show on the overhead projector, exercise T/9.4* in the
Appendix (page 228). Ask the students to work through the exercise.
11 Check that the students are making the entries correctly in the answer to exercise
T/9.4. In particular check that:
(a) each transaction is dated;
(b) transactions are entered in strict date order;
(c) the appropriate wording is entered in the middle ‘details’ column, which always
contains the name of the corresponding account, ie where the double entry is
completed.
12 Ask the students if they can spot any bad business practice being followed by
W Towcester. The answer is that there is some bad business practice. W Towcester is
keeping too much cash in the office at one time, which is a security risk. On 6 April,
£470 cash was received for sales, none of which was banked until 9 April.
13 Explain that for reasons of security, the general practice is to bank cash, if possible, on
the day of receipt. If cash is banked on the day that it is received, the account entries
should be recorded as if a cheque had been banked immediately. For example, on 9 May
Year 6,W Towcester receives £590 in cash from sales and banks the cash the same day.
The account entry for this transaction would be as follows:
CASH BOOK
Year 6
9 May Sales
Cash
£
Bank
£
590
Year
Cash
£
Bank
£
14 Point out that some book-keepers record the entry for cash sales that are banked, first
as a debit in the cash column and then separately bank the amount. If the entry has been
recorded in this way, the initial entry must be followed by a complete set of contra
entries such as credit cash/debit bank. For examination purposes, the method shown in
W Towcester’s Cash Book above – direct entry in the debit bank column – is strongly
recommended. This method prevents complications and confusion as to the double
entry is less likely. A common fault in answers to examination questions on this topic
is failing to make the complete contra, which loses marks.
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Bank facilities Cash Book: 2 columns
15 Explain that there is an alternative way of recording cash sales that are banked. This
alternative is used when part of the cash received from sales is banked (on the same day)
and the remainder is retained as office cash. For example, 5 June Year 6, £985 is received
from cash, £900 of which was banked on the same day. This transaction would be
recorded as follows:
Method A
CASH BOOK
Year 6
5 Jun
Sales
Cash
£
85
Bank
£
900
Cash
£
Bank
£
Cash
£
900
Bank
£
If treated as 2 transactions, the entry would be recorded as follows:
Method B
CASH BOOK
Year 6
5 Jun
5 Jun
Sales
Cash C
Cash
£
985
Bank
£
Year 6
5 Jun
Bank C
900
Method A is to be preferred. It is simpler and less prone to error.
16 Hand out copies of, or show on the overhead projector, exercise T/9.5* in the
Appendix (page 229). Ask the students to work through the exercise.
Step 3
Aim: to be aware of the significance of a bank overdraft and its effect on the bank account
1 Explain that a bank overdraft might arise because:
• the bank has agreed that the account may be overdrawn, subject to a limit;
• the customer (intentionally or otherwise) has drawn more out of the account than it
contains.
2 Tell the students that the effect of an overdraft is to create a ‘minus’ or negative balance
from the customer’s viewpoint.The balance changes from debit to credit and from asset
to liability (the amount owed to the bank).
3 Illustrate the significance of a bank overdraft and its effect by referring in the Appendix,
page 229 to the Cash Book of F Swaine (see T.9.5/A). If a cheque for £9,000 had been
drawn from F Swaine’s account on 30 November Year 5, the Cash Book would appear
as follows:
57
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Bank facilities Cash Book: 2 columns
F Swaine
CASH BOOK
Year 5
1 Nov
3 Nov
8 Nov
17 Nov
20 Nov
23 Nov
30 Nov
Capital
Cash C
Sales
Bank C
T Dart
Sales
Balance c/d
Cash
Bank
£
£
12,000
11,500
860
130
315
210
700
1,455
12,340 14,830
1 Dec Balance b/d
87
Year 5
3 Nov
5 Nov
10 Nov
13 Nov
15 Nov
17 Nov
18 Nov
28 Nov
29 Nov
30 Nov
30 Nov
Cash
Bank
£
£
Bank C
11,500
Motor vehicle
4,200
Wages
270
Purchases
1,040
Carriage
43
Cash C
130
Wages
290
Drawings
150
F Glubb
460
S Royal
9,000
Balance c/d
87
12,340 14,830
1 Dec Balance b/d
1,455
4 Point out that:
●
●
The credit balance for bank will appear in the balance sheet of F Swaine as a liability,
ie under the heading of ‘Amounts due within 1 year’.
Cash never has a credit balance. Negative cash is an impossibility.
Particularly stress the second point; this will help prevent students from wrongly showing
a concluding credit balance for cash.
Step 4
Aim: to appreciate the book-keeping relationship between the bank Current Account
and the bank Deposit Account
Remind the students that the bank Current Account is very much a working account that
is used for regular banking and withdrawal of money. The Deposit Account, however, has
money paid into it or withdrawn from it infrequently.The Current Account is recorded in
the Cash Book; the Deposit Account is kept in the General Ledger because entries are
infrequent. Thus, if there were a transfer on 12 April Year 4 of £2,000 from the Current
Account into the Deposit Account, the entries would be recorded as follows:
58
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Bank facilities Cash Book: 2 columns
CASH BOOK
Year 4
12 Apr
Cash
£
Bank
Deposit a/c
Bank
£
2,000
General Ledger
Bank Deposit Account
Year 4
12 Apr
£
Bank
(Current a/c)
2,000
If there were a withdrawal from the bank Deposit Account into the bank Current Account
the entries would, of course, be the reverse of those shown above.
59
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Page 60
Lesson 10: Cash Book: 3 columns – cash discount
Topic summary
●
●
●
The significance of cash discount
Account entries in respect of cash discount
Preparing the 3-column Cash Book, including entries for discounts, and posting
discount totals to the General Ledger
Extended Syllabus references
8.2
Use of the 3-column Cash Book (the bank columns recording the Bank Current
Account only)
8.3 The posting of individual transactions from the Cash Book to the ledger
8.5 The differences in book-keeping entries regarding the withdrawal of funds from
the bank, as between:
8.5.1 that for use in the business – a contra entry
8.5.2 that for private use – drawings
8.8 Cash discount as part of the terms of sale
8.9 The impact of cash discount upon the seller (discount allowed) and the buyer
(discount received) respectively
8.10 The double-entry effect of discount allowed and discount received respectively
8.11 The purpose and use of discount columns in the Cash Book
8.18 The periodic posting of discount-column totals from the Cash Book to the
Discount Allowed and Discount Received Accounts in the General Ledger
One of the topics that causes students difficulty is discounts. ‘Cash discount’ is a rather
misleading term: it is really an allowance given to encourage payment within a certain
period of time. Understanding what cash discount means is the key to solving at least part
of the students’ difficulty. A debtor is entitled to a cash discount only when the payment
condition is met.
60
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Cash Book: 3 columns – cash discount
Step 1
Aim: to appreciate the significance of cash discount
1 Discuss the purpose of cash discount. Explain that its purpose is to induce prompt or
early payment by a customer who has been sold goods on credit. By receiving payment
early, the seller is able to use the money to purchase and then sell more goods. Cash
discount, as part of the seller’s ‘terms of sale’, also serves to attract the would-be
purchaser.The terms of sale might state, for example, that:
●
●
a period of credit of one month is allowed;
if payment is made within 10 days of buying the goods, a cash discount of 2% will
be allowed.
2 Explain that the term ‘cash discount’ is misleading; it is an allowance given to encourage
the purchaser to pay an account within a certain period of time. The allowance is
calculated as a percentage (%) of the price of the goods. For example, if the price of the
goods is £250 and the cash discount for payment within 10 days is 2%, then:
Amount of cash discount:
Net amount to be paid
£
250 x 2/100 = £5
245
3 Stress that the buyer of goods (on credit) is not automatically entitled to a cash discount.
It is conditional, although it may be part of the terms of sale, ie the buyer has to meet
certain conditions to receive the discount. For example, he or she must:
(a) pay by a certain date (10 days after the date of sale, in the example above)
(b) pay in a duly acceptable form (eg in cash or with a cheque drawn on a reputable
bank).
It is the first of these two conditions with which students will be concerned. If, in the
example above, the purchaser pays the account 13 days after the date of purchase, then
he or she foregoes any entitlement to cash discount and must pay the full list price,
ie £250.
4 Copy and hand out, or display on the overhead projector, the simple examples below.
Ask the students to work through them.
Example (a)
On 3 June Year 6, X sells goods on credit to Y for £480. The terms of sale allow a
period of credit of one month but, if payment is made within 7 days of purchase, a cash
discount of 2 1/2 % will be allowed. Y pays the account on 8 June Year 6. Y is
entitled to the cash discount because he or she has paid the account within the
conditional 7-day period.
61
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Cash Book: 3 columns – cash discount
£
480
12
468
Selling price
less 21/2% cash discount
Payment made
Example (b)
On 7 August Year 6, A sells goods on credit to B for £350. The terms of sale allow a
period of credit of one month but, if payment is made within 14 days of purchase, a
cash discount of 2 1/2% will be allowed. B pays the account on 5 September Year 6.
B settles the account after a lapse of more than 14 days, foregoing entitlement to the
cash discount. He or she has to pay the full list price of £350. However, B has taken
advantage of most of the period of credit, which expires on 7 September Year 6.
In Example (a), for X, the seller/creditor, the discount is described as ‘discount allowed’;
for Y, the purchaser/debtor, the discount is described as ‘discount received’. This
situation can be illustrated thus:
Sale of goods on credit
Purchase of goods on credit
debtor
creditor
discount allowed
discount received
Firms, as both buyers and sellers of goods, can be both ‘allowers’ and ‘receivers’ of cash
discount.
5 Make it clear to the students that the term ‘cash’ covers payments in actual cash, and
through the banking system.
Step 2
Aim: to be able to make account entries in respect of cash discount
1 Discount allowed
Remind the students that discount allowed represents discount from the seller’s
viewpoint. Illustrate discount allowed with the example below.
Example
On 1 July Year 3, L Green owes A Brown, a trader, £100. The terms of sale allows a
2 1/2 % discount for payment within 14 days. L Green meets this condition and so pays
£100 less the £2.50 discount = £97.50
62
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Cash Book: 3 columns – cash discount
In account terms, the transaction would appear as follows:
Transaction effect
(a) Cash
Debtor: L Green
(b) Discount allowed
Debtor: L Green
Book-keeping action
+ £97.50
- £97.50
+ £2.50
- £2.50
Debit Cash Account
Credit L Green
Debit discount allowed
Credit L Green
Point out that Discount Allowed is an expense account of A Brown and is kept in
the General Ledger. It also represents a ‘holding’ account, which holds the balance of
the discount allowed until it is transferred to the Profit & Loss Account at the end of the
period.
Illustrate the account on the overhead projector or board as follows:
CASH BOOK
Year 3
9 Jul
L Green
Cash
£
97.50
Bank
£
Cash Bank
L Green
Year 3
1 Jul
Balance b/d
£
100
Year 3
9 Jul
9 Jul
Cash
Discount allowed
£
97.50
2.50
Discount Allowed
Year 3
9 Jul
L Green
£
2.50
Hand out copies of, or show on the overhead projector, the following exercise and ask
the students to work through it.
Exercise
On 2 May Year 5, B Hall, a trader, sells goods worth £720 on credit to F Trill.The terms
of sale allow a 2 1/2% cash discount for payment within one month. F Trill pays his
account by cheque on 30 May Year 5.
Required
Record these transactions in the books of B Hall.
Solution
CASH BOOK
Year 5
30 May
Cash
£
F Trill
Bank
£
702
Cash Bank
£
£
63
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Page 64
Cash Book: 3 columns – cash discount
F Trill
Year 5
2 May
£
720
Sales
Year 5
30 May Bank
30 May Discount allowed
£
702
18
Discount Allowed
Year 5
30 May
£
18
F Trill
2 Discount received
Remind the students that discount received represents discount from the buyer’s
viewpoint, ie by receiving cash discount the buyer pays less to settle the account.
Illustrate discount received with the example below.
Example
A Brown the trader (see page 62) is now a debtor who owes T Wells the sum of £500
at 1 July Year 3. The terms of sale allow 2% cash discount for payment within 14 days
and A Brown meets this condition.Thus, A Brown pays only
£500 less the £10 discount = £490
In account terms, the transaction would appear as follows:
Transaction effect
(a) Bank
Creditor: T Wells
(b) Creditor: T Wells
Discount received
Book-keeping action
- £490
- £490
- £10
+ £10
Credit bank account
Debit T Wells
Debit T Wells
Credit discount received
Point out that discount received is an income (or ‘revenue’) account of A Brown and is
kept in the General Ledger. It also serves as a ‘holding’ account, which holds the
balance of the discount received until it is transferred to the Profit & Loss Account at
the end of the period.
Illustrate the account entries on the overhead projector or board as follows:
64
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Cash Book: 3 columns – cash discount
CASH BOOK
Cash
£
Bank
£
Year 3
10 Jul
Cash
£
T Wells
Bank
£
490
Balance b/d
£
500
T Wells
£
10
T Wells
Year 3
10 Jul
10 Jul
Bank
Discount received
£
490
10
Year 3
1 Jul
Discount Received
Year 3
10 Jul
Hand out copies of, or display on the overhead projector, the following exercise. Ask
the students to work through it.
Exercise
On 3 June Year 5, B Hall buys goods worth £840 on credit from Laken Ltd.The terms
of sale allow 3 3/4 % cash discount for payment within one month. B Hall pays the
account by cheque on 29 June Year 5.
Required
Record this transaction in the books of B Hall.
Solution
The amount of cash discount = £840 × 3 3/4 /100 = £31.50
Therefore the amount to be paid = £840 - £31.50 = £808.50
CASH BOOK
Cash Bank
Year 5
29 Jun B Hall
Cash Bank
£
£
808.50
Laken Ltd
Year 5
29 Jun Bank
29 Jun Discount received
£
808.50
31.50
Year 5
29 Jun
£
840
Discount Received
Year 5
29 Jun Laken Ltd
£
31.50
65
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Cash Book: 3 columns – cash discount
Step 3
Aims: to be able to prepare a 3-column Cash Book, including entries for discounts; and
to be able to post discount totals to the General Ledger
1 Explain the disadvantage of going to the General Ledger every time an entry is made
for cash discount. It makes less work to have discount columns in the Cash Book.The
discount entry can then be made when entering either the receipt or payment of
money.
2 Show the Cash Book entries for A Brown that would be recorded in place of those
shown on pages 63 and 65.
CASH BOOK
Year 3
9 Jul
L Green
Disc
All’d Cash Bank
£
£
£
2.50 97.50
Year 3
10 Jul
T Wells
Disc
Rec’d Cash Bank
£
£
£
10
490
Point out that the entries in the personal (debtor/creditor) accounts are unchanged.
Because these entries remain unchanged, discount amounts can be collected in the
discount columns and the totals transferred periodically into the General Ledger as
shown below.
total of left-hand discount column to
total of right-hand discount column to
Discount Allowed Account
(debit side)
Discount Received Account
(credit side)
3 Explain that when payment is made by cheque, it is common practice to include the
number of each cheque in the Cash Book. If cheque numbers are included in a
question, these numbers should be stated in the answer beside the name of the payee in
brackets. Cheque numbers appear only on the credit side of the Cash Book, ie in respect
of cheques drawn by the firm for which the entries in the Cash Book are being
recorded. It is sufficient for the students to show the last 3 numbers only, eg a payment
of £315 by cheque number 235212 to F Smith would appear as:
CASH BOOK
Dr
66
Cr
Disc Cash Bank
Year 4
£
£
£
17 Feb F Smith (212)
315
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Cash Book: 3 columns – cash discount
4 Display exercise T/10.1 in the Appendix (page 230) on the overhead projector. Work
through it with the class. This exercise illustrates the use of the 3-column Cash Book,
as well as the immediate postings to ledger accounts and the end-of-the-month
transfer of column totals to the respective discount accounts.
Solution to T/10.1
CASH BOOK
Year 5
1 May
11 May
24 May
28 May
Bal’s b/d
R Vine
A Croft
Bank C
Disc
All’d Cash Bank
£
£
£
93 1,040
7
343
11
429
80
18
1 Jun
Bal’s b/d
173
1,812
117
978
Year 5
13 May Stationery
18 May T Dole (214)
21
28
30
31
May
May
May
May
Disc
Rec’d Cash Bank
£
£
£
56
7
273
Insurance (215)
Cash (216) C
W Kone (217) 9
Bal’s c/d
16
190
80
291
117 978
173 1,812
SALES LEDGER
A Croft
Year 5
1 May Balance b/d
£
440
Year 5
24 May Bank
24 May Discount allowed
440
£
429
11
440
R Vine
Year 5
1 May Balance b/d
£
350
Year 5
11 May Bank
11 May Discount allowed
350
£
343
7
350
PURCHASES LEDGER
T Dole
Year 5
18 May Bank
18 May Discount received
£
273
7
280
Year 5
1 May Balance b/d
£
280
280
W Kone
Year 5
30 May Bank
30 May Discount received
£
291
9
300
Year 5
1 May Balance b/d
£
300
300
(continued)
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Cash Book: 3 columns – cash discount
GENERAL LEDGER
Stationery
Year 5
13 May Cash
£
56
Insurance
Year 5
21 May Bank
£
190
Discount Allowed
Year 5
31 May Sundries
£
18
Discount Received
Year 5
31 May Sundries
£
16
5 Direct the students’ attention to the following points in the Cash Book and ledgers
shown above, that:
●
●
●
●
the total of each discount column is transferred – to the same side (Dr or Cr) in the
ledger;
there is no balancing of discount columns;
prompt postings are made of other items, eg to personal accounts, stationery, or
insurance;
use of the word ‘sundries’ in each discount account.
Note
Explain that the word ‘sundries’ has a general application and has been used elsewhere
in this text. In this subject, it means a number of entries amounting to the sum stated.
6 Common errors made by candidates
Draw the attention of students to the following points as they work through the
exercises listed on page 69.
(a) The reversal of entries: payments debited and income credited.
(b) When recording money received from cash sales that is banked the same day
candidates may fail to do the full contra (see Lesson 9, page 49). They make the
entry in Dr cash but then either debit or credit the bank column.
(c) Showing a credit balance of cash.This type of entry is the equivalent of a deficit of
cash, which is impossible. If a Cr cash balance emerges there is something wrong
with the entries.
(d) Sometimes discount columns have been omitted from the Cash Book when the
entries should be included.
(e) Cash discount added to the amount of a cheque.
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Cash Book: 3 columns – cash discount
(f ) The discount columns are balanced, ie a balance is found between the totals of the
2 columns.
(g) When the candidates post entries to the discount accounts (in the General Ledger)
they may make one of two errors; they:
● post individual items, which is quite wrong and defeats the purpose of having the
discount columns;
● post the column totals to the wrong side of each discount account.
7 Give the students each a copy of exercise T/10.2 in the Appendix (page 231) and ask
them to work through it. However, before they start work on the exercise, point out
that sometimes a payment or receipt of money to or from a debtor or creditor is
described as being ‘in settlement of the amount due’ or ‘in settlement of a debt’.These
terms indicate that a cash discount has been either received or allowed. For example a
cheque for £720 received in settlement of an amount of £750 means that a cash
discount of £30 has been allowed, and this amount should be recorded in the discount
allowed column of the Cash Book.
Hand out copies of exercises T/10.3 and T/10.4 in the Appendix (pages 232–3) to the
class and ask the students to work through them. Both these exercises are from past
LCCIEB First Level Book-keeping papers. They require information from different
sources to be brought together. For example, for T/10.3, information from the bank
paying-in book, cheque-book counterfoils, and record of movements of cash is
required.Tell the students that they must keep the entries in strict date order. In T/10.3
certain information picked up from the bank statement is to be entered after an initial
balancing.
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Page 70
Lesson 11: Purchases and Sales Day Books
Topic summary
●
●
●
●
●
The invoice or copy invoice as the source document for credit purchases or sales
The preparation of a Sales Day Book for a given period and posting entries to
ledger accounts
The function of the Sales Day Book
The book-keeping significance of trade discount and how it contrasts with cash
discount
The preparation of a Purchases Day Book for a given period and posting entries to
ledger accounts
Extended Syllabus references
5.7
Use of the term source document: in particular, the part played in book-keeping by
the invoice and the credit note
5.8 The significance of trade discount
5.9 The calculation of trade discount, from list price to obtain net price
6.1 The function of Purchases, Sales, Returns Outwards, and Returns Inwards Day
Books
6.2 The alternative names used for these various day books
6.3 The recording of individual transactions in the day books
6.4 Making individual postings from the day books to personal accounts
6.5 Making postings of period day-book totals to the Purchases, Sales, and Returns
Accounts in the General Ledger
8.12 The differences between trade discount and cash discount and the different
book-keeping effects
Day books is a topic that sometimes results in the loss of examination marks.The problem
arises largely from failure of students to understand the function of the day books. So often,
day books are prepared as if they are ledger accounts.
Entries in the day books require an authorized source such as an invoice or copy invoice.
Trade discount also has to be considered.
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Purchases and Sales Day Books
Step 1
Aim: to recognize the invoice or copy invoice as the source document for credit
purchases or sales
1 Explain that when goods are sold on credit, the seller will send an invoice to the buyer,
setting out:
●
●
●
●
the parties to the transaction
details of the goods sold
their prices
the ‘terms of sale’.
2 Show a specimen invoice (Figure 11.1) on the overhead projector.
INVOICE
Tempster & Fall
25 The Square
Northbridge NT3 5WR
7 April Year 4
Invoice no 5622
To:
R Maundy
17 The Luttens
Wednesbury WD4 3ET
Quantity
Description
40
Moveable shelves
20
10
Unit price
£
Total
£
7
280.00
Lockable containers
12
240.00
Storage cabinets
20
200.00
720.00
12
less trade discount at 12 / %
90.00
630.00
Terms: 21/2% cash discount for payment within 30 days
Figure 11.1 A specimen invoice
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Purchases and Sales Day Books
If possible, obtain actual invoices for the students to see.
3 Explain that the seller will pass a copy of the outgoing invoice to his or her book-keeper.
The copy invoice will then be the basis of entry into the accounts, ie it will be the
‘source document’.
Step 2
Aim: to be able to prepare a Sales Day Book for a given period and to post entries to
ledger accounts
1 On the board or overhead projector, show the Sales Day Book of Tempster & Fall,
below, and:
●
●
●
explain that the sources of the entries are copy invoices;
show the postings to the ledger one by one;
show clearly how the double entry is achieved.
SALES DAY BOOK
Invoice no
Year 4
2 Apr
7 Apr
20 Apr
26 Apr
A Trumble
R Maundy
W Trent
F Skane
5621
5622
5623
5624
To Sales Account
Amount
£
433
630
290
375
1,728
Point out that invoice numbers might not be included in some examination questions,
and so the ‘invoice no’ column would be left out.
2 The double entry for Tempster & Fall’s transactions is achieved as follows:
(a) the individual amounts are posted to the debtor accounts as soon as possible, ie they
are debit entries;
(b) the total of the credit sales for April Year 4 is transferred at the end of the month to
the credit of the Sales Account in the General Ledger.
SALES LEDGER
Dr
Year 4
2 Apr
72
A Trumble
Sales
£
433
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Purchases and Sales Day Books
R Maundy
Year 4
7 Apr
£
630
Sales
W Trent
Year 4
20 Apr
£
290
Sales
F Skane
Year 4
26 Apr
£
375
Sales
GENERAL LEDGER
Sales
Year 4
30 Apr
Sundries
Cr
£
1,728
Check that the total of the 4 debit entries is equal to the amount of the credit entry.
Step 3
Aim: to appreciate the functions of the Sales Day Book
1 Discuss the function of the Sales Day Book. Explain that it is used for:
●
●
recording credit sales;
carrying transaction detail instead of the Sales Account.
Emphasize that, usually, only credit sales are entered in the day book: cash sales will
continue to be entered directly into the Sales Account.1
2 Illustrate the procedure for credit sales by displaying Figure 11.2 on the overhead
projector.
Copy invoice (source document)
SALES DAY BOOK
daily posting
Customer accounts
(DEBIT)
monthly posting
of total to
GENERAL LEDGER –
Sales Account
(CREDIT)
Figure 11.2 Credit sales procedure
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Purchases and Sales Day Books
Stress that the entry in the day book is not part of double entry: it is a note only – a
form of memorandum. The amounts of credit sales are held in the day book
throughout each month. At the end of each month the total is transferred to the Sales
Account. Thus, during the month, the debit part of each credit sale has been entered
but not the credit part. The double entry is complete when the monthly total is
transferred.
3 Ask the students what the advantages are of having a Sales Day Book. The answers
should be that:
●
●
fewer items need to be passed through the double-entry system;
accounting work can be divided among staff, with one person looking after the day
book and another the ledger.
4 The day book seems to have limited detail recorded for each transaction. Ask the
students if it really helps the ledger that much.The answer is that it is true that day book
entries nowadays are much briefer than in the past. Much of the detail is shown on the
copy invoice, which can be referred to if necessary. The file of copy invoices can be
regarded as supporting the day book. Present-day practice still means that the ledger is
helped by not having to carry a lot of detail.
5 Explain that in a computer-based account system, the information included in the
manually based Sales Day Book would be recorded to enable many functions to be
performed. Thus, the amount of monthly credit sales could be known quickly.
Information may also be readily available on the amounts outstanding on individual
customer accounts, on the regularity of payments by customers, etc. The print-out of
invoices for despatch to customers and other documents could also be part of an
integrated system.
6 Hand out copies of or display exercise T/11.1 in the Appendix (page 234) on the
overhead projector and ask the students to work through it.
Step 4
Aim: to appreciate the book-keeping significance of trade discount and how it contrasts
with cash discount
1 Explain the nature of trade discount and its effect on selling price. Trade discount is
normally an allowance to traders for buying in bigger quantities. Any one trader might
offer different levels of discount, eg 10%, 121/2 %, or 15%, according to the quantity or
amount (in £) of an order.
2 If possible, show examples of trade discount in catalogues or price lists issued by traders.
Refer to the trade discount shown on the invoice illustrated on page 71. Show that the
entry in the Sales Day Book for R Maundy is £630 (see page 72), ie the net figure on
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Purchases and Sales Day Books
the invoice after the trade discount is deducted. From this example, the
students will see that trade discount is not recorded in the accounts. However, cash
discount is recorded in the accounts: the buyer still has to meet the condition of
paying the account by a certain date.
3 Hand out copies of or display the following exercise on the overhead projector and ask
the students to work through it.
Exercise
On 5 January Year 7, K Johnson sells goods on credit to V Lympne, at a list price of
£750 and quantity (trade) discount of 20%. A cash discount of 21/2 % is allowed if the
account is settled within 30 days of the invoice date. V Lympne pays the account by
cheque on 31 January Year 7.
Required
In the books of K Johnson, show the relevant entries in:
(i) the Sales Day Book
(ii) the ledger account of V Lympne.
Solution
In the books of K Johnson:
SALES DAY BOOK
Year 7
5 Jan
V Lympne
£
600
SALES LEDGER
V Lympne
Year 7
5 Jan
Sales
£
600
600
Year 7
31 Jan
31 Jan
Bank
Discount allowed
£
585
15
600
Note
The trade discount does not appear in any account and need not appear in the Sales Day
Book, ie it is sufficient to show the net figure after the deduction of the trade discount.
4 Explain that cash discount does not, as some students think, appear in the Sales Day
Book. It does, however, appear on the credit side of V Lympne’s account – because
Lympne has paid the account within the required 30 days.
5 Hand out copies of or display on the overhead projector exercise T/11.2 in the
Appendix (page 234) and ask the students to work through it.
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Purchases and Sales Day Books
Step 5
Aim: to be able to prepare a Purchases Day Book for a given period and to post entries
to ledger accounts
1 Explain that purchases on credit are treated on a similar basis to credit sales. First, they
are listed in a Purchases Day Book. Illustrate the procedure for credit purchases by
displaying Figure 11.3 on the overhead projector.
Invoice
PURCHASES DAY BOOK
monthly posting
of total to
daily posting
PURCHASES LEDGER –
Supplier Accounts
(CREDIT)
GENERAL LEDGER –
Purchases Account
(DEBIT)
Figure 11.3 Procedure for credit purchases
2 Show the following Purchases Day Book of R Maundy on the board or overhead
projector:
PURCHASES DAY BOOK
Invoice no
Year 4
7 Apr
14 Apr
20 Apr
23 Apr
Tempster & Fall
980
S Clegg
981
T Roman
982
B Porter
983
To Purchases Account
Amount
£
630
416
528
364
1,938
3 Show the students how to post the transactions recorded in the Purchases Day Book to
the ledger accounts:
PURCHASES LEDGER
Tempster & Fall
Year 4
7 Apr
S Clegg
Year 4
14 Apr
76
Purchases
£
630
Purchases
£
416
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Purchases and Sales Day Books
T Roman
Year 4
20 Apr
Purchases
£
528
Purchases
£
364
B Porter
Year 4
23 Apr
GENERAL LEDGER
Purchases
Year 4
30 Apr
Sundries
£
1,938
Point out that the sale to R Maundy, in the Sales Day Book of Tempster & Fall,
becomes a purchase in the Purchases Day Book of R Maundy.The amount is the same.
4 Inform the students that each entry in the Purchases Day Book is made from an invoice
received from the seller. Compare this procedure with that for the copy invoice from
which entries are made in the seller’s day book.
5 Display exercise T/11.3 in the Appendix (page 235) on the overhead projector, or hand
out copies of it to the students. Ask the students to work through the exercise.
Note
Advise the students that they need to be familiar with the alternative names for the 2 day
books dealt with in this lesson to complete the exercise. The alternative names are given
below:
Sales Day Book
Purchases Day Book
or
or
Sales Journal
Purchases Journal
6 Common errors made by candidates concerning day books
Draw the attention of the students to the following points.
(a) The day books are shown in account format, which demonstrates a basic
misunderstanding of the function of the day book.
(b) The transactions that have been recorded in the day books are repeated, line by
line, in the Purchases Account and/or Sales Account. Only period totals are
supposed to be posted to the Purchases and Sales Accounts.
(c) The deduction of cash discount in the day books.
7 Display exercise T/11.4 in the Appendix (page 236) on the overhead projector or hand
out copies of it to the students. Ask them to work through the exercise. This exercise
should help to reinforce the students’ knowledge about the 3-column Cash Book.
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Page 78
Lesson 12: Returns Day Books
Topic summary
●
●
●
●
●
●
The credit note or copy credit note as the source document for returns entries
The function of the Returns Inwards and Returns Outwards Day Books
The preparation of a Returns Inwards Day Book for a given period and posting
entries to the ledger accounts
The preparation of a Returns Outwards Day Book for a given period and posting
entries to the ledger accounts
The use of the term ‘book of prime entry’
The reinforcement of learning and practice in regard to the use of day books
Extended Syllabus references
5.7
6.1
6.2
6.3
6.4
6.5
6.6
8.1
Use of the term source document: in particular, the part played in book-keeping by
the invoice and the credit note
The function of Purchases, Sales, Returns Outwards, and Returns Inwards Day
Books
The alternative names used for these various day books
The recording of individual transactions in the day books
Making individual postings from the day books to personal accounts
Making postings of period day-book totals to the Purchases, Sales, and Returns
Accounts in the General Ledger
The reason for maintaining separate Returns Accounts instead of entering to the
credit or debit, respectively, of Purchases or Sales Account
The dual role of the Cash Book as a book of prime entry and an integral part of
the double-entry record
Returns, previously introduced in Lesson 2, page 11, should be treated with care by
candidates. Candidates’ examination answers often show confusion between inward and
outward returns, as well as about the relevant price to apply to the returned goods.
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Returns Day Books
Step 1
Aim: to recognize the credit note or copy credit note as the source document for returns
entries
1 Explain further the process of returns, both inwards and outwards, and various possible
reasons for the seller granting an allowance. The reasons might include, for example:
●
●
●
●
the wrong goods were sent;
the goods were damaged before arrival;
the goods did not match those described in catalogues, etc;
some of the goods were faulty, for which a part allowance may be made.
Stress that the seller grants, and the buyer receives, an allowance against the relevant
invoice, whether or not the goods are actually returned.
2 Explain that when making the allowance, the seller will send a credit note to the buyer.
A copy of the credit note will be passed to the seller’s book-keeper and this serves as
the basis of the account entries. An example of a credit note is shown in Figure 12.1,
which you can show on the overhead projector.
CREDIT NOTE
Tempster & Fall
25 The Square
Northbridge NT3 5WR
18 April Year 4
Credit note no 529
To:
R Maundy
17 The Luttens
Wednesbury WD4 3ET
Reference invoice no 5622 dated 7 April Year 4
Quantity
Description
Unit price
£
Total
£
10
Lockable containers
12
120.00
less trade discount at 121/2%
Damaged in transit
15.00
105.00
Figure 12.1 An example of a credit note
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Returns Day Books
Relate this credit note to the invoice shown on page 71 in Lesson 11: where trade
discount was deducted on the invoice, this must be deducted at the same rate on the
credit note.
Step 2
Aim: to appreciate the function of the Returns Inwards and Returns Outwards Day
Books
1 Show that, when the seller has agreed to make an allowance against the return of goods,
the procedure (in outline) is as illustrated in Figure 12.2.
Seller issues
CREDIT NOTE
Sent to
COPY CREDIT NOTE
CUSTOMER
RETURNS OUTWARDS
DAY BOOK
(of customer)
RETURNS INWARDS
DAY BOOK
(of seller)
Figure 12.2 The procedure on the return of goods
2 Explain that the functions of Returns Inwards and Returns Outwards Day Books are:
●
●
to record credit returns;
to carry transaction detail instead of the ledger accounts.
Effectively, the entries in the day books represent a reversal of purchase and sales entries.
3 Point out that the Returns Day Books serve basically the same purpose as the 2 day
books considered in Lesson 11. They serve to reduce the detail recorded in the ledger
and allow staff to specialize in the work they do. In addition, by having separate books
for returns, more information is available than if set-off entries (ones that have the effect
of reducing the amount of a previous entry) were made in either the Purchases Day
Book or Sales Day Book. If the entries were made in the other day books, there would
be a danger of information on returns being hidden.
4 Ask the students why a firm needs to have detailed records of returns.
The answer is that the record is important for dealing with individual customers or
suppliers. It is also important for a supplier knowing how to improve the supply of
goods or for a purchaser knowing which firms are the better suppliers.
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Returns Day Books
Step 3
Aim: to be able to prepare a Returns Inwards Day Book for a given period and to post
entries to the ledger accounts
1 Show the Returns Inwards Day Book of Tempster & Fall, below, on the board or
overhead projector.
RETURNS INWARDS DAY BOOK
Credit note no
Year 4
11 Apr
18 Apr
26 Apr
Amount
£
A Trumble
528
87
R Maundy
529
105
W Trent
530
42
To Returns Inwards Account 234
2 Record the following postings to ledger accounts, entry by entry:
SALES LEDGER
A Trumble
Year 4
2 Apr
Sales
£
433
Year 4
11 Apr
£
Returns inwards
87
Returns inwards
£
105
R Maundy
Year 4
7 Apr
Sales
£
630
Year 4
18 Apr
W Trent
Year 4
20 Apr
Sales
£
290
Year 4
26 Apr
£
Returns inwards
42
GENERAL LEDGER
Returns Inwards
Year 4
30 Apr
Sundries
£
234
Note
The 3 debit entries in the Sales Ledger Accounts were previously posted from the Sales
Day Book of Tempster & Fall, shown in Lesson 11, page 72.
3 Point out that the double entry in the Tempster & Fall example is achieved by the debit
of £234 in the Returns Inwards Account being matched by the total of the 3 credit
entries in the customer accounts.
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Returns Day Books
4 Figure 12.3 illustrates the part played by the Returns Inwards Day Book in the account
system. Show the figure on the overhead projector.
Seller issues
CREDIT NOTE
COPY CREDIT NOTE
entered in
RETURNS INWARDS
DAY BOOK
Memorandum
only
daily
postings
end-of-month
posting of total
Returns Inwards
Account
Customer
(debtor)
accounts
GENERAL
LEDGER
SALES
LEDGER
Figure 12.3 The returns inwards procedure
5 Explain that the double entry is made by means of:
(a) prompt postings to the customer accounts = credit;
(b) end-of-month posting of the total to the Returns Inwards Account = debit.
6 Hand out copies of, or show on the overhead projector, exercise T/12.1 in the
Appendix (page 237). Ask the students to work through the exercise.
Step 4
Aim: to be able to prepare a Returns Outwards Day Book for a given period and to post
to the ledger accounts
1 Show the Returns Outwards Day Book of R Maundy (below) on the board or
overhead projector:
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Returns Day Books
RETURNS OUTWARDS DAY BOOK
Credit note no
Year 4
9 Apr
18 Apr
24 Apr
J Jolly
2178
Tempster & Fall
529
N Nathan
1165
To Returns Outwards
Amount
£
127
105
38
Account 270
2 Record the following postings to ledger accounts, entry by entry:
PURCHASES LEDGER
J Jolly
Year 4
9 Apr
Returns outwards
£
127
Tempster & Fall
Year 4
18 Apr
Returns outwards
£
105
Year 4
7 Apr
Purchases
£
630
Sundries
£
270
N Nathan
Year 4
24 Apr
£
Returns outwards
38
GENERAL LEDGER
Returns Outwards
Year 4
30 Apr
3 Point out that the 3 debit entries in the Purchases Ledger equal, in total, the amount of
the end-of-month credit entry in the Returns Outwards Account.
Note
The credit entry in Tempster & Fall’s account was previously posted from the Purchases
Day Book of R Maundy, shown in Lesson 11 (page 76). The accounts of Jolly and
Nathan would, in practice, have credit entries for purchases previously made.
4 Figure 12.4 (overleaf) illustrates the part played by the Returns Outwards Day Book in
the account system. Show the figure on the overhead projector.
5 Explain that the double entry is made by means of:
(a) prompt postings to supplier accounts = debit;
(b) end-of-month posting of total to Returns Outwards Account = credit.
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Returns Day Books
6 Hand out copies of, or show on the overhead projector, exercise T/12.2 in the
Appendix (page 237). Ask the students to work through it.
Buyer receives
CREDIT NOTE
entered
in
RETURNS OUTWARDS
DAY BOOK
daily
postings
Memorandum
only
end-of-month
posting of total
Returns Outwards
Account
GENERAL
LEDGER
Supplier
(creditor)
accounts
PURCHASES
LEDGER
Figure 12.4 The returns outwards procedure
Step 5
Aim: to be familiar with the use of the term ‘book of prime entry’
Explain that the term ‘book of prime entry’ means the stage in the book-keeping system
where a transaction is recorded for the first time, before it is entered in the ledger.The term
includes the 4 day books already considered. The Cash Book can serve 2 roles. Thus, for
cash sales or cash purchases, it is a book of prime entry but, as part of the ledger, it is also
a component of the double-entry system.
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Returns Day Books
Step 6
Aim: to reinforce learning and practice in regard to the use of day books
1 Display exercise T/12.3 in the Appendix (page 238) on the overhead projector and
work through it with the class. The exercise involves preparation of all 4 day books,
together with the postings to the ledger accounts.
Note
When a question states ‘Returned goods to £26’, it can be assumed, unless stated
otherwise, that the seller has agreed to make an allowance.
In the case of returned goods, when a trade discount has previously been allowed at the
purchases or sales stage, the amount of the discount (or a due proportion, when only
some of the goods are returned) must be deducted at the ‘returns’ stage.This applies to
the transactions on 8, 15, 19, 27, and 30 October Year 6 in exercise T/12.3.
Solution to T/12.3
PURCHASES DAY BOOK
Year 6
3 Oct
17 Oct
24 Oct
R Varney
T Langton
R Varney
To Purchases Account
£
420
296
272
988
SALES DAY BOOK
Year 6
5 Oct
11 Oct
21 Oct
K Petts
J Beaver
K Petts
To Sales Account
£
357
448
544
1,349
RETURNS OUTWARDS DAY BOOK
Year 6
8 Oct
27 Oct
30 Oct
£
R Varney
T Langton
R Varney
To Returns Outwards Account
56
37
34
127
RETURNS INWARDS DAY BOOK
Year 6
15 Oct
19 Oct
K Petts
J Beaver
To Returns Inwards Account
£
102
72
174
(continued)
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Returns Day Books
PURCHASES LEDGER
R Varney
Year 6
8 Oct
30 Oct
Returns outwards
Returns outwards
£
56
34
Year 6
3 Oct
24 Oct
(Cr £602)
Purchases
Purchases
£
420
272
Purchases
£
296
Returns inwards
£
102
T Langton
Year 6
27 Oct
Returns outwards
£
37
Year 6
17 Oct
(Cr £259)
SALES LEDGER
K Petts
Year 6
5 Oct
21 Oct
Sales
Sales
£
357
544
Year 6
15 Oct
(Dr £799)
J Beaver
Year 6
11 Oct
Sales
£
448
Year 6
19 Oct
(Dr £376)
£
Returns inwards
72
GENERAL LEDGER
Purchases
Year 6
31 Oct
Sundries
£
988
Sales
Year 6
31 Oct
Sundries
£
1,349
Returns Outwards
Year 6
31 Oct
£
Sundries
127
Returns Inwards
Year 6
31 Oct
Sundries
£
174
Check that the total creditor balances of £861 (£602 + £259) = purchases of
£988 less returns outwards of £127, and that the total debtor balances of £1,175
(£799 + £376) = sales of £1,349 less returns inwards of £174.
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Returns Day Books
2 Hand out copies of, or show on the overhead projector, exercise T/12.4 in the
Appendix (page 239). Ask the students to work through it. This question is mainly a test
of knowledge about discounts; the entries are straightforward.The points below might
be helpful for the students.
(a) The trade discount should be deducted in each case from the list price and only the
resulting net figure should be entered in the day book. Cash discount is calculated
on the net purchase or sales figure.1 It should be deducted from the net figure only
if payment is made within the required period.
B Stevens
F Robins
J New
P Harper
K Burton
Required
payment date
17 Jan
26 Jan
27 Jan
5 Feb
2 Feb
Payment
date
30 Jan
18 Jan
22 Jan
Cash
discount
No
Yes
Yes
(b) Traders allow cash discount to encourage prompt or early payment.
3 Hand out copies of, or show on the overhead projector, exercise T/12.5 in the
Appendix (page 240).Ask the students to work through it. In this question, a minimum
level of purchase is necessary to qualify for a trade discount.
Common errors made by candidates in dealing with returns
Draw the following common errors to the attention of the students:
(a) confusion between returns inwards and returns outwards;
(b) failure to deduct trade discount when this had been allowed in the original
purchase or sale transaction;
(c) day books shown in account form;
(d) transactions repeated, individually, in the General Ledger Account (ie in either the
Returns Outwards Account or the Returns Inwards Account).
Note
Advise the students that they need to be aware of the alternative names for the 2 day books
dealt with in this lesson.The alternative names are:
Returns Inwards Day Book or Sales Returns Day Book
Returns Outwards Day Book or Purchases Returns Day Book
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Lesson 13: Accruals and prepayments –
expenses
Topic summary
●
●
●
The meaning of expense accruals and the necessary entries or adjustments in an
expense account for expense accrual
The meaning of expense prepayment and the necessary entries or adjustments in
an expense account for expense prepayment
Adjustments for expense accruals and prepayments in final accounts
Extended Syllabus references
13.1
13.2
13.3
13.4
13.5
The nature of an accrual
End-of-period adjustments in expense accounts for accruals
The meaning of an expense prepayment
End-of-period adjustments in expense accounts for prepayments
Adjustments for end-of-period expense accruals and expense prepayments in the
Profit & Loss Account and balance sheet
20.7 The appropriate inclusion of prepayments and accruals under ‘current assets’ and
‘amounts payable within 12 months’ respectively
Accruals and prepayments is a topic that book-keeping students often find difficult. It is an
important topic: first, because it may be the main subject of a question; second, because it
can also occur in other topics in an examination, particularly in the adjustments of final
accounts. Therefore explain accrual and prepayments carefully, and make sure that the
students have plenty of practice in answering questions on this topic.
Step 1
Aim: to understand expense accruals and to be able to make the necessary entries or
adjustments in an expense account
Expense accrual
1 Explain that the term ‘accrual’ refers to an amount that is owing. An expense accrual is
an amount payable, in respect of an account period, that remains unpaid at the end of
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Accruals and prepayments – expenses
that period.The students’ aim is to relate the expenses to the periods (usually years) in
which the benefit is obtained from the expenditure, whether or not the expense
accounts have been paid.This may require making adjustments in the expense accounts.
2 Illustrate accrual by showing the example below on the overhead projector or board.
Example
Jacqui Tillot commenced in business at 1 January Year 3. She pays £500 rent ‘in arrears’
at the end of each quarter. At 31 December Year 3, the fourth quarter’s rent is still
unpaid. Her Rent Account appears as follows:
Rent
Year 3
31 Mar
30 Jun
30 Sep
Bank
Bank
Bank
£
500
500
500
3 Ask the students what is wrong with this example.
4 The problem with the example is that this Rent Account records the rent for only 3
quarters; the rent for the fourth quarter will probably be paid early in Year 4. Left as it
is, the account gives a misleading picture for Year 3 because Jacqui has benefited from
the use of the premises for 4 quarters in that year. The true charge for the rent for
Year 3 is:
4 quarters at £500 per quarter = £2,000
Jacqui Tillot’s Profit & Loss Account for Year 3 should show £2,000. The £500 in
respect of the fourth quarter should be treated as a liability. The account would then
appear as:
Rent
Year 3
31 Mar
30 Jun
30 Sep
31 Dec
£
Bank
Bank
Bank
Balance c/d
500
500
500
500
2,000
Year 3
31 Dec Profit & loss
£
2,000
2,000
Year 4
1 Jan
Balance b/d
500
5 Show the correct Rent Account (above) on the overhead projector or board.
6 Explain that the £2,000 credit entry is matched by a debit of that amount to the Profit
& Loss Account. The ‘correct’ charge for the year is thus made in the Profit & Loss
Account. The £500 balance carried down at 31 December Year 3 is matched by the
credit brought down at 1 January Year 4. This credit balance represents a liability and
appears as such in the balance sheet at 31 December Year 3.
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Accruals and prepayments – expenses
7 Show the students that early in Year 4, Jacqui Tillot’s Rent Account might appear as
follows:
Rent
Year 4
18 Jan
Bank
£
500
Year 4
1 Jan
Balance b/d
£
500
This illustrates that the overdue rent is paid on 18 January, which clears the account.
8 It is essential that the students grasp the meaning of these account entries. Review the
key entries, which show that:
●
●
●
the transfer to the Profit & Loss Account is the due amount of rent for Year 3 – not
what has actually been paid. The transfer ensures that the ‘true’ charge is made in
the Profit & Loss Account;
the credit balance (brought down) at 1 January Year 4 represents the amount owing at
that date, which would appear as a liability in the balance sheet at 31 December Year 3;
the debt is cleared early in Year 4.
9 Ask the students to work through the following exercise.
Exercise
Douglas Miller commenced in business at 1 October Year 5. He paid monthly staff
salaries in arrears by cheque as follows:
Year 5
31 Oct
30 Nov
£
1,200
1,200
At 31 December Year 5, salaries for December amounting to £1,400 were unpaid.
Required
Prepare the Salaries Account for the 3 months ending 31 December Year 5, duly balanced
at that date.
Solution
Salaries
Year 5
31 Oct Bank
30 Nov Bank
31 Dec Balance c/d
£
1,200
1,200
1,400
3,800
Year 5
31 Dec Profit & loss
3,800
Year 6
1 Jan
90
£
3,800
Balance b/d
1,400
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Accruals and prepayments – expenses
Step 2
Aim: to understand expense prepayment and to be able to make the necessary entries in
an expense account
Expense prepayment
1 Explain that the term ‘expense prepayment’ is a payment made in advance of the
account period to which it refers.A prepayment is the opposite of an accrual. However,
the transfer to the Profit & Loss Account in the expense account will still be credited.
The difference is in the balance, which is brought down as a debit balance, ie as an asset.
2 Illustrate prepayment on the overhead projector or board with the following example.
Example
James Jewell commenced in business at 1 January Year 7. He paid his rent quarterly and
in advance by cheque as follows:
Year 7
2 Jan
28 Mar
26 Jun
1 Oct
28 Dec
£
450
450
475
475
475
Required
Show the Rent Account for Year 7, duly balanced at 31 December Year 7.
Solution
Rent
Year 7
2 Jan
28 Mar
26 Jun
1 Oct
28 Dec
Year 8
1 Jan
£
Bank
Bank
Bank
Bank
Bank
Balance b/d
450
450
475
475
475
2,325
Year 7
31 Dec Profit & loss
31 Dec Balance c/d
£
1,850
475
2,325
475
3 Review the example’s solution by drawing attention to the following points:
●
●
the transfer to the Profit & Loss Account includes 2 quarters’ rent at £450 (£900)
plus 2 quarters’ rent at £475 (£950), which results in a total transfer of £1,850;
the balance (£475) brought down at 1 January Year 8 will appear as an asset in the
balance sheet of James Jewell at 31 December Year 7.
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Accruals and prepayments – expenses
4 Explain that, so far, the examples given have had no opening balance since they
illustrate the first year of trading. It is more usual to have an opening balance as well as
a closing balance.
5 Emphasize the rule about prepayment and accrual:
if a prepayment, the opening balance = Debit
if an accrual, the opening balance = Credit
Example
From the following details, prepare John Sim’s Insurance Account for the year ended
31 December Year 6. Balance the account at the year end, showing the transfer to the
Profit & Loss Account.
Year 6
1 Jan
23 Mar
29 Sep
The balance on the account is £80, representing one quarter’s insurance paid
in advance
The amount of £190 is paid by cheque, which covers the insurance for the
half-year ended 30 September Year 6
The amount of £210 is paid by cheque, which covers the insurance for the
half-year ended 31 March Year 7
Solution
Insurance
Year 6
1 Jan Balance b/d
23 Mar Bank
29 Sep Bank
Year 7
1 Jan
Balance b/d
£
80
190
210
480
Year 6
31 Dec Profit & loss
31 Dec Balance c/d
£
375
105
480
105
Note
The transfer to the Profit & Loss Account is made up of:
Jan–Mar
Apr–Sep
Oct–Dec
£
80
190
105
375
Explain that the remaining £105 has been paid in advance for the quarter ended
31 March Year 7 and is carried down as an asset (debit) balance.
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Accruals and prepayments – expenses
6 Point out that expense accounts involving accrual, prepayment, or both (and including
an opening balance) are made up of 4 elements:
(i) the amount either accrued or prepaid at the beginning of the year;
(ii) the amount paid during the year;
(iii) the amount to be transferred to the Profit & Loss Account, ie the ‘true’ cost for
the year;
(iv) the amount owing or prepaid at the end of the year.
These elements may be shown as a single example (see Figure 13.1).The example may
be described as a situation of initial accrual and closing prepayment. If 3 of the elements
are known, the fourth can be found by preparing an expense account based on the
relevant structure.The diagrams can be adapted to each situation. Each situation will be
determined by, first, the particular combination of opening and closing balances, such
as initial prepayment and closing accrual (see point 8 below); and, second, the respective
amounts of the 4 elements as outlined in point 6 above.
Amount accrued b/d
Amount paid
during year
Transfer to
Profit & Loss Account
Amount prepaid c/d
Amount prepaid b/d
Figure 13.1 A pictorial example of an expense account
7 Display the example on the overhead projector. The basic structure can be copied on
to a transparency and used as the master diagram, and sample figures can be copied on
to a number of other transparencies. Insert the figures progressively by placing the
transparencies on top of one another.
8 Ask the students to construct simple diagrams (like the one above) that show the
following situations, which should all relate to expense:
(a)
(b)
(c)
(d)
initial
initial
initial
initial
accrual and closing accrual
prepayment and closing prepayment
prepayment and closing accrual
accrual and closing prepayment.
The students may find it helpful to practise constructing simple diagrams (in
double-entry account form) that position the various items.
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Accruals and prepayments – expenses
Another form of prepayment
9 Explain that a prepayment could take the form of items purchased for use in the
business, which are separate from ordinary ‘purchases’ that are for resale. Purchases for
use in the business might include stationery, packing materials, or cleaning materials.
Any stock of such items at the end of an accounting period represents a form of
prepayment.
Draw the students’ attention to the following points:
●
●
allowance must be made for stock at the end of an accounting period in the figure
charged to the Profit & Loss Account;
the value placed on the stock must be carried down as a balance on the expense
account.
10 Illustrate the two points above with the following example.
Example
Stationery bought in the year ended 31 December Year 3 cost £2,750. The stock of
stationery held at 31 December Year 3 is worth £250
Required
Prepare the Stationery Account for the year ended 31 December Year 3.
Solution
The amount used is £2,750 - £250 = £2,500. This total is charged to the Profit &
Loss Account and the amount remaining (stock) is carried forward as an asset balance.
Stationery
Year 3
Jan–Dec Sundries
£
2,750
2,750
Year 4
1 Jan
Balance b/d
Year 3
31 Dec Profit and loss
31 Dec Balance c/d
£
2,500
250
2,750
250
Stress that any such balance should not be included with the stock-in-trade, but should
be shown separately as part of the item ‘prepaid expenses’.
11 Copy and hand out or display the following exercise on the overhead projector. Ask
the students to work through it.
Exercise
Cleaning materials bought in the year ended 31 December Year 4 cost £870.The stock
of cleaning materials at 31 December Year 4 is worth £130. The cleaning materials
bought in the year ended 31 December Year 5 cost £920. The stock of cleaning
materials at 31 December Year 5 is worth £150.
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Accruals and prepayments – expenses
Required
Show the Cleaning Materials Account for the 2 years ended 31 December Year 5.
Note
The stock at 31 December Year 4 (the closing stock) is also the stock at 1 January Year 5
(the opening stock).
Solution
Cleaning Materials
Year 4
Jan–Dec Sundries
£
870
Year 4
31 Dec Profit & loss
31 Dec Balance c/d
870
Year 5
1 Jan Balance b/d
Jan–Dec Sundries
Year 6
1 Jan
Balance b/d
130
920
1,050
Year 5
31 Dec Profit & loss
31 Dec Balance c/d
£
740
130
870
900
150
1,050
150
Note
The charge to the Profit & Loss Account is calculated as:
Year 4
Year 5
Purchased stock at £870 less closing stock at £130 = £740
Opening stock at £130 plus purchased stock at £920 = £1,050
less closing stock at £150 = £900
12 Explain that the financial period or year of the firm does not always correspond with
that of the supplier of services. Adjustments to deal with this mismatch may be
necessary at the end of the accounting period.
Example
At 1 January Year 5, the Insurance Account has a balance of £90 (Dr). The insurance
premium was paid by cheque £330 on 28 April Year 5 for the (insurance) year to
30 April Year 6.
Required
Show the Insurance Account for the year ended 31 December Year 5, duly balanced at
that date.
Note
It can be concluded that the debit balance at 1 January Year 5 relates to Insurance for
the 4 months ended 30 April Year 5. The charge for the remaining 8 months of the
financial year is calculated as the due proportion of the annual premium: £330 × 8/12
= £220. The remaining £110 is carried forward as a prepayment. The charge to the
Profit & Loss Account for insurance for Year 5 is: £90 + £220 = £310.
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Accruals and prepayments – expenses
Insurance
Year 5
1 Jan
28 Apr
Balance b/f
Bank
£
90
330
420
Year 6
1 Jan
Balance b/d
110
Year 5
31 Dec Profit & loss
31 Dec Balance c/d
£
310
110
420
13 Copy and hand out or display exercise T/13.1* in the Appendix (page 241) on the
overhead projector.Work through it with the class. Exercise T/13.1 concerns 3 expense
accounts: 2 accounts (rent and insurance) have opening prepayment balances, ie debits;
the other (advertising) has an opening accrual balance, ie credit. You should first
calculate the amount of the charge for Year 4 for each expense. In examination answers,
if workings are shown clearly, marks can be awarded for what is correct.
It is clear that the monthly rent is £230 from January to September and £250 from
October to December.
Prepayment balance 1 Jan Yr 4
Payment 28 Feb
31 May
31 Aug
30 Sep
=
=
=
=
=
Period of rent (Year 4)
Jan
Feb, Mar
Apr, May, Jun
Jul, Aug, Sep
Oct
Thus the accrual of 2 months’ rent at 31 December Year 4 is 2 × £250 = £500.
With regard to insurance:
●
●
●
the initial prepayment of £65 covers the period 1 January to 31 August;
the charge for the period 1 September to 31 December Year 4 is the due part of the
premium paid on 31 August Year 4, ie £180 × 4/12 = £60;
the other £120 is carried forward as a prepayment for Year 5.
Therefore the total insurance charge for Year 4 is £65 + £60 = £125.
The following are major weaknesses shown by candidates in answers to exercise T/13.1
(an LCCIEB past examination question):
●
●
●
failure to calculate correctly the charge to the Profit & Loss Account in the Rent
Account;
charging an incorrect proportion to the Profit & Loss Account from the insurance
premium paid on 31 August Year 4;
being confused about applying double-entry rules, which is sometimes done
inconsistently.
Draw the students’ attention to these weaknesses as appropriate.
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Accruals and prepayments – expenses
Step 3
Aim: to be able to make necessary adjustments for accruals and prepayments in final
accounts
1 Remind the students that, at the financial year end, some expenses will be paid in
advance of the forthcoming year, while other expenses will be in arrears, ie ‘accrued’.
This often occurs because the firm’s financial year and the payment year for the expense
do not correspond. Adjustments may therefore be necessary when preparing final
accounts.
2 This topic can be developed with reference to the final accounts of T Avis in Lesson 7
(page 40).
3 The following adjustments are to be made in relation to the balances included in the
trial balance of T Avis at 31 December Year 6:
●
●
rent payable prepaid – £100
lighting and heating accrued – £60.
4 Trading and Profit & Loss Account
The effect of the adjustments is limited to the Profit & Loss Account, so only that need
be shown on the overhead projector.
T Avis
Profit & Loss Account
for the year ended 31 December Year 6
Rent payable (1,100 - 100)
Office expenses
Lighting and heating (610 + 60)
Carriage outwards
Net profit
£
1,000
590
670
380
1,380
4,020
£
3,570
450
Gross profit
Rent receivable
4,020
The effect has been to increase the net profit of the adjustments:
Net profit before adjustment
add Rent payable prepaid
less Lighting and heating accrued
Net profit after adjustment
£
1,340
100
1,440
60
1,380
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Accruals and prepayments – expenses
5 Balance sheet
To illustrate the remaining effects of the adjustments mentioned in point 3 (page 97),
show the following balance sheet on the board or overhead projector:
T Avis
Balance sheet at 31 December Year 6
Fixed Assets
Fixtures and fittings
Motor vehicle
£
£
900
1,600
2,500
Current Assets
Stock
Debtors
Prepayment
Cash at bank
Cash in office
less Amounts due within 1 year
Creditors
Accrual
£
2,450
1,170
100
1,230
70
5,020
1,750
60
1,810
3,210
5,710
Financed by:
Capital – balance at 1 Jan Yr 6
add Net profit
less Drawings
5,430
1,380
1,100
280
5,710
Note
Period-end prepayments should be shown under current assets, and positioned after
‘debtors’ but before ‘bank’. If there is more than one prepayment, these do not have to
be listed individually. It is advisable, however, to record the separate amounts (in brackets)
beside the total figures.Then candidates can be sure of obtaining marks for the parts that
are correct.
6 Point out that period-end accruals should be shown under ‘amounts due within 1 year’.
If there is more than one accrual, the individual amounts should be shown.
7 Copy and hand out or display exercises T/13.2, T/13.3, T/13.4 in the Appendix
(pages 243–5). Ask the students to work through them.
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Lesson 14: Accruals and prepayments – income
Topic summary
●
●
●
The meaning of income accrual and the entries necessary in an Income Account
The meaning of income prepayment and the entries necessary in an Income
Account
The preparation of an expense account that includes two areas of expense with
distinctive balances
Extended Syllabus references
13.7
13.8
13.9
13.10
13.11
The nature of income accrual
End-of-period adjustments in income accounts for income accrual
The meaning of income prepayment
End-of-period adjustments in income accounts for income prepayment
Adjustments for end-of-period income accrual and income prepayment in the
Profit & Loss Account and balance sheet
13.12 The recording of 2 areas of expense within the one expense account, with
distinctive balances, eg the Rent & Rates Account
20.7 The appropriate inclusion of prepayments and accruals under ‘current assets’ and
‘amounts payable within 12 months’ respectively
Many students experience difficulty with the concept of income accrual and prepayment.
Careful explanation of this topic is essential and students should be encouraged to practise
working through exercises.
Step 1
Aim: to understand income accrual and to be able to make the necessary entries in an
Income Account
Income accrual
1 Explain that the topic of income accrual deals with income such as rent receivable or
commission rather than sales revenue. Accrual means that income due for the financial
year has not been received by the end of the year. Outstanding sales revenue is allowed
for by being shown as debit balances on customer personal accounts.
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Accruals and prepayments – income
2 Point out that as the income is earned in a given year, it should be included as income
for that year, even though payment has not yet been received.
3 Tell the students that, in the Income Account, the accrual should be:
●
●
included in the transfer to the Profit & Loss Account;
carried down as a debit balance (representing an amount to be received early in the
next period).
Explain to them also that, in the balance sheet, the accrual should be shown as a
current asset.
4 Illustrate income accrual by displaying the following example on the overhead
projector or board.
Example
Edward Smith is a trader and, in addition to his normal business income from the sale
of goods, he receives a commission on services he carries out. During the year ended
31 December Year 6, he received commission as follows:
Year 6
30 Mar
2 Jul
4 Oct
Relating to the quarter ended
31 March Year 6
30 June Year 6
30 September Year 6
£
512
470
630
The amount due, but not yet received, for the quarter ended 31 December Year 6 was
£580.
The account for Year 6 should appear as follows:
Commission Receivable
Year 6
31 Dec Profit & loss
£
2,192
2,192
Year 7
1 Jan
Balance b/d
Year 6
30 Mar
2 Jul
4 Oct
31 Dec
£
Bank
Bank
Bank
Balance c/d
512
470
630
580
2,192
580
5 Explain that although accrued income should be included with the current assets in the
balance sheet, it is common practice in business to include it with debtors. In an
examination answer, however, it is safer to show accrued income as a distinct item
otherwise a mark may be lost.
6 Copy and hand out or show the following exercise on the overhead projector or board.
Ask the students to work through it.
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Accruals and prepayments – income
Exercise
Hilary Truelove receives rent from subletting business premises. During the year ended
31 December Year 5, she received the following payments:
Year 5
3 Apr
29 Jun
11 Oct
Payment received by
cheque for quarter ending
31 March Year 5
30 June Year 5
30 September Year 5
£
650
650
675
The amount due for the quarter ended 31 December Year 5 was received on 14 January
Year 6.
Required
Show the Rent Receivable Account for the year ended 31 December Year 5, complete
with year-end balancing and with as many entries as possible for Year 6.
Solution
Rent Receivable
Year 5
31 Dec Profit & loss
£
2,650
Year 5
3 Apr
29 Jun
11 Oct
31 Dec
Bank
Bank
Bank
Balance c/d
£
Year 6
14 Jan
Bank
2,650
Year 6
1 Jan
Balance b/d
675
650
650
675
675
2,650
675
Step 2
Aim: to understand income prepayment and to be able to make the necessary entries in
an Income Account
Income prepayment
1 Point out that in the case of income prepayment the income has been received in
advance of the next financial year.
2 Tell the students that, in the Income Account at the end of the financial year, the
advance payment should be:
●
●
deducted from the amount of income for the year;
carried down as a credit balance.
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Accruals and prepayments – income
Explain to them also that, in the balance sheet, the prepayment should be shown under
‘amounts due within 1 year’.
3 Illustrate income prepayment by showing the following example on the overhead
projector or board.
Example
Rent is received on sublet premises as follows:
Year 7
12 Jan
6 Apr
4 Jul
29 Sep
21 Dec
The
The
The
The
Payment for quarter ending
31 March Year 7
30 June Year 7
30 September Year 7
31 December Year 7
31 March Year 8
£
250
250
250
250
250
unadjusted income for Year 7 is 5 × £250 = £1,250.
adjusted or true income is 4 × £250 = £1,000.
fifth payment really relates to Year 8 and should be carried forward into that year.
account for Year 7 should appear as follows:
Rent Receivable
Year 7
31 Dec Profit & loss
31 Dec Balance c/d
£
1,000
250
Year 7
12 Jan
6 Apr
4 Jul
29 Sep
21 Dec
Bank
Bank
Bank
Bank
Bank
£
Year 8
1 Jan
Balance b/d
1,250
250
250
250
250
250
1,250
250
4 Explain that the £250 received in advance should be shown in the balance sheet under
‘amounts due within 1 year’ and described as ‘rent received in advance’.
5 Copy and hand out or show on the overhead projector exercises T/14.1 and T/14.2 in
the Appendix (pages 247–8). Ask the students to work through them.
Step 3
Aim: to be able to prepare an account that includes two areas of expense, with distinctive
balances
1 Explain that, as candidates, the students might be required to prepare an expense
account that includes two areas of expense, eg Rent & Rates Account.
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Accruals and prepayments – income
2 Illustrate this type of acccount by showing the example below on the overhead
projector or board.
Example
At 1 January Year 4, £780 of rates were prepaid and £2,700 of rent payable was
accrued. During Year 4, the following payments were made:
Rent
Rates
£
8,700
3,120
At 31 December Year 4, £780 of rates were prepaid and £3,200 of rent was owing.
The following amounts were due to be paid for Year 4:
Rent
Rates
£
9,200
3,120
The combined Rent & Rates Account would appear as follows:
Rent & Rates
Year 4
1 Jan Balance b/d (rates)
Jan–Dec Bank (rent)
Bank (rates)
£
31 Dec
Balance c/d (rent)
3,200
15,800
Year 5
1 Jan
Balance b/d (rates)
780
8,700
3,120
780
Year 4
1 Jan
31 Dec
31 Dec
Balance b/d (rent)
Profit & loss
rent
rates
Balance c/d (rates)
Year 5
1 Jan
Balance b/d (rent)
£
2,700
9,200
3,120
780
15,800
3,200
3 Emphasize strongly that different categories of expense should be combined only if the
examination questions require it.
4 Copy and hand out or show exercise T/14.3* in the Appendix (page 249) on the
overhead projector. Ask the students to work through it. T/14.3* is a question
requiring the preparation of a combined type of expense account.
5 Common errors made by candidates concerning income and expense accounts
Candidates sometimes:
(a) lack a grasp of the rules of double entry, eg payments credited to the expense
account and income debited to the Rent Receivable Account;
(b) adjust actual individual payments or income in some instances, instead of
apportioning expense or income at the end of the period;
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Accruals and prepayments – income
(c) make entries inconsistently, often within the same account, eg payments are partly
debited or partly credited within an Insurance Account; income is partly debited or
partly credited within the Rent Receivable Account;
(d) make adjustments according to the calendar year instead of according to the firm’s
financial year;
(e) overbalance accounts – each time an entry is made (in extreme cases);
(f ) interpret ‘show transfers to the Profit & Loss Account’ as meaning that a Profit &
Loss Account is required rather than the transfer of entries within each income or
expense account.
6 Copy and hand out or show exercises T/14.4, T/14.5 and T/14.6 in the Appendix
(pages 250–3) on the overhead projector.Ask the students to work through them. Point
out that they should look out for differences between the financial year and the calendar
year, particularly when working through T/14.5.
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Lesson 15: Depreciation of fixed assets
Topic summary
●
●
●
●
●
●
●
The need to allow for fixed asset depreciation
The calculation of depreciation by the straight line method and the reducing
balance method
The purpose, meaning, and significance of a ‘provision’
The account entries for fixed asset depreciation
Suitable entries in the Profit & Loss Account and balance sheet in respect of fixed
asset depreciation
The calculation of depreciation on fixed assets bought or sold during the course of
a financial year
The account entries for the disposal of a depreciated fixed asset
Extended Syllabus references
14.1 The nature of depreciation of fixed assets and the need for making provision in
the accounts (with the awareness that this is not the putting by of cash for
replacement)
14.2 The basis of the straight line (or fixed instalment) method of depreciation
14.3 Calculation of the amount of annual depreciation and the effect on the book
value of a fixed asset, using the straight line method
14.4 The accounting entries for straight line method depreciation, using a Provision
for Depreciation Account
14.5 The basis of the reducing balance (or diminishing balance) method of depreciation
14.6 Calculation of the amount of annual depreciation and the effect on the book
value of a fixed asset, using the reducing balance method
14.7 The accounting entries for the reducing balance method of depreciation, using a
Provision for Depreciation Account
14.8 A comparison, through basic calculation, between use of the straight line
method and use of the reducing balance method
14.9 The accounting entries relating to the sale or scrapping of a depreciated fixed
asset, using an Asset Disposal Account
14.10 The entries in the Profit & Loss Account and balance sheet relating to fixed
assets and their depreciation
14.11 Significance of the terms aggregate depreciation and net book value and their use in
the balance sheet
20.6 The effective presentation of fixed assets to show, if appropriate: cost, aggregate
depreciation, net book value
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Depreciation of fixed assets
Depreciation of fixed assets, like accruals and prepayments, is a topic that might occur as a
question in its own right or as an element in a question, particularly on final accounts.The
First Level Syllabus is concerned with two depreciation methods only:
(i) the straight line method
(ii) the reducing balance method.
This lesson is important also in that it introduces the concept of the provision. Failure to
understand a provision is often a major cause of failure in the examination.
Step 1
Aim: to understand the need to allow for fixed asset depreciation
1 Explain why and how the value of fixed assets usually falls over a period of time; that
their fall in value may be due to:
●
●
being used (‘wear and tear’)
the availability of newer superior or more efficient assets, eg the newer assets might
run more cheaply or use less fuel.
2 Point out that if fixed assets never fall in value and could, at a later date, be sold for the
price they were purchased at, there would be no ‘usage cost’ of owning the fixed assets
(although interest could not be earned on the money paid for the fixed asset, effectively
a cost). They do, however, generally fall in value, so that by failing to take account of
this:
●
●
profit would be overstated
fixed assets in the balance sheet would be overstated in value.
3 Explain that if fixed assets are hired, a charge for hiring would appear in the Profit &
Loss Account. However, for assets that are owned, depreciation is charged, much like a
charge for owning the assets.
4 Discuss the varying ways in which depreciation applies, eg leases on premises as opposed
to ownership of motor vehicles.
5 Emphasize that depreciation, as recorded, is the estimate of the fall in value of fixed
assets over a period of time. Illustrate this point with the following example.
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Depreciation of fixed assets
Example
original cost of
asset
£15,000
less
estimated disposal
or sale amount
=
amount of
depreciation
£1,500
=
£13,500
6 Explain that the calculation for depreciation is necessarily an estimate because:
●
●
of the problem of estimating the ‘working life’ of an asset, ie the number of years of
use
the amount that will be received on eventual sale of the asset, is being estimated,
perhaps several years ahead
7 Point out that, often, simplified methods of measurement are used, therefore any
resulting figure is necessarily an estimate. For example, a motor vehicle that is purchased
on 1 January Year 4 for £9,000, for use in a business, is estimated to have a working life
of 4 years. At the end of that time it is believed that it will be sold for £1,000.The fall
in value – the cost of ownership and use of the asset – is: £9,000 - £1,000 = £8,000.
This will have to be ‘written down’ over the period of 4 years until it is sold.
Step 2
Aim: to be able to calculate depreciation by the straight line method and the reducing
balance method
1 Point out that the LCCIEB First Level Book-keeping is concerned with only two
methods of calculating depreciation: the straight line and reducing balance methods.
2 The straight line method
This is also known as the ‘fixed instalment method’.The calculation follows from what
was stated in Step 1 about estimation, point 6 above. It involves:
●
●
●
●
an estimate of the number of years of use (working life);
an estimate of the eventual sale (disposal) value;
the original cost less sale value = total amount to be written down;
total amount to be written down = annual depreciation charge.
number of years
Illustrate the straight line method by showing the examples below on the overhead
projector or board.
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Depreciation of fixed assets
Example (a)
A machine, bought for £20,000, is estimated to have a working life of 6 years and to
have a sale value at the end of the 6 years of £2,000. The annual depreciation charge
would be:
£20,000 - £2,000 = £3,000
6
Note
The same result would be obtained by depreciating the total amount to be written
down (£18,000) by 162/3% each year.
Example (b)
Calculate the annual depreciation charge in each of the following cases:
(i) a motor vehicle, bought for £10,500, is estimated to have a working life of 5 years
and to have a resale value at the end of that time of £1,500;
(ii) a machine bought for £32,000 is estimated to have a working life of 8 years and at
the end of that time to have a zero resale value.
Solution
(i) £10,500 - £1,500 = £1,800 per annum
5
(ii) There is no resale value (sometimes termed ‘scrap value’) and so the original cost is
the total amount to be written down.
£32,000 = £4,000 per annum
8
3 Reducing balance method
This method is also known as the ‘diminishing balance method’. Explain that a fixed
percentage is written off the reduced balance each year. The reduced balance is the cost
of the asset less depreciation to date.
Illustrate this method by showing the example below on the overhead projector or board.
Example
A machine is bought for £15,000 and depreciation is to be provided at 40%. The
calculations for the first 4 years would be as follows:
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Depreciation of fixed assets
Cost of machine
Year 1 depreciation (40%)
Year 2 depreciation (40% of £9,000)
Year 3 depreciation (40% of £5,400)
Year 4 depreciation (40% of £3,240)
£
15,000
6,000
9,000
3,600
5,400
2,160
3,240
1,296
1,944
Note that the amounts charged as depreciation fall quite strikingly. Depreciation in Year 1
is nearly three times that of Year 3 and over 4.6 times that of Year 4.
4 Ask the students what advantage the reducing balance method has compared with the
straight line method. The answer should be that, in the early years, when repair bills
should be low, the depreciation charges are greatest. In later years, when repair bills are
likely to rise, depreciation charges are low. This has the effect of smoothing out charges
over the life of the asset. With the straight line method, depreciation charges are
relatively high in later years when repair bills increase.
5 Copy and hand out or show exercise T/15.1 in the Appendix (page 253) on the
overhead projector. Ask the students to work through the exercise.
Step 3
Aim: to have a basic understanding of the purpose, meaning, and significance of a
‘provision’
1 Much of the problem experienced by candidates in answering questions involving
depreciation result from a failure to understand the purpose and significance of a
‘provision’. Explain that a provision is an amount built up by charges in the Profit &
Loss Account to provide for a fall in value of certain assets. A provision for depreciation
is one example. Such a provision builds up when a charge is made year by year for the
estimated depreciation.
2 Point out that any provision is not like a fund of cash: the charge(s) in the Profit & Loss
Account creating or increasing a provision do not ensure that cash is conserved for the
eventual replacement of the asset. However, creating a provision has the advantage of:
●
●
helping to ensure that profits are not overstated, ie provision takes into account the
cost of owning and using fixed assets;
helping to ensure that the values of fixed assets are cautiously stated as the provision
is deducted in the balance sheet from the amount of the fixed asset.
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Depreciation of fixed assets
A provision is usually shown in the balance sheet as a deduction from the amount of
the relevant asset.
3 Describe how the net book value of an asset at a particular balance sheet date is not the
amount for which it could be sold at that date, ie depreciation calculations are based
upon the business as a ‘going concern’. It is assumed that the business will continue to
operate for at least the period over which depreciation provisions are being built up. If,
however, the future of a business is in considerable doubt, the net realizable value of
assets might fall below the net book value, so requiring extra depreciation to be charged
to the Profit & Loss Account.
Step 4
Aim: to be able to make book-keeping entries relating to fixed asset depreciation
1 Tell the students that it is usual to show the depreciation of fixed assets as follows:
●
●
the fixed asset account is kept at cost, without any adjustment for depreciation;
a separate provision for depreciation account is maintained that accumulates the
amount of depreciation year by year.
2 Emphasize that the LCCIEB requires this method to be used in examination answers.
Far too many candidates make the mistake of recording depreciation in both the Asset
Account and the Provision Account. In doing so, they break the rules of double entry.
3 Illustrate the correct method of showing the depreciation of fixed assets by displaying
the example below on the overhead projector or board.
Example
A machine, purchased by cheque for £80,000 on 1 January Year 1, is expected to have
a working life of 4 years, after which it will be sold for £5,000. The financial year ends
on 31 December.
The straight line method is calculated as follows:
£80,000 - £5,000 = £75,000 = £18,750 per annum
4
4
The reducing balance method is based in this instance on a 50% write down.
Note
Any questions requiring the use of this method will state the percentage rate of the
write down to be applied.
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Page 111
Depreciation of fixed assets
The calculation for the reducing balance method is as follows:
£
80,000
40,000
40,000
20,000
20,000
10,000
10,000
5,000
5,000
Cost of machine
Year 1 depreciation
Year 2 depreciation
Year 3 depreciation
Year 4 depreciation
The accounts for each of the methods appears as follows:
Machine
Year 1
1 Jan
Bank
£
80,000
Straight line method
Provision for depreciation on machine
Year 1
31 Dec Balance c/d
£
18,750
Year 1
31 Dec Profit & loss*
Year 2
31 Dec Balance c/d
37,500
Year 2
1 Jan Balance b/d
31 Dec Profit & loss*
37,500
Year 3
31 Dec Balance c/d
56,250
Year 3
1 Jan Balance b/d
31 Dec Profit & loss*
56,250
Year 4
1 Jan Balance b/d
31 Dec Profit & loss*
£
18,750
18,750
18,750
37,500
37,500
18,750
56,250
56,250
18,750
* or Depreciation expense
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Page 112
Depreciation of fixed assets
Reducing balance method
Provision for depreciation on machine
Year 1
31 Dec Balance c/d
£
40,000
Year 1
31 Dec Profit & loss*
Year 2
31 Dec Balance c/d
60,000
Year 2
1 Jan Balance b/d
31 Dec Profit & loss*
60,000
Year 3
31 Dec Balance c/d
70,000
Year 3
1 Jan Balance b/d
31 Dec Profit & loss*
70,000
Year 4
1 Jan Balance b/d
31 Dec Profit & loss*
£
40,000
40,000
20,000
60,000
60,000
10,000
70,000
70,000
5,000
* or Depreciation expense
Note
In reality, a firm would use only one method.The two are shown here for comparison.
An examination question might require both methods to be shown. The provision
accounts are left open in Year 4 to deal with the sale of the machine. This feature will
be dealt with in Step 7.
4 Draw the students’ attention to the key points illustrated by the example:
●
●
●
●
the Asset Account has a debit balance (unchanged in amount and the same for the two
depreciation methods);
provision for depreciation has a credit balance;
the provision for depreciation builds up (accumulates) the amounts of depreciation
year by year;
the difference between the asset balance and the provision balance is the ‘book value’
or ‘net book value’ of the asset.
5 Common error made by candidates concerning depreciation
The common error is to show the provision for depreciation with a debit balance,
which is fundamentally wrong. Emphasize that a provision account always has a credit
balance.
6 Underline the fact that a provision exists because the charge to the Profit & Loss
Account creating it (or increasing it) lessens the net profit and thus lessens the addition
to the Capital Account. Instead of being part of Capital Account (Cr balance), the
amount is shown as a provision (Cr balance).
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Page 113
Depreciation of fixed assets
7 Copy and hand out or show exercise T/15.2 in the Appendix (page 254) on the
overhead projector. Ask the students to work through the exercise.
Step 5
Aim: to be able to make suitable entries in the Profit & Loss Account and balance sheet
in respect of fixed asset depreciation
1 Point out that the provision accounts, shown in Step 4 in the details column, state ‘Profit
& loss’ or ‘Depreciation expense’.The use of a Depreciation Expense Account to carry
the debits of asset write down is standard practice. The account serves as a collection
point for depreciation charges and is especially useful when a business has a number of
depreciation provision accounts. At the end of the year the total of the Depreciation
Expense Account is transferred to the Profit & Loss Account and therefore only one
entry has to appear there. The use of a Depreciation Expense Account is therefore an
indirect way of achieving the same result as a direct debit to the Profit & Loss Account.
The LCCIEB will accept either entry. First Level candidates may find the further stage
in the process (ie recording depreciation in a Depreciation Expense Account) somewhat
confusing.
2 The Profit & Loss Account
Creating or increasing a depreciation provision results in the double entry appearing as
follows:
●
●
the Profit & Loss Account is debited (or the Depreciation Expense Account for later
transfer to the Profit & Loss Account);
the Provision for Depreciation Account is credited.
3 Balance sheet
Usually leads to each fixed asset (or class of fixed asset) being shown at cost less total
depreciation to date, resulting in the net book value.
4 Show the following typical layout of fixed assets in a balance sheet on the overhead
projector or board.
Fixed Assets
Premises
Fixtures and fittings
Motor vehicles
Cost
£
120,000
9,500
17,800
147,300
Accumulated
depreciation
£
4,200
5,200
9,400
Net book
value
£
120,000
5,300
12,600
137,900
The total of the net book value, £137,900, is to be added in due course to the other
assets in the balance sheet.
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Page 114
Depreciation of fixed assets
5 Copy and hand out or display the following exercise on the overhead projector.Ask the
students to work through the exercise.
Exercise
On 1 April Year 5, L Johns purchased a machine for £30,000. He decided to depreciate
it at the rate of 40% using the reducing balance method. He keeps a provision for
depreciation account.
Required
Show, as an extract, how the asset would appear in the balance sheet of L Johns at 31
March Year 8.
Solution
L Johns
Balance sheet (extract) at 31 March Year 8
Fixed Assets
Machine
Cost
£
30,000
Accumulated
depreciation
£
23,520
Net book
value
£
6,480
6 Copy and hand out or show exercise T/15.3 in the Appendix (page 254) on the
overhead projector. Ask the students to work through the exercise.
Step 6
Aim: to be able to calculate depreciation on fixed assets bought or sold during the course
of a financial year
1 Explain that sometimes fixed assets are either bought or sold during the course of a
financial year and the instructions given in the examination question need to be
followed with care.The question will state what to do when a fixed asset is purchased
part of the way through a firm’s financial year. There are various ways in which
candidates can answer the question, including:
(a) charging depreciation for the part of the year the asset is owned, eg if the financial
year ends on 31 December, then for a fixed-asset purchase on 1 May the charge for
the year to 31 December would be 8/12 of the annual amount of depreciation;
(b) charging a full year’s depreciation for assets purchased in the first half of the
financial year and charging a half year’s depreciation for those purchased in the
second half of the financial year;
(c) providing depreciation for the whole year on assets held at the end of the year.
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Page 115
Depreciation of fixed assets
The following example illustrates the calculation of depreciation on fixed assets
purchased during the course of the financial year.
Example
The financial year of Sands & Co ends on 31 December. During Year 1, the following
fixed assets were purchased:
Date of purchase
Fixed Assets
Motor vehicle
Fixtures and fittings
5 February Year 1
11 September Year 1
Cost
£
9,000
6,000
The assets are depreciated using the following bases:
Motor vehicles
Fixtures and fittings
40% per annum, using the reducing balance method
20% per annum, using the straight line method
The policy for assets purchased during the year is as follows:
●
●
a full year’s depreciation is charged for assets purchased in the first half of the financial
year;
a half year’s depreciation is charged for assets purchased in the second half of the
financial year.
Required
In a statement, show the amount of the depreciation on each asset for each of the years
ended 31 December Year 1 and 31 December Year 2.
Solution
Depreciation
Year 1
Year 2
Motor vehicles
£
3,600
2,160
Fixtures and fittings
£
600
1,200
2 For asset sales during a financial year there are also different ways of dealing with
depreciation, eg:
(a) ignoring part periods and calculating a full period’s depreciation only on those
assets owned at the end of the period.Thus, assets sold during the period will have
no provision for depreciation made for that last period; whereas assets bought
during the period will have a full period’s depreciation provision;
(b) calculating the depreciation provision according to the proportion of time the asset
was owned (probably calculated to the nearest whole month);
(c) making no provision for depreciation on assets sold in the first half of the financial
year and half the annual provision for assets sold in the second half of the year.
3 Copy and hand out or show exercises T/15.4 and T/15.5 in the Appendix (page 255–6)
on the overhead projector. Ask the students to work through the exercises.
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Page 116
Depreciation of fixed assets
Step 7
Aim: to be able to make book-keeping entries concerning the disposal of a depreciated
fixed asset
1 Identify the 3 elements involved in the sale of a fixed asset, which are
●
●
●
the original cost of the asset
the depreciation provided to date
the sale proceeds
Explain that there is often a ‘profit’ or a ‘loss’ arising out of the sale: the original
calculations regarding the working life and sales value of the asset were only estimates.
2 Review the book-keeping entries regarding the disposal of an asset.The entries are:
the original cost of the asset
(i) Dr Disposals Account
(ii) Cr Fixed Asset Account
● the depreciation provided to date
(i) Dr Provision for Depreciation Account
(ii) Cr Disposals Account
● the sale proceeds
(i) Dr Bank/Cash Account
(ii) Cr Disposals Account
● loss on sale
(i) Dr Profit & Loss Account
(ii) Cr Disposals Account
● profit on sale
(i) Dr Disposals Account
(ii) Cr Profit & Loss Account.
●
3 Illustrate the calculation and account entries for an asset sold at a profit by displaying
the example below on the overhead projector.The data are taken from the example in
Step 4 on page 111.The straight line method has been used to calculate depreciation.
Example
The machine is sold on 31 December Year 3 for £27,200. At that date, the Provision
for Depreciation Account has a credit balance of £56,250.
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Page 117
Depreciation of fixed assets
The calculation for profit/loss appears as follows:
Cost of machine
less Provision for
depreciation to 31 Dec Yr 3
Sale price
Profit on sale
£
80,000
56,250
23,750
27,200
3,450
The book-keeping entries, excluding bank account, are:
Machine
Year 1
1 Jan
Bank
£
80,000
Year 1
31 Dec Balance c/d
£
80,000
Year 2
1 Jan
Balance b/d
80,000
Year 2
31 Dec Balance c/d
80,000
Year 3
1 Jan
Balance b/d
80,000
Year 3
31 Dec Disposal of machine 80,000
Provision for depreciation of machine
Year 3
31 Dec Disposal of
machine
£
Year 3
£
56,250
1 Jan Balance b/d
31 Dec Profit & loss*
37,500
18,750
56,250
56,250
Disposal of machine
Year 3
31 Dec Machine
£
80,000
31 Dec Profit & loss
(profit on sale)
3,450
83,450
Year 3
31 Dec Prov for deprec’n –
machine
31 Dec Bank
£
56,250
27,200
83,450
Profit & Loss Account
for the year ended 31 December Year 3
Profit on sale of machine
£
3,450
* or Depreciation expense
4 Illustrate the calculation and account entries for an asset sold at a loss by displaying the
example overleaf on the overhead projector.
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Page 118
Depreciation of fixed assets
Example
Using the same data and the same disposal date, this time the machine is sold for
£22,100.
The calculation for profit/loss is as follows:
Cost of machine
less provision for depreciation to
31 December Year 3
Sale price
Loss on sale
£
80,000
56,250
23,750
22,100
1,650
Machine
Year 1
1 Jan
Bank
£
80,000
Year 1
31 Dec Balance c/d
£
80,000
Year 2
1 Jan
Balance b/d
80,000
Year 2
31 Dec Balance c/d
80,000
Year 3
1 Jan
Balance b/d
80,000
Year 3
31 Dec Disposal of machine 80,000
Provision for depreciation of machine
Year 3
£
31 Dec Disposal of machine 56,250
Year 3
1 Jan Balance b/d
31 Dec Profit & loss*
56,250
£
37,500
18,750
56,250
Disposal of Machine
Year 3
31 Dec Machine
£
80,000
Year 3
31 Dec Prov for deprec’n –
machine
31 Dec Bank
31 Dec Profit & loss
(loss on sale)
80,000
£
56,250
22,100
1,650
80,000
Profit & Loss Account
for the year ended 31 December Year 3
£
Loss on sale of machine
1,650
In the examples above, a full year’s depreciation has been charged in the year of disposal,
ie Year 3.
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Depreciation of fixed assets
5 Point out that the so-called profit or loss on disposal is only a depreciation adjustment.
In practice, it is usual for profit or loss to be added to depreciation, which in the first
instance of the disposal, would be:
£18,750 less £3,450 = £15,300 for the year
If the policy is to charge no depreciation in the year of disposal, then (again in the first
instance) the calculation would be:
Cost
less Accumulated depreciation
Net book value
Sale of the machine
Loss/depreciation
£
80,000
37,500
42,500
27,200
15,300
6 Explain that loss is really another word for depreciation.
7 Common errors made by candidates regarding depreciation
Draw the students’ attention to the errors they should avoid, such as:
(a) recording depreciation to the credit of both the Provision Account and the Asset
Account, breaking the rules of double entry;
(b) using the Provision Account as merely a calculating stage: ie entering the amount
to the credit of the Provision Account, and then transferring it to the Asset Account
(Dr provision, Cr asset);
(c) debiting depreciation to the Provision Account;
(d) failing to accumulate the depreciation from year to year;
(e) failing to follow the instruction regarding the due proportion of annual
depreciation where the asset is purchased during the year;
(f) wording account entries poorly.
8 Copy and hand out or show exercise T/15.6 in the Appendix (page 256) on the
overhead projector. Ask the students to work through the exercise.
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Lesson 16: Bad debts and provision for
doubtful debts
Topic summary
●
●
●
●
●
●
●
The meaning of ‘bad debts’ and the effect of writing off a debt
Recording the writing off of customer debts
The function of the provision for doubtful debts and the creation of such a provision
The increase or decrease of the provision for doubtful debts and making book-keeping
entries accordingly
The effect on debtors of a doubtful debts provision (i) within a balance sheet or
(ii) as a balance sheet extract
Making specific provision for the non-recovery of certain debts as well as a general
provision for doubtful debts
Recording the recovery of debts previously written off
Extended Syllabus references
15.1 The process of debts becoming irrecoverable and being written off, in whole or
in part
15.2 The accounting entries for writing off individual debtor balances, in whole or
in part, using a Bad Debts Account
15.3 The end-of-period transfer of total debts written off from the Bad Debts
Account to the Profit & Loss Account
15.4 The reasons for the creating of, and subsequent adjusting of, a provision for
doubtful debts
15.5 Given certain data, the creating of a provision for doubtful debts and the
adjusting of it, as necessary, for subsequent accounting periods
15.6 The entries in the Profit & Loss Account and balance sheet relating to the
provision for doubtful debts
15.7 Making specific provision for certain bad debts as well as general provision for
doubtful debts
15.8 The accounting entries relating to the recovery of debts previously written off
15.8.1 if recovered within the same financial period in which the debt was
written off; and/or
15.8.2 if recovered after the year of writing off
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Bad debts and provision for doubtful debts
Writing off amounts due from debtors (‘bad debts’), in whole or in part, is not usually a
great problem for LCCIEB book-keeping students. They can have more difficulty with
creating and/or adjusting a provision for doubtful debts, which arises largely from the
failure to grasp the concept of the provision. Careful explanation and illustration is therefore
required.
The recovery of debts that have been written off is often neglected in book-keeping studies
and yet it is a relatively straightforward exercise.
Step 1
Aim: to appreciate the meaning of ‘bad debts’ and the effect of writing off a debt
1 Explain that a bad debt is an amount that a firm is unable, for a number of reasons, to
collect from a customer; it is a debt beyond any hope of recovery. The amount is
written off in the firm’s accounts as being ‘irrecoverable’. Sometimes, however, a debtor
will pay part of the amount owing and the balance of the debt will be written off.
2 Tell the students that the aim in writing off bad debts is to ensure that the figure shown
in the balance sheet for debtors represents the total of collectable debts, ie that the
figure for debtors is not overstated.
3 Point out that writing debts off involves charging the amount written off in the Profit
& Loss Account.The effect of charging this amount is to reduce the net profit for the
year in question.As the net profit is reduced, so the addition to capital is lessened, which
is matched by the reduction in the total of the current assets.
4 Outline the fact that the frequency with which debts are written off may vary. For
example, they may be written off:
●
●
●
at intervals throughout the year
yearly (e.g. as part of a year-end review)
as the need arises.
Step 2
Aim: to be able to record the writing off of customer debts
1 Explain that the role of the Bad Debts Account is to be a collection point for amounts
written off, which are later transferred in total to the Profit & Loss Account.
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Bad debts and provision for doubtful debts
2 Illustrate the role of the Bad Debts Account by displaying the example below on the
overhead projector or board.
Example
T Jackson and J Grand are debtors whose balances are outstanding. In the annual review
of debtors on 31 December Year 7, the following accounts are shown in the Sales
Ledger:
T Jackson
Year 7
1 Jan
Balance
£
530
Year 7
13 Apr
Bank
£
90
J Grand
Year 7
11 Mar Sales
£
415
T Jackson has managed to pay part of the amount due, but it is now clear that he will
be unable to pay the balance due.The decision is made to write off this balance and the
whole amount due from J Grand.
T Jackson
Year 7
1 Jan
Balance
£
530
Year 7
13 Apr Bank
31 Dec Bad debts
530
£
90
440
530
J Grand
Year 7
11 Mar Sales
£
415
Year 7
31 Dec Bad debts
£
415
Bad Debts
Year 7
31 Dec T Jackson
31 Dec J Grand
£
440
415
855
Year 7
31 Dec Profit & loss
Profit & Loss Account
for the year ended 31 December Year 7
Bad debts
122
£
855
£
855
855
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Bad debts and provision for doubtful debts
3 Set out the rule below for bad debt entries on the overhead projector or board:
(a) Dr Bad Debts Account
Cr Individual debtor accounts (or ‘debtors’ if only a total figure is stated in the
question)
(b) Dr Profit & Loss Account
Cr Bad Debts Account
4 Copy and hand out or show the exercise below on the overhead projector or board.Ask
the students to work through the exercise.
Exercise
During the year ended 31 December Year 4,W Glossop had written off debts due from
customers that amounted to £1,306. On 31 December Year 4, he received a cheque for
£73 from J Hinge in part payment of the amount of £295 that was due. W Glossop
believed that it was now unlikely that any further payment would be received from this
debtor and that the balance of the debt should be written off.
Required
Show the following accounts for the year ended 31 December Year 4:
(i) J Hinge
(ii) Bad Debts
(iii) Profit & Loss – as an extract.
Solution
J Hinge
Year 4
1 Jan
Balance
£
295
Year 4
31 Dec Bank
31 Dec Bad debts
295
£
73
222
295
Bad debts
Year 4
Jan–Dec Sundries
31 Dec J Hinge
£
1,306
222
1,528
Year 4
31 Dec Profit & loss
£
1,528
1,528
Profit & Loss Account (extract)
for the year ended 31 December Year 4
Bad debts
£
1,528
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Bad debts and provision for doubtful debts
Step 3
Aim: to be able to understand the function of the provision for doubtful debts and to be
able to create such a provision
1 Explain the practice of firms allowing for a certain number of debts becoming ‘bad’, i.e.
irrecoverable. It is never certain which debtors will be unable to pay, but experience
makes it possible to calculate the total amount of debts that will need to be written off
approximately, eg 2% of total debtor balances. A provision for doubtful debts is then
created and maintained. Draw attention to the term ‘doubtful’.The calculation is really
a broad estimate and is not the result of a close analysis of the position of individual
debtors.
2 Distinguish the provision for doubtful debts from writing off bad debts.The procedure
for creating a provision for doubtful debts is as follows:
(a) a gross debtors’ figure is calculated by totalling the balances on individual debtor
accounts;
(b) individual debtor balances may have to be written off;
(c) the provision for doubtful debts is calculated on the total of remaining debtor
balances.
3 Illustrate this procedure with the following on the overhead projector or board.
Gross debtors (at 31 Dec Yr 5)
less Bad debts written off
less Provision for doubtful debts at 3%
£
38,360
960
37,400
1,122
36,278
The account entries appear as follows:
Profit & Loss Account
for the year ended 31 December Year 5
Provision for doubtful debts
£
1,122
Provision for Doubtful Debts
Year 5
31 Dec Profit & loss
124
£
1,122
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Bad debts and provision for doubtful debts
4 Explain that, like any provision, a provision for doubtful debts remains in the books until
it is changed.The provision is likely, in practice, to be reviewed annually because:
●
●
if the provision is kept at a certain percentage of debtors, the amount of the provision
has to be adjusted as the total of debtors changes;
it may be considered desirable from time to time to change the percentage rate.
5 Copy and hand out or display the following exercise on the overhead projector.Ask the
students to work through the exercise.
Exercise
At 31 December Year 3, Ellen Tamworth has debtors totalling £25,130. During Year 3,
she has written off £540 of debts. She decides to write off a further £330 of debts. In
addition, she creates a provision for doubtful debts of 4% of the remaining debtors.
Required
Show the following accounts for the year ended 31 December Year 3:
(i) Bad Debts
(ii) Provision for Doubtful Debts
(iii) Profit & Loss – as an extract.
Solution
Working:
£25,130 - £330 = £24,800
4% of £24,800 = £992
Bad debts
Year 3
Jan–Dec Debtors
31 Dec Debtors
£
540
330
870
Year 3
31 Dec Profit & loss
£
870
870
Provision for Doubtful Debts
Year 3
31 Dec Profit & loss
£
992
Profit & Loss Account
for the year ended 31 December Year 3
Bad debts
Provision for doubtful debts
£
870
992
Note
Point out that the £540 was written off ‘during Year 3’ and is therefore removed before
31 December Year 3.Thus, only £330 has to be deducted from debtors.
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Bad debts and provision for doubtful debts
Step 4
Aim: to be able to increase or decrease the provision for doubtful debts and make
book-keeping entries accordingly
1 Make it clear that the provision, once created, carries on as it is in the book until it is
either increased or reduced.
2 Increase in the provision
Continuing with the last example, it is supposed that, at 31 December Year 4, the
amount of debtors after writing off bad debts is £29,400. The 4% rate is unchanged.
The calculation is:
£
1,176
992
184
4% of £29,400
less Amount of existing provision
Increase in provision
The book-keeping entries are:
Profit & Loss Account
for the year ended 31 December Year 4
£
Increase in provision
for doubtful debts
184
Provision for Doubtful Debts
Year 3
31 Dec Balance c/d
Year 4
31 Dec Balance c/d
£
992
1,176
Year 3
31 Dec Profit & loss
Year 4
1 Jan Balance b/d
31 Dec Profit & loss
1,176
Year 5
1 Jan
Balance b/d
£
992
992
184
1,176
1,176
Stress that only the increase in the provision is debited to the Profit & Loss Account.
3 Decrease in the provision
It is supposed that, at 31 December Year 5, the amount of debtors after writing off bad
debts is £26,800.The 4% rate is unchanged.
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Bad debts and provision for doubtful debts
The calculation is:
£
1,072
1,176
104
4% of £26,800
less Amount of existing provision
Decrease in the provision
The book-keeping entries are:
Profit & Loss Account
for the year ended 31 December Year 5
£
Reduction in provision for
doubtful debts
104
Provision for Doubtful Debts
Year 3
31 Dec Balance c/d
Year 4
31 Dec Balance c/d
£
992
1,176
Year 3
31 Dec Profit & loss
Year 4
1 Jan Balance b/d
31 Dec Profit & loss
1,176
Year 5
31 Dec Profit & loss
31 Dec Balance c/d
104
1,072
1,176
Year 5
1 Jan
Balance b/d
£
992
992
184
1,176
1,176
1,176
Year 6
1 Jan
Balance b/d
1,072
Step 5
Aim: to be able to show the effect on debtors of a doubtful debts provision (i) within a
balance sheet or (ii) as a balance sheet extract
1 Explain that the provision, although having a credit balance, is always deducted from
debtors in the balance sheet.
2 Relate this deduction to the deduction of a provision for depreciation from the
relevant fixed asset.The principle of obtaining a figure net of the provision is the same.
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Bad debts and provision for doubtful debts
3 Illustrate a doubtful debts provision within a balance sheet on the overhead projector
with the following:
Current Assets
Debtors
less Provision for doubtful debts
£
36,800
1,840
£
34,960
4 Inform the students that if a balance sheet extract is required, then a suitable heading
should be included, eg:
F Lucas
Balance sheet (extract)
at 30 September Year 6
Current Assets
Debtors
less Provision for doubtful debts
£
41,300
1,239
£
40,061
5 Copy and hand out or display the following exercise on the overhead projector or
board. Ask the students to work through the exercise.
With reference to Step 4, show each of the following as balance sheet extracts:
(a) The debtors at 31 December Year 4, following the example on page 125.
(b) The debtors at 31 December Year 5, following the examples on pages 126 and 127.
Solutions
(a)
Balance sheet (extract) at 31 December Year 4
Current Assets
Debtors
less Provision for doubtful debts
(b)
£
29,400
1,176
£
28,224
Balance sheet (extract) at 31 December Year 5
Current Assets
Debtors
less Provision for doubtful debts
£
26,800
1,072
£
25,728
6 Copy and hand out or show exercises T/16.1 and T16.2 in the Appendix
(pages 257–8). Ask the students to work through them.
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Bad debts and provision for doubtful debts
Step 6
Aim: to be able to make specific provision for the non-recovery of certain debts as well
as a general provision for doubtful debts
1 Explain that some firms create 2 categories of debt provision.
(a) After writing off known bad debts, a specific provision is made on a few debtors
when there is a high chance that they will become bad debts. They are not yet
known as bad debts but information suggests they might become so. The full
amount of each high-risk debt might be included in the provision.
(b) A general provision is made on the remaining balance of debtors. The provisions
dealt with in Steps 3 and 4 are known as general provisions.
The calculation involving both a specific provision and a general provision might be as
follows:
Gross amount of debtors
less Bad debts written off
less Specific provision
(ie the total of certain high-risk debts)
less general provision at 3%
£
32,970
870
32,100
1,100
31,000
930
30,070
The balance sheet is shown as follows:
Current Assets
Debtors
less Provision for bad and doubtful debts
£
32,100
2,030
30,070
2 Copy and hand out or show exercise T/16.3* in the Appendix (page 259) on the
overhead projector. Ask the students to work through the exercise.
Step 7
Aim: to be able to record the recovery of debts previously written off
1 Debts that have been written off are sometimes recovered, ie the debtor may, after all,
be able to pay part of the original debt. Point out that it is necessary to distinguish
between:
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Bad debts and provision for doubtful debts
(a) debts recovered within the same year as the debt was written off;
(b) recovery after the year the debts were written off.
2 Explain that if the debts are recovered within the same financial year as the debt was
written off, the entries would be:
Dr debtor
Cr bad debts
Dr cash/bank
Cr debtor
which reinstates the debt (or part of it) on the debtor’s account
which effectively cancels the previous write off
which clears the account
Taking the year as a whole, the debtor is a late payer rather than a bad debtor.The credit
on the Bad Debts Account reduces the balance of bad debts to the sum of debts written
off and still not received by the year end.
3 If recovered after the year of write off, demonstrate that the entries would be:
Dr
Cr
Dr
Cr
debtor
bad debts recovered
cash/bank
debtor
At the end of the year of recovery, the balance on the bad debts recovered account
would be transferred to the Profit & Loss Account:
Dr
Cr
bad debts recovered
Profit & Loss Account
4 Advise the students that the LCCIEB believes that, on recovery of a debt (or part of it)
that was previously written off, the amount should be reinstated in the account of the
debtor.The debtor has made the effort to clear the debt, even if later than anticipated,
and this should be recognized in the account. In any case, decisions about granting
credit in the future should not be decided by account entries alone.
5 Copy and hand out or show exercises T/16.4 and T/16.5 in the Appendix
(pages 260–1) on the overhead projector. Ask the students to work through them.
6 Common errors made by candidates relating to bad debts and provision for
doubtful debts
Draw the students attention to common errors, which include:
(a) not appreciating that the purpose of the Bad Debts Account is to store the
amounts of debt written off during a trading period;
(b) wrongly transferring each amount written off to the Profit & Loss Account; it is
the period total that should be transferred;
(c) failure to grasp the meaning of the provision: an especially common mistake is to
enter the whole of the latest provision amount in the Profit & Loss Account,
regardless of any existing provision;
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Bad debts and provision for doubtful debts
(d) the provision account showing a debit balance;
(e) incorrect calculation of the provision, which should be a percentage of the debtor
balance after any further bad debts have been written off;
(f ) taking bad debts that have been written off to the provision for doubtful debts
account (see the Extended Syllabus, paragraph 15.3) ‘Bad Debts Account should
not be written off against the Provision Account’;
(g) poor wording of entries in Bad Debts Account and Provision for Doubtful Debts
Account.
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Lesson 17: Bank reconciliation statements
Topic summary
●
●
●
●
●
●
The need for reconciling the Cash Book with the bank statement
Updating the Cash Book from the bank statement
Preparing a bank reconciliation statement
The meaning and effects of a cheque being dishonoured
Reconciling the Cash Book and bank statement where a bank overdraft is involved
Drafting a bank statement from the data provided
Extended Syllabus references
8.13
8.14
8.15
9.1
9.2
9.3
9.4
9.5
The periodic updating of the Cash Book from the bank statement
The possible reasons for the dishonouring of a cheque and its signficance
The book-keeping entries arising on the dishonouring of a cheque
The need for periodic reconciliation between the balance in the bank statement
and the balance in the Cash Book (Bank Current Account)
The updating of the Cash Book (bank column) with as yet non-recorded items
which are revealed in the bank statement
Understanding of and use of the terms:
9.3.1 unpresented cheques (or cheques drawn, not yet presented)
9.3.2 cheques paid in (lodged ), not yet credited
The preparation of a statement reconciling the balance in the Cash Book (Bank
Current Account) with that shown in the bank statement, in respect of items
still causing a difference
From data provided, the drafting of a bank statement
Knowledge of bank facilities and practice with the Cash Book (see Lessons 9 and 10) are
an essential basis for answering questions relating to bank reconciliation. Candidates are
often unaware of the purpose of the bank statement and of what should be done by the
customer on receiving it from the bank. Only when the Cash Book has been brought up
to date should bank reconciliation begin formally.
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Bank reconciliation statements
Step 1
Aim: to understand the need for reconciling the Cash Book with the bank statement
1 Outline the records used to keep the bank and account holder up to date with a bank
account:
●
●
the Cash Book: the firm’s record of transactions with the bank;
the bank statement: issued by the bank at regular intervals, eg monthly or weekly, it
is the bank’s record of the firm’s account.
2 Explain that differences will arise between the two records, due to:
●
●
timing differences, eg a cheque being paid into the account that the bank has not yet
recorded;
the Cash Book not yet showing items that appear on the bank statement, ie the
account holder can update the Cash Book by including items from the bank statement.
3 Explain and discuss with students the main timing differences. Link the discussion with
Lesson 9, focusing in particular on how cheque clearance can affect timing. For example:
●
●
a drawn cheque may not be recorded on a bank statement until 2-3 days after it has
been drawn; the time delay is increased if the payee delays paying the cheque into his
or her bank account;
amounts paid into the bank may not yet be included in a current bank statement
because the amounts were paid into a different branch of the account holder’s bank;
alternatively, they may have been paid in late in the banking day and crediting could
be further delayed if the next day(s) are not working days.
Step 2
Aim: to be able to update the Cash Book from the bank statement
1 Tell the students that when the bank statement has been received, they should:
(a) compare the Cash Book with the bank statement, tick () off the items that
correspond (which might include most items in both sets of record), and look
carefully for any mistake made by the bank or the customer;
(b) look for any items in the bank statement that should be entered in the Cash Book
before it is (finally) balanced; the items relate to transactions that have already taken
place and that should no longer cause any difference between the two records; such
items include:
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Bank reconciliation statements
●
●
●
various means of bank transfer, eg credit transfer, standing order, direct debit – for
either the payment or receipt of money (see Lesson 9,‘Other payment methods’,
page 53);
bank charges for operating the account or interest charged for a bank overdraft;
interest paid by the bank to the account holder, which applies to some bank
accounts if the account balance is over a certain minimum figure.
2 Illustrate how to update the Cash Book from the bank statement by showing the
example below on the overhead projector or board.
Example
It is supposed that Alec Simmons’ Cash Book for August Year 4 appears as follows:
CASH BOOK (bank columns)
Year 4
1 Aug
3 Aug
9 Aug
19 Aug
30 Aug
£
Balance b/d
J Slade
T Medway
N Thorne
L Nathan
790
125
363
95
156
1,529
31 Aug Balance b/d
338
Year 4
5 Aug
14 Aug
26 Aug
29 Aug
31 Aug
£
R Clapton (316)
W Rigden (317)
B Tallon (318)
P Gaul (319)
Balance c/d
280
406
190
315
338
1,529
The above represents only a preliminary (first) balancing. An alternative practice is not
to record a balance at this stage, but to keep a separate note of the preliminary balance.
Alec Simmons receives the following bank statement:
Year 4
1
5
7
8
10
Aug
Aug
Aug
Aug
Aug
11
17
20
22
27
Aug
Aug
Aug
Aug
Aug
31 Aug
Paid out
£
Balance b/f
J Slade
Credit transfer (C/T): K Jordan
R Clapton (214316)
Direct debit (D/D):
Midshire Gas Co
T Medway
W Rigden (214317)
N Thorne
Credit transfer (C/T): Wilders Ltd
Standing order (S/O):
DVS Publications
Balance c/f
Paid in
£
125
96
280
62
363
406
95
310
174
Balance
£
790 Cr
915 Cr
1,011 Cr
731 Cr
669
1,032
626
721
1,031
Cr
Cr
Cr
Cr
Cr
857 Cr
857 Cr
Note
Show that the reconciliation of the 2 balances should be carried out by:
●
134
ticking () the items that appear in both the Cash Book and bank statement and
watching out for errors;
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Bank reconciliation statements
●
●
●
entering the unticked items on the bank statement into the Cash Book and checking
for errors;
balancing the Cash Book finally to provide the updated balance;
using the unticked items in the Cash Book to prepare the bank reconciliation statement.
The updated Cash Book appears as follows:
CASH BOOK (bank columns)
Year 4
1 Aug
3 Aug
9 Aug
19 Aug
30 Aug
£
Balance b/d
J Slade
T Medway
N Thorne
L Nathan
31 Aug Balance b/d
31 Aug K Jordan –
credit transfer (C/T)
31 Aug Wilders Ltd –
credit transfer (C/T)
1 Sep Balance b/d
790
125
363
95
156
1,529
338
96
310
744
Year 4
5 Aug
14 Aug
26 Aug
29 Aug
31 Aug
£
R Clapton (316)
W Rigden (317)
B Tallon (318)
P Gaul (319)
Balance c/d
31 Aug Midshire Gas Co –
direct debit (D/D)
31 Aug DVS Publications –
standing order (S/O)
31 Aug Balance c/d
280
406
190
315
338
1,529
62
174
508
744
508
Note
Point out that the items obtained from the bank statement are entered at the last date
of the period, ie 31 August Year 4.
Step 3
Aim: to be able to prepare a bank reconciliation statement
1 Emphasize that only the final stage of reconciliation is recorded in the bank reconciliation
statement, ie after the Cash Book has been updated.
2 Display the reconciliation for the data regarding Alec Simmons shown overleaf on the
overhead projector or board.
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Bank reconciliation statements
Alec Simmons
Bank reconciliation statement
at 31 August Year 4
£
Balance as per Cash Book
add Unpresented cheques:
B Tallon (318)
P Gaul (319)
£
508
190
315
505
1,013
less Cheque paid in, not yet credited:
L Nathan
Balance as per bank statement
156
857
3 An alternative way of showing the reconciliation would be to start with the bank
statement balance. If so, the items appear in reverse order to those shown above. The
bank reconciliation statement for Alec Simmons would then be:
Alec Simmons
Bank reconciliation statement
at 31 August Year 4
£
Balance as per bank statement
add Cheque paid in, not yet credited:
L Nathan
less Unpresented cheques:
B Tallon (318)
P Gaul (319)
Balance as per Cash Book
£
857
156
1,013
190
315
505
508
4 Ensure that the students are able to prepare a bank reconciliation statement in both
ways: starting either with Cash Book balance or the bank statement balance.
5 Common errors made by candidates concerning bank reconciliation
statements
Draw the students’ attention to the common errors, which are:
●
●
failing to update the Cash Book before preparing the bank reconciliation statement;
attempting the wrong ‘reconciliation’, eg attempting to reconcile the closing bank
statement balance with the opening Cash Book balance, which is sometimes done
even though the students have updated the Cash Book.
6 Copy and hand out or show exercises T/17.1, T/17.2, and T/17.3 in the Appendix
(pages 262–5) on the overhead projector. Ask the students to work through them.
136
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Bank reconciliation statements
Step 4
Aim: to understand the meaning and effects of a cheque being dishonoured
1 Explain that the meaning and significance of a cheque being dishonoured is that the
drawer’s bank refuses to accept (ie to honour) the cheque.
2 Tell the students that a cheque may be dishonoured because:
(a) the cheque has been prepared incorrectly, which may not have been noticed before;
(b) the cheque may have become ‘stale’ (ie too old to be accepted by the paying bank);
a cheque is usually considered stale 6 months after the date on the cheque, although
practice varies;
(c) the drawer has insufficient funds in his or her bank account.
3 Illustrate the effects of a cheque being dishonoured by showing the example below on
the overhead projector or board.
Example
It is supposed that on 9 July Year 8 a cheque for £3,000 is received from J Fargo in
settlement of a debt.
Bank
Year 8
9 Jul
J Fargo
£
3,000
J Fargo
Year 8
1 Jul
Balance b/f
£
3,000
Year 8
9 Jul
Bank
£
3,000
On 14 July Year 8, the bank returns the cheque marked ‘refer to drawer’. The bank
account needs to be adjusted and the debt reinstated on Fargo’s account.
Bank
Year 8
9 Jul
J Fargo
£
3,000
Year 8
14 Jul
£
J Fargo – cheque
dishonoured
3,000
Bank
£
3,000
J Fargo
Year 8
1 Jul
14 Jul
Balance b/f
Bank – cheque
dishonoured
£
3,000
Year 8
9 Jul
3,000
J Fargo is once again a debtor.
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Bank reconciliation statements
Step 5
Aim: to be able to reconcile the Cash Book and bank statement where a bank overdraft
is involved
Candidates tend to find reconciling the Cash Book and bank statement more difficult if the
procedure involves a bank overdraft. The measure of the problem depends upon the stage
at which the overdraft arises. If, for instance, the Cash Book opens with an overdraft, this
overdraft might be turned into a positive balance once the Cash Book is updated. The
positive balance removes the difficulty of dealing with the overdraft. An overdraft is
problematic, however, when it exists at the stage of formal reconciliation, ie after the Cash
Book has been updated.
Example
The example that follows can be used to show the students how to produce a bank
reconciliation statement when an overdraft is involved.The following Cash Book has been
updated from the bank statement at the bottom of the page.
CASH BOOK
Year 6
3 Apr
18 Apr
29 Apr
30 Apr
30 Apr
30 Apr
£
J Drake
L Trim
A Simes
Balance c/d
T Lofter –
credit transfer (C/T)
Balance c/d
57
203
59
694
1,013
68
796
Year 6
1 Apr
9 Apr
17 Apr
25 Apr
30 Apr
30 Apr
30 Apr
£
Balance b/f
R Upton (572)
T Gunge (573)
P Skate (574)
715
96
115
87
1,013
Balance b/d
Uplands Services –
direct debit (D/D)
Bank interest
864
1 May Balance b/d
1
4
11
13
18
23
30
138
Apr
Apr
Apr
Apr
Apr
Apr
Apr
Paid out
£
Balance b/f
J Drake
Credit transfer (C/T): T Lofter
R Upton: 217572
96
L Trim
Direct debit (D/D): Uplands Services 142
Bank interest
28
Paid in
£
57
68
203
142
28
864
796
Bank statement
Year 6
694
Balance
£
715 O/D
658 O/D
590 O/D
686 O/D
483 O/D
625 O/D
653 O/D
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Bank reconciliation statements
Note
‘O/D’ on the bank statement means that the account is overdrawn.
In this case, not only is the opening Cash Book balance overdrawn but an overdraft also
exists at the stage of formal reconciliation. The bank reconciliation statement might be
shown as follows:
Bank reconciliation statement
at 30 April Year 6
£
Balance per Cash Book – overdraft
add Unpresented cheques:
T Gunge (573)
P Skate (574)
115
87
less Cheque paid in, not credited: A Simes
Balance per bank statement – overdraft
£
(796)
202
(594)
59
(653)
Note
The addition is serving to reduce the overdraft and any deduction serving to increase it.
Alternatively, the bank reconciliation statement might be shown as follows:
Bank reconciliation statement
at 30 April Year 6
£
Balance per Cash Book – overdraft
add Cheque paid in, not yet credited: A Simes
less Unpresented cheques:
T Gunge (573)
P Skate (574)
Balance per bank statement – overdraft
115
87
£
796
59
855
202
653
Step 6
Aim: to be able to draft a bank statement from the data provided
1 Display the following example of a bank statement on the overhead projector.
139
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Bank reconciliation statements
Westshires Bank
12 High Street
Crampton
Shropshire CR3 5TU
Mr Roger Dolby
Account No. 75643
Date Year 4
Particulars
1
3
5
8
12
14
17
20
22
Balance b/f
R Tenby: 200136
C/T – R Beale
L Scales
D/D – Selsby Services
L Germaine: 200137
C/T – F Renoir
L Pinter
S/O – Loxby
Publications
A Croft: 200138
L Scales
Interest
May
May
May
May
May
May
May
May
May
24 May
27 May
31 May
Paid out
£
Paid in
£
92.00
405.00
392.00
125.50
33.00
253.50
141.00
174.00
207.00
367.00
32.00
Balance
£
716.00 O/D
808.00 O/D
403.00 O/D
11.00 O/D
136.50 O/D
169.50 O/D
84.00 Cr
225.00 Cr
51.00
156.00
211.00
179.00
Cr
O/D
Cr
Cr
Key:
C/T credit transfer
D/D direct debit
O/D overdrawn
S/O standing order
2 Point out that bank statements are prepared in running balance format, so that the
‘balance’ column is automatically updated as each transaction is entered.
3 Explain that bank statements have become more ‘user friendly’ in recent years.Thus the
headings of Dr and Cr above the amount columns – confusing for many bank
customers – have been replaced by some banks by ‘paid out’ and ‘paid in’.
4 Make it clear that, in the ‘particulars’ column, it is now common for cheques drawn on
the bank to be entered on the bank statement by cheque number only. In examination
questions, there will be sufficient information provided to link the items. In bank
reconciliation statements, it is desirable to include names and cheque numbers (if
applicable) wherever possible.
5 Copy and hand out or show exercise T/17.4* in the Appendix (page 265) on the
overhead projector. Ask the students to work through the exercise.
140
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Page 141
Lesson 18: Petty Cash Book – imprest system
Topic summary
●
●
●
●
●
●
●
The purpose and uses of petty cash
The principle and working of the imprest system
Recording the opening imprest and individual payments in the Petty Cash Book
Totalling and balancing the Petty Cash Book and recording the reimbursement of
the float at the period end
The purpose of the petty-cash analysis columns and making double-entry postings
to the ledger
Responding to questions involving (i) variations within the Petty Cash Book and
(ii) the part played by the Petty Cash Book in the double-entry system
Preparing a Cash Book with analysis of expenditure
Extended Syllabus references
8.16 The use of simple columnar analysis (of expenditure) within the Cash Book
10.1 The possible need for one (or more) Petty Cash Book(s) as subsidiary to the
main Cash Book
10.2 Petty cash as a system for effecting minor disbursements
10.3 The use of sequentially numbered vouchers and their authorization for payment
10.4 The practice of setting a limit to the amount allowed in reimbursement per
claim/voucher
10.5 The basis of the imprest system; periodic reimbursement of the (controlled) float
10.6 The recording of incidental receipts of money into petty cash, other than the
periodic reimbursement of the float
10.7 The balancing of the Petty Cash Book and the book-keeping entries relating to
the reimbursement of the float, as well as in respect of any adjustment of the
float
10.8 The analysis of petty cash outlay, the totalling of the analysis columns, and the
posting of these totals as required to appropriate ledger accounts
10.9 The dual role of the Petty Cash Book as a book of prime entry and an integral
part of the double-entry record
The students should understand the function of the Petty Cash Book, its relationship to the
Cash Book itself, its part in the double-entry system, and the practical way in which it is
operated (including the imprest system).The means of analysing expenditure that is used in
a Petty Cash Book can be applied also to the main Cash Book, which is covered in Step 7.
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Petty Cash Book – imprest system
Step 1
Aim: to appreciate the purpose and uses of petty cash
1 The students will often have had experience of using petty cash, even if only as a user
or beneficiary. Draw upon their experience when discussing the purpose and uses of
petty cash. Emphasize that in numerous cases many of the disbursements will be to
members of staff, ie reimbursing them for payments already made on behalf of their
employer, such as travelling expenses. A limit, such as a maximum of £50, may be
placed on the amount of any individual payment from petty cash.
2 Point out that the Petty Cash Book is a means of lessening the load on the main Cash
Book.The Petty Cash Book is concerned with minor payments, while the Cash Book
is for recording payments above a certain figure and for entering the receipt of money.
3 Explain that, by having analysis columns (where petty cash outlay is classified) beside
the total payments column, expenditure can be recorded under different headings, such
as postage or ‘travelling’. This analysis can provide useful information and can be used
to save time and effort when making account entries. The role of analysis columns is
explained in greater detail in Step 5 (page 146).
Step 2
Aim: to understand the principle and working of the imprest system
1 Explain the basis of the imprest system. The petty cashier starts each week or month
with a certain amount of money, called the imprest amount or ‘float’. As payments are
made during the week or month, the amount of money decreases. At the end of the
period (or the beginning of the next one), the fund of cash is made up by the main
cashier to the imprest amount.
2 Illustrate the principle and working of the imprest system by showing the example
below on the overhead projector or board.
Example
Amount of cash at first made available to the petty cashier
Amount spent during the month
Amount left in cash ‘float’ at month-end
Amount reimbursed from main Cash Book
Float topped up ready for next month
142
£
100
79
21
79
100
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Petty Cash Book – imprest system
3 Point out that if at any time the size of the float proves to be insufficient for the demands
placed upon it, the imprest amount may be increased, either temporarily or permanently.
4 Acquaint the students with the use of vouchers to control payments from petty cash.
An employee must present a voucher with a request for petty cash. Each voucher must
be signed by someone in authority to formally authorize the payment. The vouchers
should be numbered and filed in numerical order.Vouchers help to make an imprest
system of petty cash self-regulating:
the total of voucher amounts for the period + the balance of cash = the float
Step 3
Aim: to be able to record the opening imprest and individual payments in the petty cash
book
1 Show that for first setting up the float (with reference to the figures in Step 2) the
book-keeping entries would be:
Dr Petty cash
Cr Cash/bank
£100
£100
Entries for reimbursing (or topping up) the float in the example in Step 2 would be:
Dr Petty cash
Cr Cash/bank
£79
£79
2 Illustrate how to record individual petty-cash payments by displaying the information
below and the analysed Petty Cash Book that follows it.
Example
Year 4
1 Nov
4
6
9
11
14
18
Nov
Nov
Nov
Nov
Nov
Nov
21 Nov
24 Nov
27 Nov
29 Nov
The cashier gives £200 in cash to the petty cashier as the starting
imprest of petty cash
Voucher no
£
Postage
1
3.70
Cleaning expenses
2
14.60
Stationery
3
5.30
T Fallon – travel expenses
4
11.80
Cleaning expenses
5
16.20
Payment of the amount owing to
J Wilds in the Purchases Ledger
6
31.10
Postage
7
4.50
Stationery
8
9.40
Refund of overpayment by debtor,
W Costain
9
40.30
R Ward – travel expenses
10
13.90
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Page 144
Petty Cash Book – imprest system
The Petty Cash Book appears as follows:
PETTY CASH BOOK
Receipts Date
Details
£
Year 4
200.00
1 Nov Cash
4 Nov Postage
6 Nov Cleaning
expenses
9 Nov Stationery
11 Nov T Fallon –
travel
14 Nov Cleaning
expenses
18 Nov J Wilds
(creditor)
21 Nov Postage
24 Nov Stationery
27 Nov W Costain
(debtor)
29 Nov R Ward –
travel
Voucher
no
Total
£
1
3.70
2
3
14.60
5.30
4
11.80
5
16.20
6
7
8
31.10
4.50
9.40
9
40.30
10
13.90
Travel
Postage Stationery Cleaning expenses Ledger
£
£
£
£
£
3.70
14.60
5.30
11.80
16.20
31.10
4.50
9.40
40.30
13.90
3 Inform the students that columns headed from ‘postage’ to ‘ledger’ are the analysis
columns.
4 Emphasize the following points about the Petty Cash Book:
(a) the ‘date’ and ‘details’ columns are shared by both Dr and Cr sides;
(b) the ‘receipts’ column represents the debit side and the ‘total’ column the credit side;
(c) the voucher numbers are entered in sequence, in this instance starting with ‘1’; from
the beginning of December Year 4, the voucher numbers will start with ‘11’;
(d) each item is entered in the ‘total’ column and in the appropriate analysis column;
(e) the column headed ‘ledger’ is used for other ledger postings not covered by the
other analysis columns.
Step 4
Aim: to be able to total and balance the Petty Cash Book and record reimbursement of
the float at the period end
1 Show that the columns are totalled at the end of the period. The total of the ‘total’
column should agree with the total of all the analysis columns.
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Petty Cash Book – imprest system
In line with common practice, reimbursement of money paid out takes place on the
first day of the next period. This time, the cashier hands a cheque to the petty cashier
for the amount of the reimbursement.
2 Display the Petty Cash Book as it would now look on the overhead projector or board.
PETTY CASH BOOK
Receipts Date
Details
£
Year 4
200.00
1 Nov Cash
4 Nov Postage
6 Nov Cleaning
expenses
9 Nov Stationery
11 Nov T Fallon –
travel
14 Nov Cleaning
expenses
18 Nov J Wilds
(creditor)
21 Nov Postage
24 Nov Stationery
27 Nov W Costain
(debtor)
29 Nov R Ward –
travel
Voucher
no
Total
£
1
Travel
Postage Stationery Cleaning expenses Ledger
£
£
£
£
£
3.70 3.70
2
3
14.60
5.30
4
11.80
5
16.20
6
7
8
31.10
4.50 4.50
9.40
9
40.30
10
13.90
150.80 8.20
30 Nov Balance c/d
11.80
16.20
31.10
9.40
40.30
13.90
14.70
30.80
25.70
71.40
49.20
200.00
200.00
49.20
150.80
14.60
5.30
1 Dec Balance b/d
1 Dec Bank
3 Show the students that, if reimbursements were made on the last day of the period, the
previous balancing would be laid out as follows:
Receipts
£
Date
150.80
30 Nov Bank
30 Nov Balance c/d
Total
£
150.80
350.80
200.00
200.00
350.80
1 Dec Balance b/d
145
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Page 146
Petty Cash Book – imprest system
Note
The total of all the analysis columns should equal the total of the ‘total’ column.
4 Display the Cash Book entries relating to the period-end reimbursements of petty cash
shown above.
CASH BOOK
Year 4
1 Nov Petty cash
1 Dec Petty cash
Cash
Bank
£
£
200.00
150.80
5 Copy and hand out or show exercise T/18.1 in the Appendix (page 267) on the overhead
projector. Ask the students to work through the exercise.
Step 5
Aim: to appreciate the purpose of the petty-cash analysis columns and be able to make
the double-entry postings to the ledger
1 Explain the existence of analysis columns in the Petty Cash Book means that the
expenditure is grouped (classified) under different expenditure headings. If the
classifications were not made, then each item would have to be posted individually to
an expense account to ensure double entry. The credit entry in petty cash, remember,
merely records a fall in the cash float.
2 Point out that the analysis columns serve as collection points, which are similar, in
principle, to the discount columns in the Cash Book. At the end of each period, the
total of each analysis column is posted to an appropriate expense account in the General
Ledger.An exception to this procedure is the total of the ‘ledger’ column: it is not posted
anywhere. Instead, the individual entries are posted directly to the relevant personal
accounts as soon as possible. The existence of that total, however, is useful for
crosschecking the column totals.
3 Demonstrate that the analysis columns are posted to the ledger accounts as follows:
GENERAL LEDGER
Postage
Year 4
30 Nov Petty cash
146
£
8.20
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Petty Cash Book – imprest system
Stationery
Year 4
30 Nov Petty cash
£
14.70
Cleaning
Year 4
30 Nov Petty cash
£
30.80
Travel expenses
Year 4
30 Nov Petty cash
£
25.70
PURCHASES LEDGER
J Wilds
Year 4
18 Nov Petty cash
£
31.10
Year 4
1 Nov Balance b/f
£
31.10
SALES LEDGER
W Costain
Year 4
27 Nov Petty cash
£
40.30
Year 4
1 Nov Balance b/f
£
40.30
4 Copy and hand out or show exercise T/18.2 in the Appendix (page 268) on the overhead
projector. Ask the students to work through the exercise.
Step 6
Aim: to be able to respond to questions involving (i) variations within the Petty Cash
Book; and (ii) the part played by the Petty Cash Book in the double-entry system
1 Sometimes, employees of the firm or members of the public pay small sums of money
to use the services of the firm, ie there is income from sources other than sales. An
example of this type of transaction might be paying for the private use of the telephone.
This money might be paid into petty cash, temporarily increasing the float. One way of
recording this transaction is to enter it in the receipts column (debit) with suitable
explanation in the details column.When totalling and balancing at the end of the period,
an allowance must be made for this amount.The appropriate expense account must be
credited with the amount (see exercise T/18.3* in the Appendix, page 269).
2 An increase in the float would usually take place at the time of reimbursement, ie at the
beginning or end of a period.The amount received from cash or bank would then be
the amount of the reimbursement, plus the increase in the float. Increase of the float
also arises in exercise T/18.3*. Copy and hand out or show exercise T/18.3* on the
overhead projector.Work through the exercise with the students.
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Petty Cash Book – imprest system
3 An examination question might require the preparation of the Petty Cash Book for 2
periods, and totalling and balancing at the end of each period. Preparation for 2 periods
is required in exercise T/18.4 in the Appendix (page 271), a question from a past paper.
The period covered in the situation given is 2 weeks. It should be noted that the exercise
states that the Petty Cash Book is to be balanced and the analysis columns totalled at
the end of each week. Some candidates balanced the account at the end of each week
but then wrongly provided one total only for each analysis column.
Part (b) of T/18.4 is a test of the students’ insight into a practical situation. It provides
scope for some discussion with the students, which should take place before any
‘solution’ is handed to them.
4 Copy and hand out or show exercise T/18.4 on the overhead projector. Ask the students
to work through the exercise.
5 Common errors made by candidates concerning the Petty Cash Book
Errors that are commonly made include:
●
●
●
●
●
faulty balancing at period-end and incorrect reimbursement of the float;
poor balancing when there is more than one period to record, eg 2 separate weeks,
and, especially, poor recording of separate (weekly) totals for the analysis columns;
faulty recording of double entry in the Cash Book in respect of reimbursement;
failing to keep to instructions regarding the headings of analysis columns;
faulty posting of period totals to General Ledger accounts.
Step 7
Aim: to be able to prepare a Cash Book with analysis of expenditure
1 Advise the students that an alternative to using a Petty Cash Book and float is to record
all disbursements, including minor ones, in the Cash Book itself.The practice of having
columns for analysing expenditure can be applied to the Cash Book just as it can to the
Petty Cash Book.The same principle of analysing items can be applied also to income,
but the LCCIEB First Level syllabus is restricted to the analysis of expenditure.
2 Explain that there might be, eg, 5 regular classes of expenditure recorded in the analysis
columns.Anything apart from these regular expenses could be entered in a ‘ledger’ column.
3 Illustrate the preparation of a Cash Book with analysis columns by showing the example
below on the overhead projector.
Example
J Kilbride, trader, maintains a 2-column Cash Book with additional columns for the
analysis of expenditure. Expenditure is analysed under the following headings: Wages,
148
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Petty Cash Book – imprest system
Stationery, Cleaning, Postage,Travelling, Ledger. On 1 March Year 6, she had a balance
of £65 in cash and a bank balance of £2,030 (Dr). The following transactions took
place in March Year 6:
3
5
8
9
11
12
14
15
16
17
18
21
23
25
27
28
30
31
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Withdrew £130 in cash from bank for office
Purchased stationery for £43 in cash
Received cheque for £250 from L Dunster
Paid £67 for travelling expenses in cash
Withdrew £350 in cash from bank for office
Paid £230 in wages in cash
Sales for cash £440
Paid £300 cash into bank
Paid £95 by cheque for cleaning
Paid £27 for postage in cash
Sent cheque for £315 to T Smart
Paid £52 for travelling expenses in cash
Paid £195 in wages by cheque
Purchased stationery for £17 in cash
Paid £31 for postage in cash
Cash sales £216
Paid £230 for machinery repairs by cheque
Paid £180 in wages in cash
Required
Prepare for J Kilbride the Cash Book for March Year 6. Balance the Cash Book at 31 March
Year 6 and bring down the balances. (The answer is shown overleaf.)
The transaction recorded in the ‘ledger’ column would be posted directly, and as soon as
possible, to the ledger accounts concerned.Thus, the account of T Smart would be debited
at 18 March Year 6 with £315; the Machinery Repairs Account would be debited at
30 March Year 6 with £230.The column totals would be posted to the 5 expense accounts
in the General Ledger at the end of each month.
Note
For checking purposes:
The total of the analysis columns = total of cash and bank credit columns
less the amounts of contra entries
149
Balance b/f
Bank
C
L Dunster
Bank
C
Sales
Cash
C
Sales
Balance b/d
Mar
Mar
Mar
Mar
Mar
Mar
Mar
1 Apr
1
3
8
11
14
15
28
254
1,201
216
1,265
2,580
300
250
Bank
£
2,030
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
31 Mar
3
5
9
11
12
15
16
17
18
21
23
25
27
30
31
Year 6
Balance c/d
Cash
C
Stationery
Travelling expenses
Cash
C
Wages
Bank
C
Cleaning
Postage
T Smart
Travelling expenses
Wages
Stationery
Postage
Machinery repairs
Wages
1,201
180
947
254
17
31
52
27
230
300
43
67
Cash
£
2,580
1,315
1,265
230
195
315
95
350
Bank
£
130
180
605
195
230
60
17
43
95
95
58
31
27
£
52
67
119
£
545
230
315
£
£
£
Stationery Cleaning Postage Travelling Ledger
£
Wages
11:16 am
350
440
Cash
£
65
130
15/3/03
Year 6
J Kilbride
CASH BOOK
pages 105-157
Page 150
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Page 151
Lesson 19: Capital and revenue expenditure
Topic summary
●
●
●
●
The nature of capital expenditure and revenue expenditure
Classifying examples of expenditure as capital expenditure or revenue expenditure
The significance of classifying capital and revenue expenditure for net profit and the
balance sheet
The basic accounting significance of the distinction between the two types of
expenditure
Extended Syllabus references
12.1 The distinctive nature of capital expenditure and revenue expenditure
12.2 The definition, in brief, of capital expenditure and revenue expenditure
12.3 Classifying a list of items into capital expenditure and revenue expenditure
respectively
12.4 The different ways in which capital expenditure and revenue expenditure items
are dealt with in the accounts
12.5 The effect on final accounts of the incorrect treatment of capital expenditure
and/or revenue expenditure
Examination answers from some LCCIEB Centres strongly suggest that the topic of capital
and revenue expenditure has been given little attention or has been overlooked. Often,
candidates are able to select between examples presented to them, either capital or revenue.
However, they have much greater difficulty in applying their knowledge to a situation that
requires correction, for example.
Step 1
Aim: to understand the nature of both capital expenditure and revenue expenditure
1 Explain that capital expenditure is the type of expenditure that is expected to provide
benefit to the business over a period longer than the current accounting period. Capital
expenditure usually involves the purchase of fixed assets or expenditure that adds to the
value of existing fixed assets. For example, extending a factory, shop, or office premises,
or adding a fitment to a machine or adapting a machine so that its productivity improves
requires capital expenditure.
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Capital and revenue expenditure
2 Inform the students that, by contrast to capital expenditure, the benefit provided by
revenue expenditure is expected to be obtained within the accounting year. This type
of expenditure may include:
●
●
●
●
buying goods to sell;
buying raw materials and/or parts to use in the course of manufacturing;
running the business, the selling and distributing of goods;
maintaining fixed assets, eg repairing or servicing machines, which does not add to the
original value of the fixed assets.
3 Show that capital expenditure is sometimes treated as revenue expenditure.This treatment
might occur when expenditure on developing new products might take several years to
result in increased sales.This capital expenditure is charged against profits in the year in
which it is spent as though it were revenue expenditure.1
Step 2
Aim: to be able to classify examples of expenditure as capital expenditure or revenue
expenditure
1 Tell the students that treating an item of expenditure as capital expenditure, ie ‘capitalizing’
it, means that the outlay is not included in the year’s Profit & Loss Account but is carried
forward as an asset in the balance sheet. Of course, if a provision for depreciation were
created on a newly purchased fixed asset, then there would be some charge for the year
in the Profit & Loss Account.
Expense items such as rent, insurance, and salaries are likely to be reviewed at the end
of each financial year. Thus at the end of Year 1, if prepayments are identified, the
prepayments will not be charged against the income of Year 1 but will be carried
forward as a current asset into Year 2. Effectively, the prepayment is ‘capitalized’ at the
end of Year 1.
2 Illustrate the classification of expenditure by showing the example opposite on the
overhead projector.
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Capital and revenue expenditure
Example
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Purchase of office equipment £27,000
Repairs to existing office equipment £760
Salaries and wages £28,400
Construction of new warehouse £45,000
Cleaning of offices £1,520
Painting of office premises £3,200
Purchase of goods for resale £980
Painting of newly constructed warehouse £1,750
Wages and salaries £63,800, of which £8,000
was paid to employees engaged on building an
addition on to the office premises
(10) Purchase of land for building new premises £30,000
(11) Payment of fee for legal services in connection with
purchase of the land mentioned in (10) £2,500
Capital
expenditure
£
27,000
Revenue
expenditure
£
760
28,400
45,000
1,520
3,200
980
1,750
8,000
30,000
55,800
2,500
3 Advise the students that, regarding item (6) in the example, it might be argued that if
the paintwork is expected to last 4 years for example, then the cost of painting the
warehouse should be capitalized and spread over the next 4 years.This, however, would
be incorrect. If repairs, renovation, painting, etc merely restore an asset to its original
condition, the outlay is regarded as revenue expenditure and should be fully charged in
the year that the cost was incurred. Item (8) contrasts with item (6).The initial painting
of the warehouse helps to complete the construction (item (4)) and is therefore treated
as capital expenditure. The cost of painting the warehouse at a later time would then,
of course, be treated as revenue expenditure.
4 Point out that in item (9) the expenditure is partly capital and partly revenue.The cost
has been ‘apportioned’ between the two categories of expenditure. Note also that item
(11) is capitalized; the legal services are necessary to make the purchase of land possible.
5 Copy and hand out or show the following exercise on the overhead projector or board.
Ask the students to work through the exercise.
Exercise
In the columns beside the items listed below, enter the amount of capital expenditure
or revenue expenditure for each item.
Capital
expenditure
£
(1)
(2)
(3)
(4)
(5)
(6)
Revenue
expenditure
£
Paid heating and lighting bill £68
Purchased stationery £1,760
Fitting of new refrigerator in delivery vehicle £2,100
Repairs to motor vehicle £215
Paid insurance £470
Fitting of new tyres to motor vehicle £190
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Capital and revenue expenditure
Solution
Capital
expenditure
£
(1)
(2)
(3)
(4)
(5)
(6)
Revenue
expenditure
£
68
1,760
2,100
215
470
190
Note
Item (2) – is treated as a consumable purchase.
Item (3) – improves the usefulness of the vehicle and might well increase the vehicle’s
resale value.
Item (6) – fitting new tyres merely helps to ‘make good’ the wear on the vehicle and
does not increase the value of the vehicle beyond the original value.Although the tyres
may have a useful life of more than one accounting year, such a purchase would generally
be treated as revenue expenditure.
6 Copy and hand out or show exercises T/19.1, T/19.2, and T/19.3 in the Appendix
(pages 272–3) on the overhead projector. Ask the students to work through them.
Candidates should be ready to apply their knowledge by suggesting examples of capital
and revenue expenditure for different types of business activity.
7 Copy and hand out or show on the overhead projector or board the exercise below.
Ask the students to work through the exercise.
Exercise
Give one example of (a) capital expenditure, and (b) revenue expenditure for each of
the following business organizations:
(i) a manufacturer of washing machines
(ii) a motor-vehicle distributor
(iii) a retailer of books, newspapers, and magazines.
Solution
(a) Capital expenditure
(i) Purchase of machinery for production
(ii) Purchase and improvement of
showrooms
(iii) Purchase of retail shop premises
(b) Revenue expenditure
Wages, advertising, etc
Salespersons’ salaries and commission
Purchase of newspapers, books, etc
Note
These answers are only examples from a range of possible answers.The answers should
be related to the type of business organization.
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Capital and revenue expenditure
8 Copy and hand out or show exercise T/19.4 in the Appendix (page 274) on the overhead
projector. Ask the students to work through the exercise.
Step 3
Aim: to appreciate the significance of classifying capital and revenue expenditure for net
profit and the balance sheet
1 Make it clear to the students that capital expenditure relates to assets and revenue
expenditure to running expenses. Capital expenditure is treated as affecting the balance
sheet, and payment is expected to be used up over more than one financial period.
Revenue expenditure, however, is treated as a profit & loss expense that is used up
within a financial period. Therefore, incorrect classification of capital and revenue
expenditure will have consequences for both net profit and the balance sheet.
2 Illustrate the consequences of incorrect classification by displaying the following table
on the overhead projector or board.
Incorrect
classification
Effect on
accounts
Effect on net
profit
Effect on balance
sheet
Purchase of fixed
asset treated as
revenue expenditure
Expense overstated
Understated
Capital understated
Revenue expense
treated as capital
item
Expenses understated
Fixed asset account
understated
Fixed asset account
overstated
Fixed asset
understated
Overstated
Capital overstated
Fixed asset
overstated
3 Explain that incorrect classification can also distort the gross profit, an effect that is
shown in the next 2 exercises.
4 Copy and hand out or show exercise T/19.5* and T/19.6* in the Appendix
(pages 275–6) on the overhead projector. Ask the students to work through them.
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Capital and revenue expenditure
Step 4
Aim: to develop an understanding of the basic accounting significance of the distinction
between the two types of expenditure
1 Tell the students that they should be able to apply their knowledge of expenditure
classification to different situations. Exercises T/19.7* and T/19.8* in the Appendix
(pages 277 and 279), taken from LCCIEB First Level Book-keeping past examination
papers, will give them some practice at applying what they have learnt.
2 Copy and hand out or show exercises T/19.7* and T/19.8* on the overhead projector.
Ask the students to work through the exercises and to explain the comments given.
3 The explanation of the comments in T/19.7* should be as follows:
Item (1) – these are all items of capital expenditure and should be deducted from
the figure for purchases.
Item (2) – £1,600 should be deducted from the figure for sales. A common mistake
made by candidates is to deduct the book value of the old delivery van, ie £3,400.That
figure is completely internal to the business and would not enter into the transaction of
selling the delivery van.
Item (3) – the figures for closing stock should be reduced by £300.
Item (4) – the £2,100 is capital expenditure and should be deducted from the wages
figure.
4 The explanation of the comments in T/19.8* should be as follows:
(a) John Bradford failed to make the distinction between capital and revenue.
(b) ● Item (1) – the total of recorded sales is the total value of sales transactions in the
period, not the amount received in cash.Therefore, the amount of £1,082 should
be added to the existing figure to give a ‘true’ sales figure of £23,746.
● Item (2) – the accrual of £286 increases the item ‘Wages’ to £2,926.
● Item (3) – £1,730 becomes the figure for closing stock.
● Item (4) – the purchase price of the motor vehicle less expected trade in value of
£700 = £1,500 cost to be carried over 3 years. £1,500 ÷ 3 = £500 depreciation
per annum. The item, ‘Cash taken for own use’ in the profit statement really
means ‘drawings’.This item is not an expense of the business and therefore should
not be included in the Profit & Loss Account. It would, of course, appear in a
balance sheet as a deduction from capital.
5 Common errors made by candidates in dealing with capital and revenue
expenditure
Draw the students’ attention to these comments.
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Capital and revenue expenditure
(a) Overlooking the significance of information in the question that explains the
purpose of certain expenditure. The information provides the clue about whether
the expenditure is to be classed as capital or revenue expenditure.
(b) In considering the effect on net profit of certain capital expenditure, students
sometimes disregard the effect of any provision for depreciation. For example, the
purchase of a motor vehicle, as a capital item, has no direct effect on net profit;
however, the need to provide for depreciation over the life of the motor vehicle
would result in reduced net profit.
(c) Students may provide an unnecessary explanation of the chosen classification when
all that is required is a one-word answer.
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Page 158
Lesson 20: The journal
Topic summary
●
●
●
●
●
The role and main uses of the journal and the advantages of having a journal
The preparation of journal entries with the correct layout
Making journal entries for certain transactions or purposes
Making journal entries for non-regular transactions or adjustments
The role and uses of the journal
Extended Syllabus references
4.1
16.1
16.2
16.3
The function of the ledger
The main uses of the (General) Journal
The advantages of having a journal, as a support to the double-entry system
Journal entries, in standard format, covering:
16.3.1 the purchase and sale on credit of fixed assets
16.3.2 the correction of errors
16.3.3 opening entries
16.3.4 other non-regular transactions or adjustments
16.4 The books of original entry; their function
Questions requiring journal entries are quite common in the LCCIEB First Level
Book-keeping examination and yet the answers are often disappointing.The quality of the
answers indicates that not enough attention is given to this topic.
The questions may test the use of the journal in its own right, eg as a record of the purchase
or sale on credit of fixed assets. Alternatively, journal entries may be used as a convenient
and direct way of testing the students’ understanding of a number of features of doubleentry book-keeping that would otherwise require the use of too much examination time.
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The journal
Step 1
Aim: to be aware of the role and main uses of the journal and the advantages of having
a journal
1 Explain the origin of the journal and its present-day function. The day books exist to
assist the ledger. Detail is recorded in the day books and more summarized postings are
made to the ledger. Originally, the day books were part of the journal and the journal
was like a notebook for recording the detail of transactions. In the course of time,
specialized day books (eg the Purchases Day Book) or journals came into use and the
journal was used to record less common transactions or adjustments. Today, the journal
is sometimes termed the Main Journal, Journal Proper, or General Journal.
2 Point out that the Cash Book serves as both a book of prime entry – effectively a day
book – and as part of the ledger.The ledger and the various day books cover the great
majority of transactions.A general rule is that any transaction not included in any of the
day books should be noted in the General Journal.
3 Tell the students that the main uses of the General Journal are to make notes on:
●
●
●
●
the purchase and sale on credit of fixed assets;
opening entries, ie the opening of a new set of accounts;
the correction of errors;
other transfers.
4 Draw the students’ attention to the advantages of having and using a journal, that:
●
●
●
it is an easily accessible record of the purchase and sale of fixed assets;
it helps to explain entries, eg various adjustments or the correction of errors;
there is less chance of omitting a transaction altogether, or of making an entry on one
side only of the accounts.
Regarding the first point above, some firms include the purchase and sale of fixed assets
for cash or bank, even though these are recorded anyway in the Cash Book – a book
of prime entry. More details of the assets, authority to purchase, etc can be shown
there than is possible in the Cash Book.1
5 Emphasize the role of the journal, that it is to support the ledger. The journal itself is
not part of the double-entry system.
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The journal
Step 2
Aim: to be able to prepare journal entries with the correct layout
1 Demonstrate the standard layout for a journal on the board or overhead projector using
the example below.
Example
T Morley
JOURNAL
Date
Name of account to be debited
Name of account to be credited
Narrative
Dr
£
X
Cr
£
X
2 Highlight the following points:
●
●
●
a date should always, if possible, be entered for each journal entry;
the account to be debited should always appear first; followed by the account to be
credited;
a narrative is an explanation of the journal entry; narratives, if required, should be
relevant, meaningful, and to the point.
Concerning the second point above, some candidates show the credit entries first or, even
worse, mix the entries – sometimes debit entries first, sometimes credit entries first. The
students should avoid both these errors, which are confusing for the Examiner and which
may lose them marks.
Step 3
Aim: to be able to make journal entries for certain transactions or purposes
1 Introduce the students to some uses of the journal with the aid of the examples given
below.
(a) The purchase and sale on credit of fixed assets
Example
(i) On 9 June Year 3, a computer is bought on credit from Datarite Limited for £23,600.
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The journal
Year 3
9 Jun
Computer equipment
Datarite Ltd
Dr
£
23,600
Cr
£
23,600
Purchase, on credit from
Datarite Ltd, computer . . . .
(ii) On 21 June Year 3, a motor vehicle, used for delivery purposes within the firm, was
sold on credit to Smithson Garages for £2,300. No provision for depreciation had
been made.
Year 3
21 Jun
Smithson Garages
Motor-vehicle disposal
Dr
£
2,300
Cr
£
2,300
Sale on credit of motor
vehicle no . . . .
In practice, more detail concerning the fixed assets is likely to be included, but this is
not required for examination purposes.
(b) The correction of errors
See Lessons 21 and 22 (pages 168–77).
(c) Opening entries
Opening entries are to be used when a business is started or for opening a new set of
accounts for an already established business.
Example
N Maxwell has been in business for some years. He now decides to set up and maintain
a proper set of double-entry accounts. On 1 March Year 8, his assets and liabilities were as
follows:
Assets
Liabilities
Premises £42,000 Fixtures and fittings £5,200 Office equipment £4,800
Motor vehicle £7,500
Stock £4,360 Debtors £1,840 (C Brandon £720;
R Sims £440; L Upton £680) Cash £130 Bank £1,100
Creditors £1,370 (M Denby £580; A Trott £790)
Solution
The total of the assets £66,930 less liabilities £1,370 = £65,560 capital
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The journal
The opening journal entries appear as follows:
JOURNAL
Dr
£
42,000
5,200
4,800
7,500
4,360
Year 8
1 Mar Premises
Fixtures and fittings
Office equipment
Motor vehicle
Stock
Debtors: C Brandon
R Sims
L Upton
Cash
Bank
Creditors: M Denby
A Trott
Capital
£
720
440
680
Cr
£
1,840
130
1,100
£
580
790
66,930
1,370
65,560
66,930
The journal is the basis for opening the set of accounts as follows:
GENERAL LEDGER
Premises
Year 8
1 Mar Balance
£
42,000
Fixtures and fittings
Year 8
1 Mar Balance
£
5,200
Office equipment
Year 8
1 Mar Balance
£
4,800
Motor vehicle
Year 8
1 Mar Balance
£
7,500
Stock
Year 8
1 Mar Balance
£
4,360
Capital*
Year 8
1 Mar Balance
162
£
65,560
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The journal
SALES LEDGER
C Brandon
Year 8
1 Mar Balance
£
720
R Sims
Year 8
1 Mar Balance
£
440
L Upton
Year 8
1 Mar Balance
£
680
PURCHASES LEDGER
M Denby
Year 8
1 Mar Balance
£
580
A Trott
Year 8
1 Mar Balance
£
790
CASH BOOK
Year 8
1 Mar Balance
Cash
£
130
Bank
£
1,100
* The Capital Account could, alternatively, be kept in a Private Ledger
2 Ask the students whether journal opening entries are prepared each year. The correct
answer is that they are not. The opening entries are prepared only as required, eg as a
new set of accounts is opened, which, in practice, is rare.
3 Copy and hand out or show exercise T/20.1 in the Appendix (page 280) on the overhead
projector. Ask the students to work through the exercise.
Step 4
Aim: to be able to make journal entries for non-regular transactions or adjustments
1 Explain that non-regular transactions or adjustments that are not otherwise recorded in
a book of prime entry, include:
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The journal
●
●
special transactions or adjustments arising during the course of the year;
year-end adjustments.
Possible adjustments include:
●
●
●
●
●
●
●
transfers to the Trading and Profit & Loss Account;
accruals and prepayments;
provision for depreciation;
writing off a fixed asset, ie transferring the remaining balance on the asset account to
the Profit & Loss Account;
writing off bad debts;
creating or adjusting a provision for doubtful debts;
adjusting for owner’s drawings.
2 Illustrate journal entries for non-regular transactions or adjustments by showing the
examples below on the board or overhead projector.
Example (a)
At 31 December Year 5, the balance on the Advertising Account is £4,850 (Dr). Of this,
£4,100 relates to Year 5, while £750 is a prepayment for Year 6.
Year 5
31 Dec Profit & loss
Advertising
Dr
£
4,100
Cr
£
4,100
Transfer of expenditure for
advertising for the year ended
31 Dec Yr 5
Example (b)
At 31 December Year 5, the balance on the Rent Receivable Account is £3,350. All of
this relates to Year 5. In addition, £450 is accrued for Year 5.
Year 5
31 Dec Rent receivable
Profit & loss
Transfer of the amount of rent
receivable for the year ended
31 Dec Year 5
164
Dr
£
3,800
Cr
£
3,800
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The journal
Example (c)
At 31 December Year 5, bad debts written off for the year amount to £715.
Year 5
31 Dec Profit & loss
Bad debts
Dr
£
715
Cr
£
715
Total of bad debts written off
for the year ended 31 Dec Year 5
Example (d)
At 31 December Year 5, the existing provision for doubtful debts is to be increased by
£370.
Year 5
31 Dec Profit & loss
Provision for doubtful debts
Dr
£
370
Cr
£
370
Increase in provision for
doubtful debts
Step 5
Aim: to develop and reinforce learning on the role and uses of the journal
1 Review the relationship between the various books of account. Figure 20.1 (overleaf )
structurally illustrates the various books of account. Note that the books of prime entry
are not part of the double-entry system.The Cash Book and Petty Cash Book are both
books of prime entry and part of the ledger in the wider sense. Also note that, apart
from contra entries in the Cash Book, it is still necessary to post from these two books
into the ledger itself to complete the double entry.
2 Remind the students that the Trading and Profit & Loss Account is part of the double-entry
system but that the balance sheet is not. The General Journal, in its function as a diary,
holds information on transactions that are not entered into any other book of prime
entry. It should also contain adjustments – changes made without a transaction arising.
In addition, transactions of a special nature may be recorded there even though they are
entered in another book of prime entry, eg the purchase or sale of fixed assets for cash
or bank payment.
3 Advise the students to practise answering questions requiring journal entries as much
as possible.These questions can be a compact way of testing the students’ knowledge of
the rules of double entry; the importance of this topic cannot be overstated.
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Page 166
BOOKS
OF
PRIME
ENTRY
Cash
Returns
Outwards
Day
Book
Purchases
Day
Book
Returns
Inwards
Day
Book
Sales
Day
Book
Book
Ledger
General (Nominal) Ledger
Purchases Ledger
Sales Ledger
(Private Ledger)
DOUBLEENTRY
SYSTEM
General
Journal
Petty Cash Book
Discount columns
The journal
Trading and Profit & Loss Account
Balance
sheet
Figure 20.1 The account system
4 Copy and hand out or show exercises T/20.2*, T/20.3, T/20.4*, and T/20.5* in the
Appendix (pages 281, 283–4, and 286). It is important that the students work
through these exercises and that you review the answers with them. Overall they show
the range of topics that can be covered in journal entries.
5 When the students work through T/20.4*, emphasize that they must provide sufficient
information in journal entries that relate to year-end adjustments on expense or income
accounts. ‘Common errors’ below deals further with this feature.
6 Common errors made by candidates regarding journal entries
Candidates sometimes:
●
●
provide ledger accounts instead of journal entries;
provide insufficient information for year-end adjustments on expense/income
accounts, eg:
Date
166
Insurance
Insurance
Narration . . . .
£
90
£
90
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The journal
The correct entries appear as follows:
Date
Insurance (year to 30 Jun Yr 9)
Insurance (year to 30 Jun Yr 8)
Narration . . . .
£
90
£
90
ie, the financial years must be stated for the entry to be valid.
●
●
●
lay out journal entries poorly; eg, the entries might be cramped together – sometimes
it is not clear which is debit and which is credit
provide description and explanation instead of an account name
either state no date (where it can or should be provided) or show an incorrect date;
the date given should be the one on which (in the firm concerned) the journal entry
is made.
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Page 168
Lesson 21: Errors in the accounts 1
Topic summary
●
●
The basic classification of errors and errors that have no effect on agreement of the
trial balance
Errors that might affect agreement of the trial balance and how the trial balance
might be affected
Extended Syllabus references
11.3
11.4
11.5
17.1
Errors in the accounts and their effect on the trial balance
The revising of an incorrectly drafted trial balance
The limitations of the trial balance as a means of check
The difference between errors which affect agreement of the trial balance and
those errors which do not affect such agreement
17.2 Those errors which do not affect agreement of the trial balance; types of such
error
17.3 From data provided, the selection of the relevant type of error
17.4 The drafting of appropriate adjusting journal entries
Students often experience difficulty with this topic, and the terms used should be explained
with care.
Step 1
Aim: to be aware of the basic classification of errors and, in particular, of the errors that
have no effect on agreement of the trial balance
1 Explain that errors in accounts may be classified as:
●
●
those that have no effect on agreement of the trial balance;
those that usually affect the trial balance.
2 Review the range of errors (below) that do not affect agreement of the trial balance.
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Errors in the accounts 1
(a) Errors of omission
This type of error occurs when a transaction is completely omitted from the books.
Use the example that follows to illustrate errors of omission.
Example
Credit note number 387 for £73 is issued to a customer. A Doyle, on the return of
goods, has not been entered in the accounts.
An adjusting journal entry should be made, as follows, before making the necessary
correcting entries in the two ledger accounts concerned.
JOURNAL
Dr
£
73
Returns inwards
A Doyle
Correction of omission of entry
of credit note no 387
Cr
£
73
(b) Errors of commission
These errors occur when a transaction is entered in a wrong account of the same class
as the one in which it should have been recorded. Often, this error means that a
transaction is entered in the wrong person’s account (either debtor or creditor). Use
the example below to illustrate this type of error of commission.
Example
Invoice number S/598 for goods bought on credit for £345 from Eastern Supplies had
been entered in the account of Eastern Sundries.
The adjusting entry would appear as:
JOURNAL
Dr
£
345
Eastern Sundries
Eastern Supplies
Cr
£
345
Purchase invoice no S/598 entered in
wrong supplier account, now corrected
In the Purchases Ledger, the 2 accounts would appear as:
Eastern Supplies
£
Purchases (entered wrongly
in Eastern Sundries Account)
345
(continued)
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Errors in the accounts 1
Eastern Sundries
£
Eastern Supplies
(posting error corrected)
£
345
Purchases
345
The correction of an error involving impersonal accounts is as follows:
JOURNAL
Dr
£
19
Postage
Telephone
Cr
£
19
Payment in cash for postage
was wrongly posted to Telephone
Account, now corrected
Stress that both accounts are in the same class, ie they are both nominal accounts.
A further example for impersonal accounts is as follows:
JOURNAL
Office furniture
Fixtures and fittings
Dr
£
463
Cr
£
463
Purchase by cheque of office furniture,
wrongly posted to Fixtures and Fittings
Account, now corrected
In this case, both accounts are real accounts.
(c) Reversal of entries
Debit and credit entries for the correct amount have been made, but on the wrong side
of the 2 accounts. Use the example that follows to illustrate the reversal of entries.
Example
The sale of goods for £420 cash has been entered as a debit to the Sales Account and
a credit to the Cash Account.
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Errors in the accounts 1
The correct entries should be:
Sales
£
420
Cash
Cash
£
420
Sales
If the correct entries are adjusted by crediting the Sales Account and debiting the Cash
Account with £420, it merely cancels the errors.To adjust fully, and to achieve what was
first intended, it is necessary to double the amount.
Sales
£
420
Cash
Cash (correction of error)
£
840
Sales
£
420
Cash
Sales (correction of error)
£
840
Therefore, the journal entry would be:
JOURNAL
Cash
Sales
Dr
£
840
Cr
£
840
Sales of goods for £420 cash
and wrongly reversed in the
accounts, now corrected
(d) Error of principle
When a transaction is entered in the wrong class of account, an error of principle
occurs. Use the example given below to illustrate this type of error.
Example
The purchase of office equipment for £1,264 has been wrongly debited to the
Purchases Account. This purchase is an item of capital expenditure that, wrongly, has
been treated as revenue expenditure and entered in a nominal account. As capital
expenditure, it should have been recorded in a real account. It is therefore necessary to
cancel the incorrect entry in the Purchases Account, ie using a credit entry, and to make
a debit entry in the Office Equipment Account.
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Errors in the accounts 1
JOURNAL
Dr
£
1,264
Office equipment
Purchases
Cr
£
1,264
Purchase of office equipment wrongly
debited in Purchases Account, now
corrected
(e) Error of original entry
When an error of original entry occurs, the correct accounts have been used and the
entries are on the correct sides, but the amount has been entered incorrectly in both
accounts. Often, although not necessarily, this error is the result of the source document
being incorrect. Use the following example to illustrate error of original entry.
Example
Sale of goods £350 on credit to T Hogan has been entered in the accounts as £380.
Both entries are £30 too much.
JOURNAL
Dr
£
30
Sales
T Hogan
Cr
£
30
Sales overstated by £30,
now corrected
(f) Compensating error
A compensating error occurs when errors cancel each other out. Use the example that
follows to illustrate this type of error.
Example
Purchases account (debit) is understated by £10 and rent receivable (credit) also is
understated by £10. The trial balance is still in balance, provided there are no other
errors in the accounts.
JOURNAL
Purchases
Rent receivable
Purchases Account and Rent
Receivable Account each undercast
by £10, now corrected
172
Dr
£
10
Cr
£
10
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Errors in the accounts 1
(g) Error of duplication
In this instance, a transaction is entered correctly in the accounts and then, in error, is
entered again.This error is not revealed by the trial balance.
3 Copy and hand out or show exercises T/21.1, T/21.2, and T/21.3 in the Appendix
(pages 288–9) on the overhead projector. Ask the students to work through them.
Step 2
Aim: to be aware of errors that might affect agreement of the trial balance and of how
the trial balance might be affected
1 Outline the errors that would usually affect the trial balance, including:
●
●
●
●
an incorrect posting on one side of the transaction;
an error in addition, eg of entries within an account;
a balance wrongly brought forward to the trial balance;
a balance omitted from the trial balance.
These errors affect agreement within the trial balance only if they do not compensate
one another.
2 Ask the students when the errors are likely to become known.The answer is that some
will become known during the course of the year, partly through checks in the system.
They will then be corrected. Others will become known at the end of the year when
the trial balance is prepared. Either way, the adjustments necessary to correct the errors
should be ‘journalized’.
3 Discuss with the students how the various errors will affect the trial balance.
4 Explain that agreement between the 2 sides of a trial balance does not prove that all
entries have been made correctly in the accounts.The trial balance is limited as a means
of checking entries.
The 2 sides of the trial balance could be in agreement even though any of the errors
outlined in Step 1 could have been made, eg the complete omission of a transaction, a
compensating error, or an error of commission.
5 Fully discuss the limitations of the trial balance with the students.
6 Copy and hand out or show exercises T/21.4 and T/21.5 in the Appendix (pages 290–1)
on the overhead projector. Ask the students to work through them.
7 Review and discuss the answers to the questions.
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Lesson 22: Errors in the accounts 2
Topic summary
●
●
Adjustments for errors through journal entries or in accounts
The effect of errors or of correcting errors on gross and net profits, as well as upon
the balance sheet
Extended Syllabus references
17.4 The drafting of appropriate adjusting journal entries
17.5 The effect of errors and/or the effect of the correction of errors both in principle
as well as by calculation on:
17.5.1 the trial balance
17.5.2 gross profit
17.5.3 net profit
17.5.4 the balance sheet
A topic that frequently occurs in LCCIEB First Level Book-keeping examinations is
correcting errors by means of journal entries or by entries in accounts. Answers to
questions requiring the correction of journal entries strongly indicate that insufficient
attention is paid to this topic.
It is also evident that candidates experience some difficulty in answering questions on the
effect of errors on profit and the balance sheet.The guidance in Step 2 and the supporting
exercises should help to overcome this problem.
Step 1
Aim: to understand the effect of errors or of correcting errors on gross and net profits, as
well as on the balance sheet
1 The problem for candidates in answering this type of question is often one of method.
In preparing for the examination as well as in the examination itself, attention should
be paid to the points listed below.
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Errors in the accounts 2
(a) Have the students fully grasped the question? Often marks are lost because parts of
the question have been misunderstood. Lack of understanding might be the result
of unfamiliarity with the topic or with the particular form of question.
(b) In preparing an answer requiring journal entries, candidates may find it helpful to
draft T-type accounts. This exercise might help them to visualize debit and credit
entries.The T-type accounts should not be in detail – just miniature ‘accounts’ are
enough. If necessary, the account can be written in the answer book and then boldly
crossed through. It is, of course, wrong to show accounts as part of an answer when
only journal entries are required.
(c) Does the question require narrations? Or does it state that narrations are not
required?
(d) Journal entries should always be in the correct format with the debit entry first and
the credit entry following it.When an answer requires a multiple of account entries,
eg in recording the sale of a depreciated fixed asset, there may be various ways of
setting out the answer, but the same rule applies: debit comes before credit.
2 Copy and hand out or show exercises T/22.1 and T/22.2 in the Appendix (page 292) on
the overhead projector. Ask the students to work through them.
3 Explain that, sometimes, an item in a question may require a one-sided journal entry
only. For example, an error could be the result of a posting failure. Illustrate this point
with the example below.
Example
Stationery purchased on 12 March Year 3 for £37 in cash is correctly entered in the
Cash Book but is not posted to the Stationery Account in the General Ledger.The trial
balance would therefore be short on the debit side by £37.The correcting journal entry
made on 31 March Year 3 would be:
JOURNAL
Year 3
31 Mar Stationery
Dr
£
37
Cr
£
–
Stationery purchased on 12 March
Year 3: entered in cash book but not
posted, now corrected.
Note
The dash (–) in the credit column gives a positive indication to the Examiner that that
candidate recognizes that no credit entry is required.
4 Copy and hand out or show exercise T/22.3* in the Appendix (page 293) on the
overhead projector. Ask the students to work through the exercise.
Note that this question requires some one-sided journal entries.
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Errors in the accounts 2
Step 2
Aim: to understand the effect of errors or of correcting errors on gross and net profits,
as well as on the balance sheet
1 Explain that the effect of errors in terms of reported profits and a prepared balance sheet
is being discussed.
2 Stress the need to distinguish between the effect of the error itself and the effect of
correcting the error.Thus, if purchases were undercast:
the effect
of the error
the effect of
correcting the error
gross profit overstated
gross profit reduced
The amount is the same for both effects.The distinction is of fundamental importance:
often questions relating to errors are answered from the wrong angle.When errors are
made, there is a sequence of consequences. It will help the students considerably if they
become used to working through the likely consequences of various types of error. For
example, the understatement of purchases mentioned above will, by itself, lead to:
●
understatement of cost of goods sold
which results in
●
overstatement of gross profit
which results in
●
overstatement of net profit
which results in
●
overstatement of the addition
to capital on the balance sheet
3 Copy and hand out or show the following exercise on the overhead projector. The
errors should be put to students one-by-one. Review the consequences of each one
before moving on to the next.
Exercise
Trace the sequence of consequences of the following errors through to the balance sheet:
(1) overstatement of sales
(2) overstatement of returns outwards
(3) understatement of carriage outwards
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Errors in the accounts 2
(4) overstatement of closing stock
(5) overstatement of carriage inwards
(6) understatement of returns inwards.
4 Use Table 22.1 to illustrate the differences between the effects of errors on reported
profits, etc, before making any correction, and the effects resulting from correction.This
table also appears on page 217 of the student’s book, How to Pass Book-keeping, First
Level.
Table 22.1 Effects of the error and effects of correcting the error
Effects of the error,
ie before correction
Effects (upon already reported
profits) of correcting the error
Gross
profit
Net
profit
Balance
sheet
Gross
profit
Net
profit
Balance
sheet
Purchases
undercast
Overstated
Overstated
Capital
overstated
Reduced
Reduced
Capital
reduced
Closing
stock
overvalued
Overstated
Overstated
Capital
overstated
Stock
overstated
Reduced
Reduced
Capital
reduced
Stock
reduced
Expense
item,
eg rent
overstated
No
effect
Understated
Capital
understated
No
effect
Increased
Capital
increased
Income
item, eg
commission
overstated
No
effect
Overstated
Capital
overstated
No
effect
Reduced
Capital
reduced
Note
Any overstatement or understatement of either an asset or a liability affects only the
balance sheet.
5 Exercise T/22.4* in the Appendix (page 294) shows the effects of errors and of their
correction. Copy and hand out, or show the exercise on the overhead projector, and
work through it with the students. Pay special attention to the note at the end of
T/22.4A.
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Page 178
Lesson 23: Final accounts and adjustments
further considered
Stock valuation
Topic summary
●
●
●
●
●
Adjustments for drawings other than cash drawings
End-of-period adjustments for outstanding purchase invoices
Year-end adjustments in the preparation of final accounts
Trading and Profit & Loss Accounts in a vertical format
The basic rule for stock valuation
Extended Syllabus references
13.6 Adjustments in the Trading Account and balance sheet for end-of-period
‘outstanding’ purchases, ie goods received but invoices still awaited
13.11 Adjustments for end-of-period income accrual and income prepayment in the
Profit & Loss Account and balance sheet
18.2 The meaning of the term drawings; the various forms of drawings
18.3 The book-keeping entries for drawings
18.4 The possible effect of drawings upon the amount of capital
18.5 How drawings are stated in the balance sheet and, where necessary, in the
Trading Account (where goods are withdrawn for private benefit)
19.4 The valuation of closing stock: the lower of cost or net realizable value
19.13 Showing income and expenses within the final accounts, with related items
being suitably brought together
This lesson considers the further adjustments that might have to be made to the final
accounts. The adjustments include different forms of drawings and the valuation of stock.
Stock valuation could also be the main subject of a question or a part of a question. The
vertical layout of the Trading and Profit & Loss Account is also discussed.
By this stage of their studies, the students should have gained a fair knowledge of the
various topics that have been discussed. Final accounts brings together many facets of
book-keeping.The working and review of final accounts affords an opportunity to clarify
points, sort out difficulties, and if necessary to reinforce key study points.
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Final accounts and adjustments further considered
Stress that the overriding aim of the final accounts is to present a true picture of a business
by showing that:
●
●
the net profit is a true result after taking into account all relevant costs and income
for the given period
the balance sheet is a true statement of assets and liabilities at the balance sheet date
Correctly classifying expenditure between capital and revenue, and making period-end
adjustments for accruals and prepayments, all contribute towards presenting a true picture
of a business.
Step 1
Aim: to be able to make adjustments for drawings other than cash drawings
1 Remind the students of the entries for drawings by the proprietor (ie owner of the
business), that they are:
Dr
Cr
Drawings Account
Cash/bank account
In the balance sheet, the total of the drawings for the year is deducted from the owner’s
capital balance at the start of the year.
If the drawings take the form of goods being withdrawn from the business for private
use, the necessary adjustment would be:
Dr
Cr
Drawings Account
Purchases Account
2 Point out that if the adjustment for drawings is made before the preparation of the trial
balance, then the purchases balance will already be reduced by the amount of the
drawings, while the Drawings Account will show both cash and goods drawings.
However, the candidates may be required to prepare final accounts that incorporate an
adjustment for goods withdrawn by the proprietor, using an already prepared trial balance
that is not adjusted for the withdrawal. It will then be necessary to:
●
●
show a deduction from purchases in the Trading Account;
increase the amount deducted as drawings in the balance sheet.
Sometimes, examination candidates merge these figures, eg drawings of cash and drawings
of goods are added together and entered as one figure.Advise the students to show each
adjustment to make sure they obtain the mark(s).
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Final accounts and adjustments further considered
3 Explain that there are other alternative forms of drawings (ie besides cash) that usually
involve the private use of business facilities. For example, the owner may use a motor
vehicle or the business telephone, or live in part of the business premises for which
rent would otherwise be payable to the business. Use of these facilities may mean
that the cost of a facility is shared (or ‘apportioned’) between the business and the
owner personally.
4 Illustrate how to show shared cost by displaying the following example on the overhead
projector or board.
Example
The business telephone is also used by the owner for private purposes.The yearly cost
of the telephone is apportioned as follows:
business
owner’s private use
4
/5
/5
1
At the year end, an adjustment would be made to allow for the owner’s private use.The
amount paid from the business bank account for the telephone during the year ended
30 June Year 7 was £380, of which £30 was prepaid at the year end.
Solution
£
380
30
350
Amount paid during year ended 30 Jun Yr 7
less Prepayment at 30 Jun Yr 7
Annual charge
To be apportioned:
£
280
70
350
4
business use
private use
/5
1
/5
The period-end adjustments in the ledger would be:
Dr
Cr
Drawings
Telephone
£70
£70
In the final accounts:
●
●
180
the figure for the telephone in the Profit & Loss Account would be shown as £280;
drawings in the balance sheet should be increased by £70.
The increased figure for
drawings is offset by
(= capital reduced)
the increased figure of net profit
(= capital increased)
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Final accounts and adjustments further considered
Step 2
Aim: to be able to make end-of-period adjustments for outstanding purchase invoices
Explain that, at the end of a financial period, purchased goods might already have been
received but the invoice may still have to come from the seller.The Purchases Account will
therefore be understated, while the period-end stock check will include the goods in the
value of the closing stock. In addition, creditors will be understated in the Purchases Ledger.
The effects will be that:
●
●
the cost of goods sold will be understated, resulting in an overstated gross profit
and overstated net profit;
in the balance sheet, creditors will be understated, while capital (through the addition
of net profit) will be overstated.
The adjustment for this at the period-end would therefore be to debit the Purchases
Account and credit the creditor’s account with the amount of the anticipated invoice.The
account entries should be supported by a journal entry. If, for some reason the amount in
the invoice (when it is received) is different from the amount shown in the adjustment, then
a further adjustment for the difference in amount has to be made. For examination purposes,
if Trading Account and balance sheet adjustments are required, the candidates should make
it clear that they are including the amount in their figures, ie it should not be lost in the
total figure.
Step 3
Aim: to reinforce understanding and practice in making year-end adjustments in the
preparation of final accounts
1 Explain that, at the stage of preparing final accounts from a trial balance, the students
should keep in mind that, with the trial balance in agreement, a position of balance
exists at the start of drafting the final accounts. Therefore, if any adjustment has to be
made, the student should always look for 2 effects: a debit adjustment and a credit
adjustment. An adjustment for an expense prepayment of £100 will reduce total
expenditure in the Profit & Loss Account and will also create an asset balance for the
expense prepaid (debit effect). The matching effect will be an increase of £100 in net
profit and consequently in the amount of capital (credit effect).
2 Copy and hand out or show exercise T/23.1* in the Appendix (page 299) on the
overhead projector. Ask the students to work through the exercise and give them
guidance on method and the particular items.
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Final accounts and adjustments further considered
Remind the students that the techniques recommended in Lesson 7 for marking each
item with its position in the final accounts should be followed here.
After the students have had time to scan the question, review the adjustments one by
one, pointing out the two-fold aspect of each adjustment:
(1)(a) The increase in each depreciation provision is charged to the Profit & Loss
Account, which reduces the net profit;
(b) this decrease is matched by a reduction in the figure for fixed assets.
(2)(a) Closing stock, as a deduction, reduces the cost of goods sold;
(b) therefore the gross profit is increased and, as a result, net profit is increased.
(3)(a) The revised provision for doubtful debts at 2% of debtors, ie 2% of
£35,000 = £700 less the existing provision of £600 = an increase of £100
which is charged to the Profit & Loss Account which reduces net profit by £100;
(b) in the balance sheet, the smaller net assets figure (ie from a reduced figure for net
debtors) is matched by a reduced addition of net profit to capital.
(4)(a) £520 is added to motor-vehicle running expenses and £420 is added to heating
and lighting in the Profit & Loss Account, so reducing the net profit;
(b) this reduction is matched in the balance sheet by 2 accrual items included under
liabilities.
(5)(a) Rates and insurances in the Profit & Loss Account is reduced by £120, making
the net profit £120 more;
(b) in the balance sheet, the increased net profit addition to capital is matched by an
item, ‘rates and insurances prepaid’, among the current assets.
Note
The adjusted entries are highlighted in the solution given in T/23.1A.
3 Copy and hand out or show exercises T/23.2 and T/23.3 in the Appendix (pages 302–3)
on the overhead projector.Ask the students to work through them. Note that in T/23.3,
item (6), the Sales Ledger figure of £370 is set off against the Purchases Ledger figure
of £4,096, resulting in a net figure of £3,726.
Step 4
Aim: to be able to prepare Trading and Profit & Loss Accounts in vertical format
1 Explain that the practice is now well established of preparing Trading and Profit & Loss
Accounts in vertical format. Stress that the double entry is maintained; only the
presentation is different.
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Final accounts and adjustments further considered
2 Illustrate vertical format on the board or overhead projector with the Trading and Profit
& Loss Account for J Salmon for the year ended 30 June Year 6 (see exercise T/23.1*,
page 299), shown below.
J Salmon
Trading and Profit & Loss Account
for the year ended 30 June Year 6
£
Sales
less Sales returns
less Cost of goods sold:
Stock, 1 Jul Yr 5
Purchases
less Purchases returns
£
370,000
3,400
£
366,600
15,700
263,500
7,300
less Stock, 30 Jun Yr 6
256,200
271,900
17,400
254,500
Gross profit
112,100
add Discount received
1,600
113,700
Depreciation:
Motor vehicles
Fixtures and fittings
Discount allowed
Bad debts
Provision for doubtful debts
Rent
Motor-vehicle running expenses
Rates and insurances
Salaries
Lighting and heating
Net profit
20,000
8,200
28,200
2,300
650
100
12,000
3,870
3,300
12,300
4,350
67,070
46,630
3 Ask the students to rewrite the Trading and Profit & Loss Account for exercise T/23.3
in vertical format.
Step 5
Aim: to appreciate and be able to apply the basic rule for stock valuation
1 Remind students of the significance of the value placed on closing stock. Show that:
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Final accounts and adjustments further considered
the value of closing stock
which in turn affects
affects cost of goods sold
gross profit
which then affects
net profit
with balance sheet
consequences
asset value and
amount of capital
2 Point out that (closing) stock is usually valued at the end of a trading period (generally
a year). Valuation involves:
(a) a check on and count of the items in stock, to allow for items lost, stolen, that have
physically deteriorated, or that are otherwise unsaleable;
(b) placing a value per item on the stock.
Then
total stock value = number of items held × stock value per item
Each item of stock is valued according to the rule of valuing at the lower of:
●
cost price
or
●
net realizable value.
3 Tell the students that profit should not be anticipated, ie it should not be included in
the accounts until the goods concerned have actually been sold. Net realizable value is
defined as the selling price less the costs of getting the goods into a saleable condition.
This means, for example, that costs incurred for repairing damaged goods before they
can be sold must first be deducted.
4 Emphasize that the result of applying the rule of valuing at the lower cost price or net
realizable value is that stock is cautiously valued. A lower figure for closing stock means
a higher ‘cost of goods sold’ and therefore a lower gross profit. This is known as being
‘prudent’.
5 Illustrate how to apply the basic rule of stock valuation by showing the example opposite
on the board or overhead projector.
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Final accounts and adjustments further considered
Example
Andy Struddles has valued his stock at 31 December Year 3 at cost £6,340. Included in
this figure are items for which the stock value is under review.
●
●
●
●
●
●
Item 1 cost £410.The likely selling price has fallen from £590 to £530.
Item 2 cost £290. Its normal selling price is £350 but it is now expected to sell for
only £270.
Item 3 cost £330.The item now has no sale or scrap value.The normal selling price
is £450.
Item 4, which cost £215, has been damaged and cannot be repaired. Its normal selling
price is £280 but it is now expected to sell for only £220.
Item 5 cost £170. Its normal selling price was £250 but this had been reduced in
November Year 3 to £190.
Item 6, which cost £520, has been damaged and is to be repaired at a cost of £110.
Once repaired it is expected to sell for £570.
Andy Struddles
Revised stock valuation
at 31 December Year 3
Pre-revised stock valuation
£
6,340
Item 1
Valued at cost. The stock value is unchanged. The likely selling price
is well above this figure.
Item 2 Valued at net realizable value. The expected selling price has fallen
below the cost price, so that £270 becomes the stock valuation figure.
(20)
Item 3 Valued at net realizable value. The stock value has fallen to zero.
This will be written off.
(330)
Item 4 Valued at cost. Although the selling price has fallen it is still above
cost. The stock value is unchanged.
Item 5 Valued at cost. The stock value is unchanged. The reduced selling
price remains above cost.
Item 6 Valued at net realizable value. The expected selling price has fallen
below the cost price, so that £460 (ie £570 - £110) becomes the
stock valuation figure.
(60)
Revised stock valuation
5,930
Note
A detailed explanation is given here for each item. Usually a question would not require
such detail to be provided.
6 Explain that the type of question similar to the example above requires adjustment for
the difference in valuation. In examination answers, some candidates add the total net
realizable value to the existing stock figure, which results in a much higher figure than
they started with.
7 Show the significance of the stock valuation rule by displaying the example overleaf on
the board or overhead projector.
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Final accounts and adjustments further considered
Example
In Year 1 a trader purchases 8 machines at a cost of £1,000 each. During the course of
the year, 6 machines are sold at £1,500 each. The remaining 2 machines are valued at
the year end at cost price, ie at £1,000 each.The profit is calculated as follows:
Sales (6 × £1,500)
less Cost of goods sold:
Purchases (8 × £1,000)
less Stock (2 × £1,000)
Profit
£
£
9,000
8,000
2,000
6,000
3,000
The profit in Year 1 consists of £500 on each of the 6 machines sold. If the unsold
machines had been valued at the selling price, ie at £1,500, the profit for Year 1 would
have been calculated as follows:
Sales (6 × £1,500)
less Purchases (8 × £1,000)
less Stock (2 × £1,500)
Profit
£
£
9,000
8,000
3,000
5,000
4,000
The profit is therefore equal to £500 on each of the 8 machines when, in fact, only 6
have been sold. The profit on the 2 unsold machines has been ‘anticipated’. If the
machines are sold in Year 2 then no profit on their sale is recorded for that year even
though plenty of effort, time, and expense might have gone into selling them in that year.
The stock at the end of Year 1 becomes the opening stock for Year 2. By valuing
the stock in Year 1 at selling price (ie the higher figure), the opening stock for Year 2 is
increased. The cost of goods sold is also increased and gross profit is reduced. The
recorded position between the 2 years is incorrect and misleading.
8 Copy and hand out or show exercises T/23.4 and T/23.5 in the Appendix (pages 304–5)
on the overhead projector. Ask the students to work through them.
9 Explain the term ‘mark-up’. It is a term used in questions relating to stock valuation,
and it often causes students problems in the examination. ‘Mark-up’ can be defined as:
cost of goods sold
+ some running cost
+ profit
= mark-up
= selling price
10 Display Figure 23.1 (opposite) on the board or overhead projector to illustrate how
mark-up is obtained.
11 With reference to Figure 23.1, explain that goods may be ‘marked up’ from the cost
price to ensure that an amount is received towards running costs and, if possible, to make
some net profit. For example, if the cost price of a product is £300 and the mark-up to
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Final accounts and adjustments further considered
selling price is 331/3 %, the selling price will be £400.The original cost portion can be
viewed as thirds.The extra 1/3 at the end means that there are now 4 thirds (4/3 ) instead
of 3 thirds ( 3/3 ).The mark-up or 1/3 on the cost price = 1/4 (25%) of the selling price.
Selling Price
Running cost
+ profit
Cost of goods sold
1
2
3
4
Mark-up 331/3 % = 1/3
Figure 23.1 Mark-up
12 Point out that the cost portion may also be viewed as quarters, fifths, and so on.
By adding the numerator to the denominator in the fraction of the cost price, the
denominator of the fraction in the selling price (the mark-up) can be obtained.Thus:
1
/3 on cost price = 1 + 3 = 1/4 of selling price
or
1
/3 on cost price = 1 + 4 = 1/5 of selling price
or
1
/5 on cost price = 1 + 5 = 1/6 of selling price
13 Copy and hand out or show exercise T/23.6 in the Appendix (page 306) on the overhead
projector. Ask the students to work through the exercise.
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Page 188
Lesson 24: Club and society accounts
Topic summary
●
●
●
●
●
●
The deficiencies of a Receipts & Payments Account
The presentation of an Income & Expenditure Account with regard to the distinctive
features of club or society accounts
The suitable and effective presentation of subsidiary income and expense information
The calculation of the accumulated fund of a club or society
The presentation of a balance sheet of a club or society
The correct recording of amounts received through donations
Extended Syllabus references
21.1 The differences between a Receipts & Payments Account and an Income &
Expenditure Account
21.2 The preparation of an Income & Expenditure Account from a list of balances or
from a Receipts & Payments Account (both with supporting data)
21.3 The suitable grouping of associated items of income and expenditure within an
Income & Expenditure Account
21.4 The preparation, if required, of an ancillary account for trading activities, eg
Refreshments Account, and the carrying of the surplus/deficit into the Income
& Expenditure Account
21.5 The preparation of the balance sheet of a club or society
21.6 The calculation, if necessary, of the amount of the Accumulated Fund
Many candidates will have personal experience of club or society accounts, whether as club
member recipients of the accounts or whether in helping to prepare the accounts. This
experience can be drawn upon when teaching this topic. Unfortunately, though, club
accounts are often not prepared according to good accounting principles.
Questions on this topic can be set with various kinds of starting information.The questions
usually start from either a trial balance or a Receipts & Payments Account. Plenty of care
is needed to answer the questions and some distinctive terms should be learned. Club
accounts, nevertheless, are based on the same accounting principles as those for a business.
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Club and society accounts
Step 1
Aim: to recognize the deficiencies of a Receipts & Payments Account
1 Explain the nature of a Receipts & Payments Account, ie that it represents a summary
(in debit and credit form) of cash/bank transactions for a given period.
2 Display the example of a Receipts & Payments Account that follows on the board or
overhead projector.
Example
Linkwell Social Club
Receipts & Payments Account
for the year ended 31 December Year 9
Receipts
£
Balance at bank, 1 Jan Yr 9
Subscriptions
received:
Year ended 31 Dec Yr 8
420
31 Dec Yr 9
4,100
31 Dec Yr 10
240
£
870
4,760
5,630
Payments
Hire of rooms
Printing and stationery
Purchase of video equipment
Hire of films
Annual social
Visit to Bruges
Balance at bank, 31 Dec Yr 9
£
1,860
570
1,160
320
490
380
850
5,630
3 Point out that the 2 sides of the account relate to the debit and credit of a cash or bank
account.The amounts, however, are item totals for the year and not individual transaction
entries.
Ask the students to identify the weaknesses of a Receipts & Payments Account.
The weaknesses are that:
●
●
●
●
there is no allowance for accruals and/or prepayments, eg subscriptions are included
for Years 8 and 10;
no account is taken of capital expenditure as distinct from revenue expenditure, eg the
video equipment is fully charged to Year 9 even though it may well be in use for
several years;
by itself the Receipts & Payments Account is incomplete: there is no mention of
assets owned other than those mentioned in the account;
there is no mention of liabilities and, unfortunately, the Receipts & Payments Account
is sometimes the only account statement issued to members.
Regarding the third and fourth points, assets and liabilities should be dealt with separately,
ie in a balance sheet. The club or society members also need to know by means of
the balance sheet whether the capital has increased or decreased over the period and
why this is so.
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Page 190
Club and society accounts
Step 2
Aim: to be able to present an Income & Expenditure Account with regard to the
distinctive features of club or society accounts
1 Explain that the Income & Expenditure Account is used by clubs and societies, ie
non-profit-making organizations, as a replacement for the Profit & Loss Account. The
account has certain distinctive features, but it is constructed on similar principles to the
Profit & Loss Account. It incorporates adjustments for:
●
●
●
accruals
prepayments
provision for depreciation of fixed assets.
Thus, the reason for using an Income & Expenditure Account is to include only ‘true’
income & expenditure for a period, in order to obtain a result that correctly reflects the
activities of the club or society for the period.
2 Tell the students that, like the Profit & Loss Account, the Income & Expenditure
Account is part of the double-entry system: the period totals for income and the various
expenses are transferred to it from the General Ledger.
3 Emphasize that the final accounts issued to members of clubs or societies should be:
●
●
●
meaningful
relevant
easily understood.
Many club members may have little if any knowledge of accounting. They should be
supplied with statements that are informative and yet easily read.The members should
not have to search for separate pieces of information and then have to put them
together to form a complete financial picture.Therefore, matters relating to a particular
topic should be brought together, ie items should be appropriately ‘grouped’.
4 Illustrate how to present an Income & Expenditure Account by showing the example
opposite on the board or overhead projector.
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Page 191
Club and society accounts
Example
Tattenham Sports Club
Trial balance at 31 December Year 4
Sports equipment at cost
Video equipment at cost
Provision for depreciation:
Sports equipment
Video equipment
Balance at bank
Subscriptions received
Rent payable
Insurance
Telephone and postage
General expenses
Surplus on annual dance
Accumulated fund
Dr
£
6,300
2,200
Cr
£
2,400
800
1,860
7,150
3,400
530
410
260
14,960
180
4,430
14,960
Additional information that applies at 31 December Year 4:
(1) subscriptions: £280 has been received in advance of Year 5; £360 is accrued due for
Year 4;
(2) rent payable accrued due amounted to £400;
(3) prepaid insurance £80;
(4) depreciation to be provided:
sports equipment – 20% on cost
video equipment – 121/2% on cost.
Required
An Income & Expenditure Account for Tattenham Sports Club for the year ended
31 December Year 4.
Note
Remind the students that capital expenditure items and liabilities are not included in this
account.They are shown in the balance sheet, which is dealt with on page 196.
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Page 192
Club and society accounts
Solution
Tattenham Sports Club
Income & Expenditure Account
for the year ended 31 December Year 4
Expenditure
Rent payable (+400)
Insurance (-80)
Telephone and postage
General expenses
Depreciation:
Sports equipment
Video equipment
Surplus of income
over expenditure
£
1,260
275
£
3,800
450
410
260
Income
Subscriptions
less received in advance
add accrued due for Year 4
Annual dance – surplus
£
7,150
280
6,870
360
7,230
180
1,535
955
7,410
7,410
5 Point out that a common mistake made by candidates is that they confuse this account
with the Receipts & Payments Account. Stress that income is entered on the credit side
of Income & Expenditure Account and expenditure on the debit side, as they are in the
Profit & Loss Account.
6 Subscriptions
Highlight the fact that in the above account, it is acceptable merely to state ‘7,230’
against subscriptions without any detail of adjustments. However, the students should be
warned that this method is unwise. Examiners like to award marks for correct workings,
if possible. If only the adjusted figure is given with no indication of the adjustments
made and that figure is incorrect, then no marks for workings can be awarded.
An alternative to showing adjustments within the Income & Expenditure Account is to
key the adjusted figures to workings shown clearly after the account.This practice can,
of course, be applied to other workings and is discussed further in Lesson 25.
7 Events
Clubs or societies may hold events or have special occasions, eg a dance, a social, a day
out, or a trip abroad.These events may be aimed at raising funds.The outcome may be
a surplus, which can boost club funds, or it may be a deficit where expenditure exceeds
income.These events might involve 2 or even 3 items that are classified as partly income
and partly expenditure.
The members would be interested in the result of any particular event, ie whether a
surplus or a deficit. It is therefore essential that these items are brought together, ie
‘grouped’. If the outcome is a deficit, the group should be positioned on the debit side;
if a surplus, the group should be on the credit side. Candidates often fail to position
groups correctly and consequently lose marks.
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Page 193
Club and society accounts
In the example on page 192, surplus on the annual dance is recorded as one entry only
in the trial balance, ie it is shown as the outcome.This entry could have been shown as
2 or more items. The best practice is for the students to develop the habit of looking
for appropriate groupings when presented with a question concerning Income &
Expenditure Accounts.The exercises in this lesson provide the opportunity for practice.
8 With reference to the Income & Expenditure Account above, draw attention to use of
the phrase ‘surplus of income over expenditure’. For Income & Expenditure Accounts,
this phrase replaces the term ‘net profit’ found in Profit & Loss Accounts. If expenditure
exceeds income, the phrase to use is ‘deficit, excess of expenditure over income’, not
‘net loss’.
9 Copy and hand out or show exercise T/24.1 in the Appendix (page 307) on the overhead
projector. Ask the students to work through the exercise.
Step 3
Aim: to be able to present subsidiary income and expense information suitably and
effectively
1 The presentation of subsidiary income and expense information has been referred to in
Step 2. Explain that this can be taken a stage further by using a separate account to deal
specifically with a club or society’s trading activities. The examination might require a
separate Trading Account to carry the trading activities. The Trading Account should
reach a profit or loss on trading which is then transferred to the Income & Expenditure
Account.A common and major mistake made by candidates is to fail to carry the trading
profit or loss into the Income & Expenditure Account or else to repeat the items already
included in the Trading Account in the Income & Expenditure Account.
Set out the correct sequence of the effect of trading and other activities:
Trading Account
£
Trading expenditure
Profit on trading c/d
£
Trading income
X1
Income & Expenditure Account
£
Various expenditure items
Surplus of income
over expenditure
Profit on trading b/d
£
X2
X3
2 Copy and hand out or show exercise T/24.2* in the Appendix (page 308) on the
overhead projector.Work through the exercise with the students. Stress that with T/24.2
capital expenditure items are not included in the account.
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Page 194
Club and society accounts
The item ‘subscriptions’ might involve making a number of adjustments.This situation
occurs in exercise T/24.3* in the Appendix (page 310), which also involves the
preparation of a separate Trading Account.Ask the students to work through the exercise.
Note
Advise the students to follow the requirements of the question closely. A separate
Trading Account should be provided in an examination answer only if it is specifically
required. Some candidates prepare one when it is not required – and forfeit marks by
preparing it incorrectly.
Step 4
Aim: to be able to calculate the accumulated fund of a club or society
1 Explain that instead of a Capital Account, a non-profit-making organization has an
‘accumulated fund’. Like a Capital Account, the fund represents the difference between
assets and liabilities.Therefore,
assets = capital + liabilities
is replaced by
assets = accumulated fund + liabilities
2 Illustrate how to calculate an accumulated fund by showing the following example on
the board or overhead projector.
Example
The following receipts and payments account has been prepared for the Bloxmore
Travel Group for the year ended 31 December Year 5:
Receipts
Balance at bank
Cash in hand
Subscriptions for Year 5
Interest on bank account
Subscriptions for Year 6
£
1,020
48
2,760
32
75
3,935
Payments
£
Refreshments
182
Rent of room
1,680
Travelling expenses
64
Postage, printing and stationery
53
Expenses for guest speakers
810
Hire of films
78
Cash in hand
82
Balance at bank
986
3,935
Additional information:
Subscriptions in arrears
Rent accrued due
Stock of stationery
194
31 December
Year 4
£
–
40
18
31 December
Year 5
£
60
50
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Page 195
Club and society accounts
The calculation of the accumulated fund at 1 January Year 5 is as follows:
Balance at bank
Cash in hand
Stock of stationery
£
1,020
48
18
less Rent accrued
1,086
40
£
1,046
3 Ask the students to prepare the Income & Expenditure Account for Bloxmore Travel
Group in vertical format for the year ended 31 December Year 5. This Income &
Expenditure Account is shown below.
Bloxmore Travel Group
Income & Expenditure Account
for the year ended 31 December Year 5
Income
Subscriptions
add accrued due Year 5
Interest on bank account
£
2,760
60
less Expenditure
Refreshments
182
Rent of room (1,680 - 40 + 50)
1,690
Travelling expenses
64
Postage, printing and stationery
(53 + 18 - 15)
56
Expenses for guest speakers
810
Hire of films
78
Excess of expenditure over income (deficit)
£
2,820
32
2,852
2,880
(28)
Step 5
Aim: to be able to present a balance sheet of a club or society
1 As a straightforward example, work through the balance sheet for Bloxmore Travel
Group (overleaf) with the students. Carefully explain each item.
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Page 196
Club and society accounts
Bloxmore Travel Group
Balance sheet at 31 December Year 5
Current assets
Stock of stationery
Subscriptions accrued due
Bank balance
Cash in hand
less Amounts due within 1 year
Rent accrued due
Subscriptions received for Year 6
£
£
15
60
986
82
1,143
50
75
Accumulated fund
Balance at 1 Jan Yr 5
less Deficit for Yr 5
125
1,018
1,046
28
1,018
2 Refer the students to the example in Step 2 (pages 191–2). The items not yet marked
off should be brought into the balance sheet for Tattenham Sports Club at 31 December
Year 4.The balance sheet is presented below in vertical format.
Tattenham Sports Club
Balance sheet at 31 December Year 4
Fixed Assets
Sports equipment
Video equipment
Cost
£
6,300
2,200
8,500
Current Assets
Subscriptions accrued due
Prepaid insurance
Bank
less Amounts due within 1 year
Rent
Subscriptions in advance
Accumulated
depreciation
£
3,660
1,075
4,735
Net book
value
£
2,640
1,125
3,765
360
80
1,860
2,300
400
280
680
1,620
5,385
Financed by:
Accumulated fund
add Surplus of income over expenditure
4,430
955
5,385
3 Refer the students back to exercise T/24.1 and ask them to prepare the balance sheet
of the Southern Jazz Club.
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Page 197
Club and society accounts
Step 6
Aim: to be able to record correctly amounts received by a club or society through
donations
Explain that a donation is a gift of money to an organization.There are two ways in which
a donation can be recorded in the books of account:
(a) as income in the Income & Expenditure Account;
(b) by adding the amount to the accumulated fund in the balance sheet, ie ‘capitalizing’ it.
If the amount is small it is more likely, that method (a) will be used.
Note
In any examination question involving a donation, the candidates will be told if it is to be
capitalized. If there is no specific instruction, the amount should be placed to the credit of
Income & Expenditure Account.
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Page 198
Lesson 25: The presentation of answers
This lesson is devoted to bringing together points regarding the layout and presentation of
examination answers. It is often evident that candidates understand the subject matter of a
question but throw away vital marks by overlooking or disregarding key points of presentation.
Attention to the appearance of the answers could well make all the difference between an
overall fail or pass.
A number of matters are highlighted, regarding presentation, that could be introduced into
the course at appropriate stages.These points can be particularly related to the requirements
of worked questions. However, it is advisable to reinforce them for the concluding stages
of the course and when finally helping the students to prepare for the examination itself.
1 Ledger accounts
The correct description must be shown for each debit and credit entry.The rule is that
this should be the name of the related account, ie where the double entry is completed.
Whenever possible, the date should be included as part of an entry.When balancing an
account, the double entry should be completed by bringing down the balance.The date
shown should be the first day of the next accounting period.
2 Layout of final accounts
For the Trading and Profit & Loss Account and balance sheet, vertical presentation is
purely optional and the students will not lose marks by using horizontal layout.
However, the balance sheet, in particular, can often be presented more effectively in
vertical format.
3 The difference between an account and a statement
This difference needs to be fully stressed. If a statement is required, it must not be
presented in account form. For an example of a statement, see ‘Andy Struddles: revised
stock valuation at 31 December Year 3’ in Lesson 23, page 185.
A suitable heading should always be provided for a statement. Where an account is
specified as being required, it must be in proper account format with debit and credit.
Running balance format is usually acceptable, as long as the debit and credit columns
are clearly marked with Dr and Cr respectively, and the cumulative (updated) balance is
clearly shown as well (either Dr or Cr).
Vertical presentation of a Trading and Profit & Loss Account effectively becomes a
statement, but that is acceptable.The balance sheet is a statement anyway.
4 Presentation in columns (‘columnar presentation’)
The 3-column Cash Book is probably the most familiar example.This should be shown
in the recognized sequence as follows:
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Page 199
The presentation of answers
Dr
Discount
allowed
£
Cr
Cash
£
Discount
received
£
Bank
£
Cash
£
Bank
£
Another example could be as follows:
Year 1
Year 2
Year 3
A
B
C
A question might specify this layout. If so, an answer should keep to the instructions and
not show something totally different, as may sometimes be the case.
5 Workings
Workings should be clearly shown. They should not be unnecessarily complicated.
Thus, if an adjustment is made to the figure of ‘rent payable’ in the Profit & Loss
Account, it is sufficient to show the adjustment as follows:
£
13,600
Rent payable (16,000 - 2,400)
The examiner can spot the working straightaway instead of having to search it out at a
more distant point.
If, however, the adjustment of an item has to be more complicated, workings (W1 W2
and so on) should be shown underneath the main account but ‘keyed’ to it, eg:
Profit & Loss Account
£
£
W1
Rent & rates
12,130
Various other entries
X
Gross profit b/d
X
X
X
X
Net profit
X
X
W1
X
X
X
X
X
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Page 200
The presentation of answers
6 Spacing
The spacing of examination answers often leaves much to be desired. Sometimes work
is crammed together within the first 3 or so pages of the answer book and becomes
difficult to read. Sensible spacing comes with practice and some guidance.
Where work is cancelled, it should be struck through with a bold diagonal line. If part
of the answer is shown later on in the answer book, the earlier stage of the answer
should clearly signal the fact.
Work often lacks legibility because candidates use too light a shade of ink. Dark blue or
black inks are strongly recommended. Pencil should never be used to write answers to
questions in this examination.
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Page 201
Appendix 1: Exercises, some worked solutions,
and support material
T/1.1
State the effect on a balance sheet of each of the following transactions, in each case stating
which assets and/or liabilities are affected.
(1) Purchase of goods by cheque £350.
(2) Sale of goods for cash £290.
(3) Purchase of office furniture from D Jackson on credit £318.
(4) Repayment by cheque of £1,500, previously borrowed from T Walls.
(5) The receipt of a cheque for £965 from a debtor, F Wiles.
(6) Purchase of postage stamps for £11 in cash.
(7) Payment by cheque of £617, due to T Gates, creditor.
T/1.2
State the effect on a balance sheet of selling a computer for £3,600:
(i) if the purchaser paid by cheque;
(ii) if it were sold on credit;
(iii) if £2,000 were paid by cheque on account and if the remainder were on credit.
T/1.3
Draw up A Grant’s complete balance sheet from the following incomplete data at 31 March
Year 4, including any missing items:
Creditors
Goods
Debtors
Cash at bank
Loan from J Tesco
Motor vehicle
Office equipment
Fixtures and fittings
£
3,970
5,160
4,250
2,380
3,500
5,600
3,400
2,870
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Page 202
Appendix 1: Exercises
T/1.4
Enter the following transactions into the accounts of K Morgan:
Year 8
1 Aug
3 Aug
7 Aug
12 Aug
16 Aug
19 Aug
25 Aug
28 Aug
30 Aug
Started business with £15,000 in cash
Transferred £14,200 of the cash into a newly opened business bank account
Bought goods on credit from B Fury for £760
Bought office furniture, for £390, paid by cheque
Sold for cash £125-worth of goods that had cost the same amount
Purchased a lease on premises, for £8,200 paid by cheque
Bought stationery for £27 in cash
Paid B Fury the amount owing
Received from N Lawson a cheque for £2,000, as a loan to the business
T/1.5
R Lines has the following items in his balance sheet on 31 October Year 3:
Cash at bank
Debtors
Goods
Creditors
Motor vehicle
Office equipment
Fixtures and fittings
Loan from T Clasp
£
1,615
3,740
4,850
2,860
6,400
4,100
2,200
4,000
During November Year 3, R Lines:
●
●
●
●
banked cheques received from debtors, amounting to £2,900;
paid creditors £2,060 by cheque;
bought goods on credit for £1,300;
sold on credit goods that had cost £1,450 for the same amount.
Required
Prepare the balance sheet of R Lines at:
(i) 31 October Year 3
(ii) 30 November Year 3.
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Page 203
Appendix 1: Exercises
T/2.1
Beside each of the details in the table, state:
(i) the name of the account to be debited;
(ii) the name of the account to be credited.
Account
debited
Account
credited
Account
debited
Account
credited
(1) Bought goods on credit from T Ball
(2) Sold goods for cash
(3) Weighing equipment for use in the business
bought by cheque
(4) Returned some of the goods previously bought from T Ball
(5) Sold goods on credit to D Trill
(6) Some furniture for use in the business bought on credit
from T Doyle
T/2.2
Beside each of the details in the table, state:
(i) the name of the account to be debited;
(ii) the name of the account to be credited.
(1)
(2)
(3)
(4)
(5)
(6)
Sold goods on credit to A Darby
A Brittle, debtor, returns goods
A Darby pays his account by cheque
Goods are returned to T Zuck, creditor
The account of F Lane, a creditor, is paid by cheque
A Darby returns some of the goods previously sold to him
T/2.3
You are required to enter the transactions of B Lancaster in the appropriate accounts.
Year 9
2 Jan
5 Jan
9 Jan
13 Jan
16 Jan
22 Jan
25 Jan
27 Jan
30 Jan
Commenced business with £15,000 in the bank
Bought goods from T Minott on credit for £620
Bought office equipment by cheque for £940
Sold goods to R Lake on credit for £370
R Lake returned goods worth £80
Sent cheque for £350 to T Minott on account
Returned goods worth £120, to T Minott
Sold goods for £90 in cash
Purchased goods from T Marner on credit for £430
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Page 204
Appendix 1: Exercises
T/2.4
You are required to enter the transactions of R Quarnby in the appropriate accounts.
Year 5
3 Sep
6 Sep
8 Sep
11 Sep
13 Sep
17 Sep
20 Sep
24 Sep
27 Sep
29 Sep
Bought goods from A Little on credit for £846
Sold goods for £73 in cash
Bought motor vehicle by cheque for £4,300
Sold goods to H Keen on credit for £380
H Keen returned goods worth £83
Returned goods to A Little worth £143
Received cheque for £60 from H Keen on account
Bought office furniture by cheque for £365
Sent cheque to A Little in settlement of account
Sold goods to J Strong on credit for £412
T/3.1
In the column beside each of the details in the table, state which account is to be debited
and which account is to be credited.
Account
debited
(1)
(2)
(3)
(4)
(5)
(6)
Account
credited
Bought goods for cash
Paid creditor the amount owing by cheque
Bought office equipment on credit from Office Services Ltd
Paid rent in cash
Sold goods for cash
F Tracey, debtor, paid her account by cheque
T/3.2
In the column beside each of the details in the table, state which account is to be debited
and which account is to be credited.
Account
debited
(1)
(2)
(3)
(4)
(5)
(6)
(7)
204
Received cheque from T Ward as a loan
Sold goods on credit to J King
Paid telephone account by cheque
Sold office furniture for cash
Paid insurance by cheque
Bought goods on credit from R Veal
A customer, B Trent, returned goods
Account
credited
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Appendix 1: Exercises
T/3.3
Record the following in accounts:
Year 5
1 Jul
3 Jul
7 Jul
9 Jul
11 Jul
12 Jul
14 Jul
16 Jul
19 Jul
20 Jul
22 Jul
25
26
28
30
31
Jul
Jul
Jul
Jul
Jul
Jen Ling started in business with £17,000 in a new bank account
Purchased goods from K Merrit on credit for £620
Returned goods to K Merrit worth £45
Paid rent by cheque for £310
Drew £130 from bank for office cash
Bought office furniture by cheque for £420
Sold goods to T Larkspur on credit for £560
T Larkspur returned goods worth £65
Purchased stationery for £34 in cash
Sold goods for £370, paid by cheque
Bought a computer for use in the business for £3,500 from Comtec Ltd,
£1,000 of which was paid by cheque, with the remainder on credit.
Drew from bank £360 in cash for office
Paid wages in cash, £330
Sold goods to T Larkspur for £850 on credit
Received cheque from T Larkspur for the amount owing on 17 July Year 5
Paid insurance by cheque for £270
T/3.4
Record the following in accounts:
Year 3
1 Oct
2 Oct
4 Oct
7 Oct
9 Oct
10
12
13
14
16
18
20
21
22
Oct
Oct
Oct
Oct
Oct
Oct
Oct
Oct
Oct
24
26
28
30
31
Oct
Oct
Oct
Oct
Oct
Choi Wing started in business with £21,000 in cash
Paid £19,000 cash into a newly opened business bank account
Purchased goods from N Tucker on credit for £850
Bought office furniture by cheque for £930
Bought a fax machine for use in the business for £2,500 from Oftech Ltd,
£1,000 of which was paid by cheque with the remainder of the account on
credit
Returned goods worth £70 to N Tucker
Paid wages in cash, £150
Sold goods to K Francis on credit for £590
Paid insurance by cheque for £280
Choi Wing drew £350 from bank for private use
Purchased stationery for £210 in cash
K Francis returned goods worth £80
Bought goods from B Minott on credit for £380
Sold to A Jenkins some office furniture bought for £200 on 7 October:
received a cheque for £30, with the balance of £170 on credit
Sent cheque to N Tucker to settle the account
Paid wages in cash, £180
Received cheque from K Francis in settlement of the amount owing
Choi Wing drew £430 from bank for private use
Sold goods on credit to R Flinn for £360
205
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Page 206
Appendix 1: Exercises
T/4.1
(a) Balance the following account:
Ching Wong
Year 4
6 May Returns outwards
£
80
Year 4
2 May Purchases
9 May Purchases
17 May Purchases
£
730
315
250
(b) How would you describe the balance you have just entered?
T/4.2
Enter the following into debtor and creditor accounts only. Balance each account at 31 October
Year 3 and bring down the balances.
Year 3
2 Oct
6 Oct
9 Oct
12 Oct
15 Oct
18 Oct
20 Oct
21 Oct
23 Oct
26 Oct
27 Oct
29 Oct
206
Bought goods from F Swain on credit for £480
Sold goods to N Knight on credit for £215
Returned goods to F Swain that had cost £62
Bought goods from A Hinter on credit for £390
N Knight returned goods which she had bought on 6 October for £45
Returned goods to A Minter that had cost £65
Received cheque for £80 from N Knight in part payment
Sold goods to W Mull on credit for £535
Sent cheque for £418 to F Swain
W Mull returned goods that he had bought on 21 October for £90
Sold goods to N Knight on credit for £383
Received cheque for £70 on account from W Mull
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Page 207
Appendix 1: Exercises
T/4.3
This bank account is an example of running balance format.
Bank account
Year 7
1 Mar
4 Mar
7 Mar
11 Mar
14 Mar
18 Mar
20 Mar
23 Mar
25 Mar
26 Mar
28 Mar
30 Mar
31 Mar
Debit
£
Balance
Insurance
Sales
Drawings
Purchases
Wages
Sales
Machine repairs
L Logan
Wages
Sales
Rent
Balance
Credit
£
300
740
200
450
300
860
700
570
380
920
450
Balance
£
1,316
1,016
1,756
1,556
1,106
806
1,666
966
1,536
1,156
2,076
1,626
1,626
Dr
Dr
Dr
Dr
Dr
Dr
Dr
Dr
Dr
Dr
Dr
Dr
Dr
Note
The above is not a representation of statements issued by banks to their customers. It is of
an account drawn up and maintained by the customer.
T/4.4
The following transactions are to be entered in (two-sided) accounts:
Year 5
1 Apr
2 Apr
5 Apr
9 Apr
12 Apr
14 Apr
16 Apr
18 Apr
21 Apr
24 Apr
25 Apr
28 Apr
30 Apr
Chan Lee commenced business with £12,000 in cash
Transferred £11,000 in cash into a bank account
Purchased goods from D Styles on credit for £830
Bought office furniture for £250 in cash
Sold goods to S Wick on credit for £570
Returned goods worth £75 to D Styles
Paid rent by cheque for £350
Purchased office stationery for £30 in cash
Chan Lee made drawings in cash for £140
Paid insurance by cheque for £170
Sold goods to S Wick on credit for £490
Purchased goods from D Styles on credit for £560
Sent cheque to D Styles for £755
207
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Page 208
Appendix 1: Exercises
T/4.5
Against each of the listed items, tick () either the debit column or the credit column
according to which side of the trial balance you would expect the item to appear.
Debit
Office equipment
Creditors
Insurance
Cash
Rent payable
Debtors
Sales
Rent receivable
Drawings
Motor vehicle
Loan from F Lang
Capital
Wages
Premises
T/4.6
On 30 June Year 4, D Lamb had the following account balances:
Debtors
Creditors
Rent
Motor vehicle
Loan from A Green
General expenses
Purchases
Sales
Cash at bank
Wages
Drawings
Fixtures and fittings
Capital
£
2,530
3,670
1,400
5,300
2,500
1,040
3,650
5,980
7,900
2,740
420
6,800
19,630
Required
Prepare the trial balance of D Lamb at 30 June Year 4.
208
Credit
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Page 209
Appendix 1: Exercises
T/5.1*
(a) The following details relate to K Fox for the year ended 30 September Year 3:
£
15,800
8,500
4,300
Sales
Cost of goods sold
Running expenses
Required
A statement relating to K Fox showing the following for the year ended 30 September
Year 3:
(i) gross profit
(ii) total net profit.
(b) The following information is available relating to R Lott in respect of the year ended
31 December Year 2:
Sales
Income from other than trading
Cost of goods sold
Running expenses
£
26,900
1,200
9,300
12,400
Required
Prepare a statement relating to R Lott showing the following for the year ended
31 December Year 2:
(i) gross profit
(ii) total net profit.
T/5.1/A
(a)
K Fox
Income and profit
for the year ended 30 September Year 3
Sales
less Cost of goods sold
Gross profit
less Running expenses
Net profit
£
15,800
8,500
£
7,300
4,300
3,000
209
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Page 210
Appendix 1: Exercises
(b)
R Lott
Income and profit
for the year ended 31 December Year 2
Sales
less Cost of goods sold
Gross profit
add Non-trading income
£
26,900
9,300
£
17,600
1,200
18,800
12,400
6,400
less Running expenses
(Total) Net profit
Note
The above are statements – not accounts.
T/5.2
T Avis
Trial balance at 31 December Year 5
Purchases
Sales
Debtors
Creditors
Rent payable
Office expenses
Lighting and heating
Rent receivable
Fixtures and fittings
Motor vehicle
Cash at bank
Cash in office
Drawings
Capital
Dr
£
5,160
Cr
£
6,320
750
910
700
360
420
450
800
1,600
1,040
50
800
11,680
4,000
11,680
Note
It is assumed that T Avis started in business on 1 January Year 5 by placing £4,000 in a
business bank account.Therefore, there is no opening stock. Stock at 31 December Year 5
was valued at cost at £2,100.This figure is due to be brought into the accounts of TAvis
after the agreement of the trial balance.
210
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Page 211
Appendix 1: Exercises
T/5.3
At the end of her first year’s trading, Shui Ling drafted the following trial balance.You are
required to draw up a Trading and Profit & Loss Account for the year ended 31 December
Year 4.
Shui Ling
Trial balance at 31 December Year 4
Purchases
Sales
Cash at bank
Wages
Debtors
Creditors
Rent
Motor vehicles
Insurance
Office equipment
General expenses
Fixtures and fittings
Drawings
Capital
Dr
£
19,800
Cr
£
32,360
3,960
7,510
3,680
2,100
3,700
12,400
390
5,400
520
3,800
4,300
65,460
31,000
65,460
Shui Ling valued her stock at 31 December Year 4 at cost at £4,650.
Note
A balance sheet is not required.
211
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Page 212
Appendix 1: Exercises
T/5.4
The following is the trial balance of Fred Trotter after his first year’s trading. You are
required to draw up a Trading and Profit & Loss Account for the year ended 30 June Year 8.
Fred Trotter
Trial balance at 30 June Year 8
Cash at bank and in office
Rent
Motor vehicles
Debtors
Creditors
Purchases
Wages
Sales
Fixtures and fittings
Sundry expenses
Premises
Drawings
Lighting and heating
Insurance
Capital
Dr
£
2,080
2,600
9,200
3,100
Cr
£
5,100
36,440
15,100
59,400
3,600
1,620
38,500
4,300
570
390
117,500
53,000
117,500
Stock at 30 June Year 8 was valued at £4,220.
Note
A balance sheet is not required.
T/6.1*
From the following details you are required to draw up a complete balance sheet for
Sai Yoon at 31 October Year 7, including any item that you believe to be missing.The balance
sheet should be in the correct format.
Loan from T Gaul, repayable 31 December Year 9, £4,000
Stock £3,980 Premises £42,000 Bank £3,130
Motor vehicle £7,100 Cash £110 Creditors £7,120
Debtors £7,800 Fixtures and fittings £2,750
212
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Page 213
Appendix 1: Exercises
T/6.1/A
Sai Yoon
Balance sheet at 31 October Year 7
£
Fixed Assets
Premises
Fixtures and fittings
Motor vehicle
Current Assets
Stock
Debtors
Bank
Cash
£
55,750
Capital
42,000
2,750
7,100
51,850
£
3,980
7,800
3,130
110
Amount due in more than 1 year
Loan: T Gaul, repayable
31 Dec Yr 9
4,000
Amount due within 1 year
Creditors
7,120
15,020
66,870
66,870
T/6.2*
With reference to the data in T/5.3 and the answer to it, draw up a balance sheet for Shui
Ling at 31 December Year 4.
T/6.2/A
Shui Ling
Balance sheet at 31 December Year 4
£
Fixed Assets
Fixtures and fittings
Office equipment
Motor vehicles
3,800
5,400
12,400
21,600
£
Capital
Commencing balance
add Net profit
5,090
less Drawings
4,300
£
31,000
790
31,790
£
Current Assets
Stock
Debtors
Bank
4,650
3,680
3,960
12,290
33,890
Amount due within
1 year
Creditors
2,100
33,890
213
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Page 214
Appendix 1: Exercises
T/6.3*
By reference to the data of T/5.4 and the answer to it, draw up a balance sheet for Fred
Trotter at 30 June Year 8.
T/6.3/A
Fred Trotter
Balance sheet at 30 June Year 8
£
Fixed Assets
Premises
Fixtures and fittings
Motor vehicles
38,500
3,600
9,200
51,300
£
Capital
Balance at 1 Jul Yr 7
add Net profit
less Drawings
£
53,000
6,900
4,300
2,600
55,600
Current Assets £
Stock
Debtors
Bank
4,220
3,100
2,080
9,400
60,700
Amount due within
1 year
Creditors
5,100
60,700
T/6.4*
(a) The ledger of Alison Sharpe includes the following balances at 30 September Year 4:
Debtors
Motor vehicle
Stock
Cash at bank
Cash in office
Creditors
Loan from T Wylie, repayable 30 Jun Yr 7
Fixtures and fittings
£
3,640
2,100
4,080
1,970
60
2,940
2,000
980
Required
Prepare a balance sheet for Alison Sharpe at 30 September Year 4, complete with the
balance of capital, which has not been shown above.
(b) On 1 October Year 4, Alison Sharpe purchased another motor vehicle for business use
for £2,600. She paid T Rolt £400 by cheque and the remainder of the amount was
on credit.
214
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Page 215
Appendix 1: Exercises
Required
(i) In ledger accounts, record the entries for the transaction.
(ii) State which one of the following effects this transaction will have:
(1)
(2)
(3)
(4)
(5)
an increase of current assets by £2,600
a decrease of current assets by £2,600
a decrease of current assets by £400
no effect on current assets
an increase of current assets by £2,200.
T/6.4/A
(a)
Alison Sharpe
Balance sheet at 30 September Year 4
£
Fixed Assets
Fixtures and fittings
Motor vehicle
£
7,890
Capital
980
2,100
Amount due in more than 1 year
Loan – T Wylie
(repayable 30 Jun Yr 7)
2,000
Amount due within 1 year
Creditors
2,940
3,080
£
Current Assets
Stock
4,080
Debtors
3,640
Bank
1,970
Cash
60
(b) (i)
Year 4
1 Oct
1 Oct
9,750
12,830
12,830
Motor Vehicle
Balance
Bank and T Rolt
£
2,100
2,600
Bank
Year 4
1 Oct
Balance
£
1,970
Year 4
1 Oct
Motor vehicle
£
400
Year 4
1 Oct
Motor vehicle
£
2,200
T Rolt
(ii) Answer = (3) a decrease of current assets by £400
215
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Page 216
Appendix 1: Exercises
T/7.1
Prepare a Trading and Profit & Loss Account for Lui Man for the year ended 31 December
Year 6 from the following details:
£
15,460
31,970
840
1,250
860
1,030
8,460
1,270
2,790
Purchases
Sales
Returns outwards
Returns inwards
Carriage inwards
Carriage outwards
Wages
General expenses
Stock at 31 Dec Yr 6
Note
Year 6 was Lui Man’s first year of trading.
T/7.2
T Avis
Trial balance at 31 December Year 6
Purchases
Sales
Carriage inwards
Debtors
Creditors
Rent payable
Office expenses
Lighting and heating
Rent receivable
Returns inwards
Returns outwards
Carriage outwards
Fixtures and fittings
Motor vehicle
Cash at bank
Cash in office
Stock at 1 Jan Yr 6
Drawings
Capital
Dr
£
9,260
13,050
430
1,170
1,750
1,100
590
610
450
480
340
380
900
1,600
1,230
70
2,100
1,100
21,020
Stock at 31 December Year 6 was valued at £2,450.
216
Cr
£
5,430
21,020
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Page 217
Appendix 1: Exercises
T/7.3
Using the following information, draw up a Trading and Profit & Loss Account for Chea
Yee for the year ended 31 May Year 4:
Stock at 31 May Yr 3
Purchases
Sales
Returns outwards
Returns inwards
Carriage outwards
Wages
Sundry expenses
Stock at 31 May Year 4
£
27,380
143,700
231,600
980
1,540
4,950
53,200
3,860
25,300
T/7.4
From the following information, draw up a Trading and Profit & Loss Account for G Crumb
for the year ended 31 October Year 7:
Sales
Returns outwards
Stock at 31 Oct Yr 6
Rent payable
Carriage outwards
Purchases
Returns inwards
Rent receivable
Wages
Lighting and heating
Carriage inwards
Office expenses
Stock at 31 Oct Yr 7
£
68,890
570
7,640
2,800
760
49,620
980
1,200
8,030
540
1,010
390
7,960
217
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Page 218
Appendix 1: Exercises
T/7.5: The end-of-year procedure
Purchases
Sales
Returns outwards
Returns inwards
Opening stock
Closing stock
account balances
transferred to
Trading Account
Gross profit to
Profit & Loss Account
Expense accounts
Other income
accounts
account
balances
transferred to
Profit & Loss Account
Net profit to
Capital Account
Drawings Account
Cash/bank account(s)
Debtor/creditor accounts
Asset accounts
Capital Account
Balanced, ie
balances c/d
on each account
Balance sheet
218
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Page 219
Appendix 1: Exercises
T/7.6
From the following trial balance of T Brackwell, prepare a Trading and Profit & Loss
Account for the year ended 31 July Year 8, together with a balance sheet at that date.
T Brackwell
Trial balance at 31 July Year 8
Purchases
Sales
Stock at 1 Aug Yr 7
Returns inwards
Returns outwards
Rent payable
Wages
Lighting and heating
Sundry expenses
Debtors
Equipment
Bank
Cash
Premises
Creditors
Loan from T Royal,
repayable 31 Jul Yr 13
Motor vehicles
Drawings
Capital
Dr
£
177,500
Cr
£
256,800
13,200
3,900
5,750
4,500
53,650
4,300
5,100
24,960
29,500
1,340
194
110,000
16,394
26,000
23,000
11,200
462,344
157,400
462,344
Stock at 31 July Year 8 was valued at £14,400.
219
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Page 220
Appendix 1: Exercises
T/8.1*
Philip Wilshaw, a sole trader, uses the following accounts in his books:
Fixtures and fittings
Rent
Motor vans
Light and heat
J Symes, a creditor
Purchases
Sales
Stock
T P Stanley, a debtor
Bank
Capital
Drawings
Required
Set out the following headings:
Account
Type of account
To be found in the
following ledger
List under the heading ‘Account’ each of the accounts given above, fill in the column ‘Type
of account’ and, in the last column, state the ledger in which you would find the account.
T/8.1/A
220
Account
Type of account
To be found in the
following ledger
Fixtures and fittings
Rent
Motor vans
Light and heat
J Symes, a creditor
Purchases
Sales
Stock
T P Stanley, a debtor
Bank
Capital
Drawings
Real
Nominal
Real
Nominal
Personal
Nominal
Nominal
Real
Personal
Real
Personal
Personal
General (or Nominal)
General (or Nominal)
General (or Nominal)
General (or Nominal)
Purchases (or Bought)
General (or Nominal)
General (or Nominal)
General (or Nominal)
Sales (or Debtors)
Cash Book
Private or General
Private or General
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Page 221
Appendix 1: Exercises
T/8.2*
Division of the
ledger
(A)
Type of account
(B)
Name of account
Sales Ledger
Purchases Ledger
General Ledger
Private Ledger
Required
(a) In column (A), state the type of accounts you would expect to find in each division of
the ledger.
(b) In column (B), against the General Ledger and Private Ledger, name 3 accounts
that might be included.
T/8.2/A
Division of the
ledger
(A)
Type of account
(B)
Name of account
Sales Ledger
Purchases Ledger
General Ledger
Personal/customers (or debtors)
Personal/suppliers (or creditors)
Impersonal: nominal or real
Private Ledger
Personal (private)
Wages, sales,
rent receivable, etc
Capital
Drawings
Trading and Profit & Loss
T/8.3*
(a) Set out the following table. In the right-hand column, enter the name of the ledger in
which each of the accounts is recorded.
Name of account
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Name of ledger
Drawings
T Lucan, creditor
Trading
Rent receivable
Fixtures and fittings
Wages
Capital
(b) Suggest 3 ways in which the Sales Ledger might be subdivided.
221
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Page 222
Appendix 1: Exercises
T/8.3/A
(a)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Name of account
Name of ledger
Drawings
T Lucan, creditor
Trading
Rent receivable
Fixtures and fittings
Wages
Capital
Private or General
Purchases (or Bought)
Private or General
General (or Nominal)
General (or Nominal)
General (or Nominal)
Private or General
(b) Answers to ways of subdividing the Sales Ledger might include:
●
●
●
●
●
alphabetically, eg by customer names;
numerically, in which customers are numbered individually, then grouped;
geographically, ie by sales areas;
on a product basis, ie according to product categories;
by type of customer, eg trade as opposed to private customers.
T/8.4
T Avis
Balance sheet at 31 December Year 6
£
Fixed Assets
Fixtures and fittings
Motor vehicle
Current Assets
Stock
Debtors
Bank
Cash
less Amounts due within 1 year
Creditors
Net current assets
£
900
1,600
2,500
2,450
1,170
1,230
70
4,920
1,750
3,170
5,670
Financed by:
Capital – balance at 1 Jan Yr 6
add Net profit
less Drawings
222
5,430
1,340
1,100
240
5,670
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Page 223
Appendix 1: Exercises
T/8.5*
From the following trial balance of J Penarth, prepare:
(i) a Trading and Profit & Loss Account for the year ended 30 April Year 8;
(ii) a balance sheet, in vertical format, at 30 April Year 8.
J Penarth
Trial balance at 30 April Year 8
Purchases
Sales
Premises
Stock at 1 May Yr 7
Rent
Returns inwards
Loan from R Jenks, repayable Yr 12
Debtors
Creditors
Wages and salaries
Carriage inwards
Cash at bank
Cash in office
Returns outwards
Insurance
Fixtures and fittings
Carriage outwards
Drawings
Capital
Dr
£
154,300
Cr
£
212,600
48,000
39,650
7,200
615
20,000
32,290
18,160
22,400
915
6,670
265
1,430
475
6,400
3,510
16,500
339,190
87,000
339,190
Stock at 30 April Year 8 was valued at £41,080.
223
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Page 224
Appendix 1: Exercises
T/8.5/A
(i)
J Penarth
Trading and Profit & Loss Account
For the year ended 30 April Year 8
£
Stock at 1 May Yr 7
Purchases
add Carriage inwards
£
39,650
154,300
915
155,215
less Returns outwards
1,430
less Stock at 30 Apr Yr 8
Cost of goods sold
Gross profit c/d
Rent
Wages and salaries
Insurance
Carriage outwards
Net profit
(ii)
Sales
less Returns inwards
153,785
193,435
41,080
152,355
59,630
211,985
211,985
7,200
22,400
475
3,510
26,045
59,630
Gross profit b/d
£
Fixed Assets
Premises
Fixtures and fittings
less Amounts due within 1 year
Creditors
Net current assets
£
48,000
6,400
54,400
41,080
32,290
6,670
265
80,305
18,160
62,145
116,545
less Amount due in more than 1 year
Loan from R Jenks, repayable Yr 12
20,000
96,545
Financed by:
Capital – at 1 May Yr 7
add Net profit
less Drawings
224
59,630
59,630
Balance sheet at 30 April Year 8
Current Assets
Stock
Debtors
Bank
Cash
£
212,600
615
211,985
87,000
26,045
16,500
9,545
96,545
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11:18 am
Page 225
Appendix 1: Exercises
T/9.1: The journey of a ‘drawn’ cheque
Year 4
T Royle (drawer)
7 May
cheque
sent to
P Sempster (payee)
receives cheque
8 May
T Royle credits
bank account
P Sempster debits
bank account
pays cheque into
account with
Derbyshire Bank
Chester branch
9 May
10 May
cheque
sent to
Derbyshire Bank
clearance centre
sent (with other
cheques) to
10 May
Albion Bank
clearance centre
11 May
Albion Bank
York East branch
charged against
account of T Royle
The journey of a ‘drawn’ cheque:
●
●
the cheque is drawn by T Royle (an account holder at Albion Bank,York East branch);
the cheque is made payable to P Sempster (an account holder at Derbyshire Bank,
Chester branch).
Note
The delay in clearance will increase if P Sempster (the payee) were to delay paying the
cheque into his account.
225
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11:18 am
Page 226
Appendix 1: Exercises
T/9.2
Multiple choice questions
(1) Which of the following are true of bank current accounts?
(a)
(b)
(c)
(d)
The account must not be overdrawn.
They provide the facilities for regular banking.
The transfer of funds requires the use of a cheque.
It may be shown in the books of the account holder as having a credit balance.
Choose the answer from the following:
(a) and (b)
(a) and (c)
(b) and (c)
(b) and (d)
(2) Which of the following are true of the standing-order method of payment?
(a)
(b)
(c)
(d)
It
It
It
It
is suited to payment of fixed amounts.
requires the use of a cheque.
can be cancelled by the payer.
gives the payee freedom to draw upon the bank account of the debtor.
Choose the answer from the following:
(a) and (b)
(b) and (d)
(a) and (c)
(b) and (c)
(3) Which of the following are not true of the direct-debit method of payment?
(a)
(b)
(c)
(d)
It is unsuited to the payment of wages and salaries.
Payments are always at pre-stated intervals.
It is suited to the payment of gas bills.
It is not intended for variable amounts.
Choose the answer from the following:
(a) and (b)
(a) and (c)
(b) and (c)
(b) and (d)
226
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Page 227
Appendix 1: Exercises
T/9.3*
Chandran Yin had the following balances on 1 October Year 9:
£
Cash 96
Bank 387 (Dr)
During October Year 9, she had the following transactions:
Year 9
3 Oct
5 Oct
8 Oct
13 Oct
20 Oct
23 Oct
27 Oct
Purchased stationery for £27 in cash
Received cheque from L Tarne for £312
Paid T Womble £95 by cheque
Sales for £117 in cash
Paid wages in cash, £87
Carriage outwards paid in cash, £32
Received cheque from T Lyle, £134
Required
Enter the balances and transactions in the 2-column Cash Book of Chandran Yin and
balance it at 31 October Year 9.
T/9.3/A
Chandran Yin
CASH BOOK
Year 9
1 Oct
5 Oct
13 Oct
27 Oct
Balances b/d
L Tarne
Sales
T Lyle
1 Nov Balances b/d
Cash
£
96
Bank
£
387
312
117
134
213
833
67
738
Year 9
3 Oct
8 Oct
20 Oct
27 Oct
31 Oct
Stationery
T Womble
Wages
Carriage outwards
Balances c/d
Cash
£
27
Bank
£
95
87
32
67
213
738
833
227
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Page 228
Appendix 1: Exercises
T/9.4*
Record the following in the 2-column Cash Book of W Towcester and balance the
accounts at the end of the month:
Year 6
1 Apr
Balances brought forward:
4
6
8
9
13
16
20
23
24
26
28
Paid rent by cheque
Cash sales
Purchased stationery for cash
Banked some office cash
Paid wages in cash
Drew from bank for office cash
Received cheque from N Vine
Sales for cash
Banked some office cash
Paid for cleaning in cash
Sent cheque to B Lines
Apr
Apr
Apr
Apr
Apr
Apr
Apr
Apr
Apr
Apr
Apr
Cash
Bank (Dr)
£
162
930
240
470
58
400
190
80
235
360
340
45
283
T/9.4/A
W Towcester
CASH BOOK
Year 6
1 Apr
6 Apr
9 Apr
16 Apr
20 Apr
23 Apr
24 Apr
Balances b/d
Sales
Cash C
Bank C
N Vine
Sales
Cash C
1 May Balances b/d
228
Cash
£
162
470
Bank
£
930
400
80
235
360
340
1,072
1,905
39
1,302
Year 6
4 Apr
8 Apr
9 Apr
13 Apr
16 Apr
24 Apr
26 Apr
28 Apr
30 Apr
Cash
£
Rent
Stationery
Bank C
Wages
Cash C
Bank C
Cleaning
B Lines
Balances c/d
Bank
£
240
58
400
190
80
340
45
39
1,072
283
1,302
1,905
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11:18 am
Page 229
Appendix 1: Exercises
T/9.5*
Prepare a 2-column Cash Book from the following transactions. Balance the Cash Book at
the end of the month.
Year 5
1 Nov
2 Nov
5 Nov
8 Nov
10 Nov
13 Nov
15 Nov
17 Nov
18 Nov
20 Nov
23 Nov
28 Nov
29 Nov
F Swaine started in business with £12,000 in cash
Placed £11,500 of cash in a newly opened business bank account
Bought motor vehicle for £4,200, paid by cheque
Sales for £860 in cash, which was banked the same day
Paid wages in cash, £270
Bought goods by cheque for £1,040
Paid carriage in cash, £43
Withdrew £130 from bank for office cash
Paid wages in cash, £290
Received cheque from T Dart for £315
Sales for £910 in cash, of which £700 was banked the same day
F Swaine withdrew £150 in cash for private use
Paid F Glubb £460 by cheque
T/9.5/A
F Swaine
CASH BOOK
Year 5
1 Nov
3 Nov
8 Nov
17 Nov
20 Nov
23 Nov
Capital
Cash C
Sales
Bank C
T Dart
Sales
1 Dec Balances b/d
Cash
£
12,000
Bank
£
11,500
860
130
210
315
700
12,340
13,375
87
7,545
Year 5
3 Nov
5 Nov
10 Nov
13 Nov
15 Nov
17 Nov
18 Nov
28 Nov
29 Nov
30 Nov
Bank C
Motor vehicle
Wages
Purchases
Carriage
Cash C
Wages
Drawings
F Glubb
Balances c/d
Cash
Bank
£
£
11,500
4,200
270
1,040
43
130
290
150
460
87 7,545
12,340 13,375
229
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11:18 am
Page 230
Appendix 1: Exercises
T/10.1
The following information relates to the business of J Mander:
Year 5
1 May Balances brought forward:
Cash
Bank (Dr)
Debtors –
–
Creditors –
–
A Croft
R Vine
T Dole
W Kone
£
93
1,040
440
350
280
300
11 May R Vine settled his account by cheque after deducting a 2% cash discount
13 May Purchased stationery for £56 in cash
18 May Settled the account of T Dole by cheque number 136214, after deducting a
21/2% cash discount
21 May Paid insurance by cheque number 136215 for £190
24 May A Croft settled his account by cheque, after deducting a 21/2% cash discount
28 May Withdrew £80 from bank (cheque number 136216) for office cash
30 May Settled the account of W Kone by cheque number 136217, after deducting a
3% cash discount
Required
Record these balances and transactions in the books of J Mander. Use a 3-column Cash
Book, ie which includes discount columns. Balance the Cash Book at 31 May Year 5 and
post the totals of the discount columns to the General Ledger.
230
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Page 231
Appendix 1: Exercises
T/10.2
Thelma Cook keeps a 3-column Cash Book for her business. The following information
refers to the month of March Year 6:
Year 6
1 Mar
2 Mar
3 Mar
5 Mar
8 Mar
9 Mar
11 Mar
13 Mar
16 Mar
18 Mar
20 Mar
22 Mar
25 Mar
26 Mar
27 Mar
29 Mar
30 Mar
31 Mar
31 Mar
31 Mar
31 Mar
Balances of cash and bank were £106 and £3,214 (Dr) respectively
Drew cheque number 10674, for rent of £250
Sales totalled £1,050, of which £950 was banked on the same day
Paid cleaning expenses of £35 from cash
Sales banked £1,680
Drew cheque number 10675, for purchases costing £1,200
Drew cheque number 10676 for £150, to replenish office cash
Cash from sales totalling £1,800 was banked
Paid postage of £50 from cash
Drew cheque number 10677 for £168, to pay a telephone bill
Paid £128 for stationery from cash
Drew cheque number 10678 for £150, to replenish office cash
Cash from sales totalling £2,108 was banked
Paid office expenses of £70 from cash
Drew cheque number 10679 for £2,000, to pay wages
Income from sales totalled £2,200, of which £2,000 was banked on the same day
Drew cheque number 10680 for £106, to pay a gas bill
Drew cheque number 10681 for £855 payable to D Coyne, in settlement of a debt of
£900
Drew cheque number 10682 for £494 payable to F Cox, in settlement of a debt of
£520
Received cheque for £720 from S Britton, in settlement of an amount of £750
Received cheque for £1,160 from D F Pratt, in settlement of an amount of £1,210
Required
Write up the 3-column Cash Book, bringing down the balances at 1 April Year 6.
231
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Page 232
Appendix 1: Exercises
T/10.3
On 1 November Year 4, the Cash Book of T Jackson, a sole trader, showed a debit balance
of cash in hand of £34 and a credit balance on bank account of £287.
Jackson prepared the Cash Book by entering the cheque-book counterfoils directly from
the bank paying-in book and by entering from a record of movements of cash in the office.
For the month of November Year 4, these showed respectively:
(1) Bank paying-in book
7
12
19
24
29
Nov
Nov
Nov
Nov
Nov
Cheque – K Lawton
Cash banked
Cheque – N West
Cash banked
Cash banked
£
153
425
373
420
360
B Thwaites
Electricity account
T Smith
Telephone account
C Lord
£
423
46
327
68
197
Cash sales
Cash sales
Cash sales
Taken for personal use
£
460
440
510
140
(2) Cheque-book counterfoils
8
14
18
22
26
Nov
Nov
Nov
Nov
Nov
(3) Record of movements of cash
11
23
29
30
Nov
Nov
Nov
Nov
All these transactions were entered by Jackson. He then received the bank statement, which
showed the following additional items for November Year 4:
11 Nov
15 Nov
21 Nov
29 Nov
Standing order payment: subscription to local trade association £25
T Drummond, a debtor of Jackson, settled his account by credit transfer £236
The account for servicing the heating system in Jackson’s office was settled by
direct debit £54
Jackson instructed the bank to pay monthly salary direct into an employee’s bank
account £340
Required
Prepare the cash and bank columns of Jackson’s Cash Book for November Year 4, entering
the information given in (1) to (3) above and balancing the cash and bank columns.Then
record the additional items obtained from the bank statement, showing the final balance at
the end of November.
(LCCIEB)
232
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Page 233
Appendix 1: Exercises
T/10.4
Ket Rampalla owns a small catering business. On 1 May Year 11, there was a credit balance
of £345 in the bank column of his Cash Book.
During May Year 11, he paid the following cheques into his bank account:
3
12
19
26
May
May
May
May
Keston Services
F Savage
Quantell Ltd
L Wright
Amount of
cheque
£
242
83
156
95
Cash discount
allowed
£
18
–
7
–
He also paid the following amounts from cash sales into his bank account:
6
13
20
27
£
585
614
603
526
May
May
May
May
He received the following remittances, which were paid directly into his bank account:
14 May
22 May
From Westerns Ltd
From Dugard & Wells
£
180
76
During the month, he drew the following cheques:
In favour of
5
11
15
21
28
May
May
May
May
May
Malata Foods
Kentish Supplies
Ambrostic Dairies
Kenton Electricals
Malata Foods
Amount of
cheque
£
507
335
261
68
283
Cash discount
received
£
25
–
8
–
14
In addition, the following took place:
(1)
(2)
(3)
18 May
19 May
23 May
(4)
29 May
Payment by direct debit to Wombles Linen Services
Bank charges
Payment by standing order of annual subscription to
Caterers’ Association
Bank interest charged
£
63
36
40
24
Required
(a) Prepare the bank and discount columns of the Cash Book of Ket Rampalla for May
Year 11, in date order, and balance the Cash Book at 31 May.
(b) Open the ledger accounts and post the totals of the discount columns of the Cash Book.
Include in your answer the name of the ledger in which the posting would be made.
233
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Page 234
Appendix 1: Exercises
T/11.1
From the following details, you are to:
(a) enter the transactions in the Sales Day Book;
(b) post the items to relevant accounts in the Sales Ledger;
(c) record the transfer to the Sales Account in the General Ledger at the end of the month.
Year 6
Credit sales to
Invoice no
£
2
5
12
18
23
29
F Dene
T Marchant
P Drummond
T Marchant
F Dene
S Field
3,516
3,517
3,518
3,519
3,520
3,521
258
312
406
194
425
538
Aug
Aug
Aug
Aug
Aug
Aug
T/11.2
From the following details, you are to:
(a) enter the items in the Sales Day Book;
(b) post the items to the relevant accounts in the Sales Ledger;
(c) record the transfer to the Sales Account in the General Ledger at the end of the month.
234
Year 6
Credit sales to
Invoice
no
List
price
Trade
discount
4
9
15
22
26
J Burton
W Thorne
A Glenn
J Burton
W Thorne
£
5,839
5,840
5,841
5,842
5,843
£
320
460
240
580
360
%
121/2
15
71/2
20
121/2
Sep
Sep
Sep
Sep
Sep
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Page 235
Appendix 1: Exercises
T/11.3
From the following details, you are required to:
(a) enter the items in the Purchases Day Book;
(b) post the items to the relevant accounts in the Purchases Ledger;
(c) record the transfer to the Purchases Account in the General Ledger at the end of the
month.
Year 8
Credit purchases
from
Invoice
no*
3
8
12
17
24
29
T Slocombe
J Barnaby
K Linden
R Tredgarth
J Barnaby
T Slocombe
B361
1634
958
A179
2583
B398
Oct
Oct
Oct
Oct
Oct
Oct
List
price
£
190
370
240
420
860
320
Trade
discount
%
10
20
121/2
20
25
15
* The invoice numbers are those provided by each supplier.
235
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Page 236
Appendix 1: Exercises
T/11.4
The Cash Book balances of Rachel McLeod at 30 June Year 2 were:
Cash £100
Bank £850 (Dr)
In July Year 2, she had the following transactions:
Date
Year 2
2 Jul
4 Jul
6 Jul
7 Jul
10 Jul
11 Jul
13 Jul
15 Jul
18 Jul
20 Jul
21 Jul
23
24
28
29
30
Jul
Jul
Jul
Jul
Jul
Details
Drew cheque number 554 for telephone expenses of £224
Paid sundry expenses in cash, £45
Cash sales of £750, £650 of which was paid into the bank
Drew cheque number 555 for electricity, £145
Drew cheque number 556 for purchases, £650
Received cheque from J Royle for £880, in settlement of a debt of £900
Cash sales totalled £80
Drew cheque number 557, payable to N Henry for £480 to settle an account of £500
Cash sales totalled £440, £400 of which was paid into the bank
Paid travelling expenses in cash, £12
Drew cheque number 558, payable to D Beckford for £240 to settle an account of
£250
Drew cheque number 559 for insurance, £442
Received and banked cheque from G Halle for £360 in settlement of a debt of £370
Drew cheque number 560 for drawings of £400
Received and banked cheque from R Holden for £620 in settlement of a debt of £650
Cash sales totalling £950 were banked the same day
Required
In Rachel McLeod’s Cash Book, enter the balances at 1 July Year 2 and the transactions for
the month of July, bringing down the balances at 1 August Year 2.
(LCCIEB)
236
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Page 237
Appendix 1: Exercises
T/12.1
From the following details, you are required to:
(a) enter the transactions in:
(i) the Sales Day Book
(ii) the Returns Inwards Day Book;
(b) post to the relevant accounts in the Sales Ledger;
(c) show the transfers to the General Ledger.
Year 3
5 Dec
8 Dec
11 Dec
18 Dec
21 Dec
23 Dec
30 Dec
Credit sales of £196 to S Preen
Credit sales of £430 to M Quant
Goods worth £38 returned by S Preen
Credit sales of £287 to M Quant
Goods worth £53 returned by M Quant
Credit sales of £392 to R Robson
Goods worth £61 returned by M Quant
T/12.2
From the following details, you are required to:
(a) enter the transactions in:
(i) the Purchases Day Book
(ii) the Returns Outwards Day book;
(b) post to the relevant accounts in the Purchases Ledger;
(c) show the transfers to the General Ledger.
Year 6
3 May
7 May
12 May
19 May
24 May
28 May
Credit purchases of £254 from L Squires
Credit purchases of £385 from N Neale
Goods worth £37 returned to L Squires
Credit purchases of £138 from N Neale
Goods worth £72 returned to N Neale
Credit purchases of £364 from T Roberts
237
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Page 238
Appendix 1: Exercises
T/12.3
From the following details, you are required to:
(a) enter the transactions in the Purchases, Sales, Returns Outwards and Returns Inwards
Day Books;
(b) post the items to the personal accounts in the Purchases and Sales Ledgers; and
(c) record the transfer to appropriate accounts in the General Ledger at the end of October
Year 6.
Year 6
3 Oct
5
8
11
15
17
19
21
24
Oct
Oct
Oct
Oct
Oct
Oct
Oct
Oct
27 Oct
30 Oct
Credit purchase from R Varney, at a list price of £480, subject to a trade discount
of 121/2%
Credit sale to K Petts at a list price of £420, subject to a trade discount of 15%
Returned goods to R Varney with a list price of £64
Credit sale to J Beaver at a list price of £560, subject to a trade discount of 20%
K Petts returned goods with a list price of £120
Credit purchase of £296 from T Langton
J Beaver returned goods with a list price of £90
Credit sale to K Petts at a list price of £680, subject to a trade discount of 20%
Credit purchase from R Varney at a list price of £320, subject to a trade discount
of 15%
Returned goods worth £37 to T Langton
Returned to R Varney, goods bought on 24 October Year 6 at a list price of £40
Note
The entry about the returns to R Varney on 8 October refers back to the purchase of
3 October, ie a discount rate of 12 1/2% must be applied to the returns. The entry
concerning returns to R Varney on 30 October is related to the purchase on 24 October;
therefore, a trade discount of 15% must be applied to the returns.
238
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Page 239
Appendix 1: Exercises
T/12.4
During the month of January Year 4, Lung Kwok had the following transactions:
5 Jan
7 Jan
12 Jan
17 Jan
18 Jan
22 Jan
22 Jan
23 Jan
25 Jan
30 Jan
Bought goods on credit from T Brown with a list price of £720, subject to a trade
discount of 25%
Sold goods on credit to B Stevens for £340, subject to a cash discount of 5%, if
paid within 10 days
Bought goods from F Robins with a list price of £420, subject to a trade discount
of 20% and a cash discount of 5%, if paid within 14 days
Sold goods to J New for £580, subject to a trade discount of 25% and a cash
discount of 3%, if paid within 10 days
Paid cheque to F Robins, in full settlement, for goods bought on 12 January
Received cheque from J New, in full settlement, for goods sold on 17 January
Bought goods from P Harper with a list price of £840, subject to a 331/3% trade
discount and a cash discount of 2 1/2%, if paid within 14 days
Sold goods to K Burton for £660 less a trade discount of 15% and a cash discount
of 5%, if paid within 10 days
Paid cheque to T Brown, in full settlement, for goods bought on 5 January
Received cheque from B Stevens, in full settlement, for goods bought on 7 January
Required
(a) Enter the above transactions in Lung Kwok’s Purchases Day Book, Sales Day Book and
Purchases Returns Day Book and show the Cash Book entries.
(b) Why do traders allow cash discount?
239
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Page 240
Appendix 1: Exercises
T/12.5
T Riggan is a sole trader and has a sports goods shop. She regularly purchases goods on
credit. Each of her suppliers grants a trade discount of 5% if the value of a transaction
exceeds £2,000.
She made the following credit purchases in May Year 8:
Date
Supplier
8
12
15
22
23
26
M Boyce
B Jones
C Smith
S Morris
M Boyce
C Smith
May
May
May
May
May
May
Gross purchases
value
£
3,000
1,800
4,200
3,700
1,800
1,200
During May, Riggan had to return some of the goods to her suppliers.The returns were as
follows:
Date
Supplier
14 May
22 May
27 May
B Jones
S Morris
M Boyce*
*
Gross purchases
value
£
300
500
200
relating to goods purchased on 23 May
M Boyce also offers a 2% cash discount if Riggan pays the account by the end of the month.
Riggan pays this account monthly to take advantage of the cash discount.
Required
(a) Prepare the Purchases Day Book for May.
(b) Prepare the Purchases Account and the Purchases Returns Account for May, showing
the transfer to the Trading Account.
(c) Prepare the personal account of M Boyce for the month of May. Assume that there
was a nil balance at the beginning of the month.
(LCCIEB)
240
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Page 241
Appendix 1: Exercises
T/13.1*
On 1 January Year 4, the following were 3 of the account balances in E Parker’s ledger:
£
230 Dr
65 Dr
110 Cr
Rent
Insurance
Advertising
During the year ended 31 December Year 4, he paid the following amounts by cheque:
31
28
31
31
31
30
Jan
Feb
May
Aug
Aug
Sep
Advertising
Rent
Rent
Rent
Insurance
Rent
£
110
460
690
690
180
250
Additional information:
(1) The monthly rent was increased to £250 from 1 October Year 4.
(2) An advertising bill amounting to £85 had not been paid by 31 December Year 4.
(3) The insurance premium paid on 31 August Year 4 covered the year ended 31 August
Year 5.
Required
Prepare accounts in the ledger of E Parker for the year ended 31 December Year 4, for:
(i) rent
(ii) insurance
(iii) advertising.
Give particular attention to dates, and show, in each account, the transfer to the Profit &
Loss Account for the year ended 31 December Year 4.
(LCCIEB)
241
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Appendix 1: Exercises
T/13.1/A
Rent
Year 4
1 Jan
28 Feb
31 May
31 Aug
30 Sep
31 Dec
£
Balance b/d
Bank
Bank
Bank
Bank
Balance c/d
230
460
690
690
250
500
2,820
Year 4
31 Dec Profit & loss
£
2,820
2,820
Year 5
1 Jan
Balance b/d
500
Year 4
31 Dec Profit & loss
31 Dec Balance c/d
£
125
120
245
Insurance
Year 4
1 Jan Balance b/d
31 Aug Bank
Year 5
1 Jan
Balance b/d
£
65
180
245
120
Advertising
Year 4
31 Jan Bank
31 Dec Balance c/d
£
110
85
195
Year 4
1 Jan Balance b/d
31 Dec Profit & loss
Year 5
1 Jan
242
Balance b/d
£
110
85
195
85
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Appendix 1: Exercises
T/13.2*
The following details are from the books of Melville & Co for the year ended 30 September
Year 9:
£
279,300
118,650
20,470
17,320
83,540
2,530
9,860
11,940
3,970
Sales
Purchases
Stock at 1 Oct Yr 8
Stock at 30 Sep Yr 9
Wages and salaries
Heating and lighting
Rent and rates
Motor-vehicle expenses
Office expenses
In addition, at 30 September Year 9:
●
●
●
●
●
wages and salaries owing amount to £620
rent payable accrued due, £250
rates prepaid amount to £180
heating and lighting accrued due, £60
office stationery is in stock amounting to £380.
Required
Prepare for Melville & Co a Trading and Profit & Loss Account for the year ended
30 September Year 9.
T/13.2/A
Melville & Co
Trading and Profit & Loss Account
for the year ended 30 September Year 9
Stock at 1 Oct Yr 8
Purchases
less Stock at 30 Sep Yr 9
Cost of goods sold
Gross profit
Wages and salaries (+620)
Heating and lighting (+60)
Rent and rates (+250-180)
Motor-vehicle expenses
Office expenses (-380)
Net profit
£
20,470
118,650
139,120
17,320
121,800
147,500
269,300
84,160
2,590
9,930
11,940
3,590
35,290
147,500
Sales
£
269,300
269,300
Gross profit b/d
147,500
147,500
243
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Page 244
Appendix 1: Exercises
T/13.3*
The following are details relating to N Tulloch’s Rent Payable Account:
Year 5
30 Jun
8 Sep
27 Nov
Balance on the account of £300, representing 2 months’ rent paid in advance
Paid £450 by cheque, being rent for the 3 months ended 30 November Year 5
Paid £720 by cheque, being rent for the 4 months ended 31 March Year 6
Year 6
9 Apr
Paid £360 by cheque, being rent for the 2 months ended 31 May Year 6
Required
Prepare for N Tulloch the Rent Payable Account for the year ended 30 June Year 6. Balance
the account at the year end and show the transfer to the Profit & Loss Account.
T/13.3/A
N Tulloch
Rent Payable
Year 5
1 Jul Balance b/f
8 Sep Bank
27 Nov Bank
Year 6
9 Apr
30 Jun
Bank
Balance c/d
£
300
450
720
Year 6
30 Jun
Profit & loss
360
180
2,010
2,010
1 Jul
Balance b/d
The transfer to the Profit & Loss Account is calculated as:
5 months at
7 months at
244
£
2,010
£
£150 =
750
£180 = 1,260
2,010
180
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Page 245
Appendix 1: Exercises
T/13.4*
Tan Lian, a sole trader, had the following account balances on 1 January Year 5:
Insurance
Office expenses
Rent payable
£
70 Dr
160 Dr
240 Cr
During Year 5, the following payments were made by cheque:
Year 5
26 Jan
9 Feb
25 Feb
12 Apr
8 Jun
25 Aug
6 Nov
11 Dec
Office expenses: purchase of stationery, £63
Rent for 4 months ended 31 March Year 5, £960
Insurance for 6 months ended 31 August Year 5, £210
Office expenses, £92
Rent for 4 months ended 31 July Year 5, £1,040
Insurance for 6 months ended 28 February Year 6, £240
Rent for 4 months ended 30 November Year 5, £1,040
Office expenses, £280
At 31 December Year 5, there was a stock of stationery valued at a cost of £90.There was
no further increase in the monthly charge for rent in December Year 5.
Required
Open the 3 accounts listed above and enter the transactions that occurred in Year 5. Balance
the accounts and make the appropriate transfers to the Profit & Loss Account for the year
ended 31 December Year 5.
245
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Appendix 1: Exercises
T/13.4/A
Tan Lian
Insurance
Year 5
1 Jan Balance b/d
25 Feb Bank
25 Aug Bank
Year 6
1 Jan
£
70
210
240
520
Balance b/d
Year 5
31 Dec Profit & loss
31 Dec Balance c/d
£
440
80
520
80
Check profit & loss transfer:
Jan–Feb 2 months
70 £35 per
Mar–Aug 6 months
210 month
Sep–Dec 4 months
160*
440



* £40 per month
Office Expenses
Year 5
1 Jan
26 Jan
12 Apr
11 Dec
Year 6
1 Jan
£
160
63
92
280
595
Balance b/d
Bank
Bank
Bank
Balance b/d
Year 5
31 Dec Profit & loss
31 Dec Balance c/d
£
505
90
595
90
Rent Payable
Year 5
9 Feb
8 Jun
6 Nov
31 Dec
£
Bank
Bank
Bank
Balance c/d
Year 5
1 Jan Balance b/d
31 Dec Profit & loss
960
1,040
1,040
260
3,300
246
£240 per month



3,060
240
3,060
3,300
Year 6
1 Jan
£
Check profit & loss transfer:
Jan–Mar (960 × 3/4)
720
Apr–July
1,040
Aug–Nov
1,040
Dec
(1,040 × 1/4)
260
£
£260 per month
Balance b/d
260
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Page 247
Appendix 1: Exercises
T/14.1
M Paine, a sole trader, is about to prepare his final accounts. As book-keeper, you need to
adjust the figures shown in certain accounts.
M Paine’s financial year ends on 31 December Year 5. At that date, certain accounts carry
the following balances:
£
Rates
Telephone
Insurance
Rent receivable
Wages
1,960
215
760
3,840
45,630
(Dr)
(Dr)
(Dr)
(Cr)
(Dr)
You ascertain the following information relating to the accounts above.
(1) Rates – included in the Rates Account is a payment of £900 for the half-year to
31 March Year 6.
(2) Telephone – the amount accrued due, not yet paid to 31 December Year 5, is £47.
(3) Insurance – a premium of £720 paid for the year to 31 January Year 6 is included in
the Insurance Account.
(4) Rent receivable – the tenant owes £160 for rent outstanding at 31 December Year 5.
(5) Wages – the amount accrued due at 31 December Year 5 was £840.
Required
(a) Open these accounts, enter the balances given, deal with the accrual or prepayment
as necessary, and show the transfers to the Profit & Loss Account.
(b) Show how any remaining balances on the above accounts would appear in the balance
sheet of M Paine at 31 December Year 5.
(LCCIEB)
247
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Page 248
Appendix 1: Exercises
T/14.2
L Reinholdt is a theatrical agent whose accounting year ends on 31 December. He provides
the following details for the year ended 31 December Year 10:
(1) On 1 January, 3 months rent had been paid in advance – £1,200.
On 1 April, he paid 6 months rent in advance – £2,400.
On 1 October, he paid rent for the 6 months ending 31 March Year 11 – £2,700.
(2) On 1 January, commission due to Reinholdt, and not yet received, amounted to £3,200.
January–December: commission received – £64,300.
At 31 December, commission due and not yet received in respect of Year 10 amounted
to £4,700.
(3) On 1 January, the estimated amount outstanding on the Telephone Account was £320.
On 31 March, he paid the telephone bill in respect of the previous 6 months, £510.
On 30 September, he paid the telephone bill in respect of the previous 6 months, £520.
On 31 December, the estimated amount outstanding on the Telephone Account was
£300.
Required
(a) Prepare the following accounts for Reinholdt for the year ended 31 December Year 10:
(i) Rent Account
(ii) Commission Receivable Account
(iii) Telephone Account.
(b) Prepare a balance sheet extract for Reinholdt at 31 December Year 10, showing how
the 3 balances would appear.
(LCCIEB)
248
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Page 249
Appendix 1: Exercises
T/14.3*
At 1 January Year 8, L Johnston, a trader, owed £320 for rent, but her rates were prepaid by
£110. During Year 8, she made the following payments by cheque:
Rent
2 Apr
28 Sep
£
600
630
Rates
7 Apr
5 Oct
160
180
At 31 December Year 8 there was accrued rent of £350 and rates were prepaid by £120.
Required
Prepare L Johnston’s combined Rent & Rates Account for Year 8, showing the transfer to
the Profit & Loss Account and the account fully balanced.
T/14.3/A
In the books of L Johnston:
Rent & Rates
Year 8
1 Jan
2 Apr
7 Apr
28 Sep
5 Oct
31 Dec
Year 9
1 Jan
£
Balance b/d (rates)
Bank (rent)
Bank (rates)
Bank (rent)
Bank (rates)
Balance c/d (rent)
Balance b/d
(rates)
110
600
160
630
180
350
2,030
Year 8
1 Jan Balance b/d (rent)
31 Dec Profit & loss
31 Dec Balance c/d (rates)
Year 9
1 Jan
Balance b/d (rent)
£
320
1,590*
120
2,030
350
120
* rent £1,260
rates £330
249
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Page 250
Appendix 1: Exercises
T/14.4
The following information relates to some of the expense and income accounts of
Jan Goldsmith for the year ended 31 December Year 5:
£
Insurance
Paid by cheque
Prepaid
Prepaid
23 Feb Yr 5
31 Dec Yr 4
31 Dec Yr 5
630
85
95
Stationery
Paid by cheque
Stock
Stock
Owing to stationery suppliers
19
31
31
31
Mar Yr 5
Dec Yr 4
Dec Yr 5
Dec Yr 5
765
130
160
45
Telephone
Paid by cheque
Paid by cheque
Owing
Owing
11
4
31
31
Jun Yr 5
Dec Yr 5
Dec Yr 4
Dec Yr 5
295
285
64
56
Rent payable
Paid by cheque
Paid by cheque
Owing
Prepaid
16
12
31
31
Feb Yr 5
Aug Yr 5
Dec Yr 4
Dec Yr 5
2,160
2,510
360
740
Rent receivable
Received by cheque
Received by cheque
Owing
Owing
31
30
31
31
Mar Yr 5
Sep Yr 5
Dec Yr 4
Dec Yr 5
450
375
75
150
Required
(a) Prepare the 5 ledger accounts, incorporating the information given above, for the year
ended 31 December Year 5. In each account, show the transfer to the Profit & Loss
Account and bring down the balance(s) at 1 January Year 6.
(b) Show how the balances on the accounts would be displayed in Jan Goldsmith’s balance
sheet at 31 December Year 5.
250
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Page 251
Appendix 1: Exercises
T/14.5
In the books of Frank Napier, a sole trader, the following account balances were brought
forward on 1 July Year 4:
Advertising
Insurance
Office cleaning
Rent receivable
£
260
40
260
350
(Cr)
(Dr)
(Cr)
(Dr)
During the year ended 30 June Year 5, the following amounts were paid by cheque:
Year 4
25 Jul
1 Aug
5 Sep
24 Oct
Office cleaning (3 months to 31 Jul Yr 4)
Insurance premium (6 months to 31 Jan Yr 5)
Advertising
Office cleaning (3 months to 31 Oct Yr 4)
£
390
270
260
390
Year 5
26 Jan
1 Feb
8 Mar
21 Apr
Office cleaning (3 months to 31 Jan Yr 5)
Insurance premium (6 months to 31 Jul Yr 5)
Advertising
Office cleaning (3 months to 30 Apr Yr 5)
420
300
210
420
The following amounts were received by cheque during the year ended 30 June Year 5:
Year 4
17 Aug
3 Oct
15 Dec
Rent (1 May – 31 Aug Yr 4)
Rent (1 Sep – 31 Oct Yr 4)
Rent (1 Nov – 31 Dec Yr 4)
£
700
350
380
Year 5
12 Jan
3 Mar
19 May
Advertising (part refund)
Rent (1 Jan – 31 Mar Yr 5)
Rent (1 Apr – 31 Jul Yr 5)
40
570
760
Frank Napier was aware that, at the end of his financial year, 30 June Year 5, there was an
outstanding advertising bill for £190 and 2 months’ payment outstanding on the office
cleaning account, at £140 per month.
Required
(a) Open the following accounts:
(i)
(ii)
(iii)
(iv)
Advertising
Insurance
Office Cleaning
Rent Receivable.
251
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Page 252
Appendix 1: Exercises
(b) Post the various items to the accounts.
(c) Show the transfer entries to the Profit & Loss Account for the year ended 30 June Year 5.
(d) Balance the accounts at 30 June Year 5.
Note
You are not required to show the Profit & Loss Account.
T/14.6
The following information is from the books of Enterprise Services in respect of the year
ended 30 June Year 9:
Rent Receivable
Year 8
1 Jul
1 Oct
Year 9
1 Apr
£
3 months’ rent prepaid
8 months’ rent received by cheque
630
1,260
6 months’ rent received by cheque at revised
rate of £2,960 per annum
1,480
Rates
Year 8
1 Jul
1 Oct
Year 9
1 Apr
3 months’ rates prepaid
Paid 6 months’ rates by cheque
780
1,680
Paid 6 months’ rates by cheque
1,680
Advertising
Year 8
1 Jul
28 Aug
Year 9
15 May
Accrued due
Paid by cheque
370
1,250
Paid by cheque
2,100
Printing and Stationery
Year 8
1 Jul
14 Sep
Year 9
12 Feb
252
Stock of stationery
Purchased stationery by cheque
3,400
850
Paid printing account by cheque
420
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Appendix 1: Exercises
At 30 June Year 9:
(1) Payments for advertising during the year included £580 for poster advertising that was
due to be carried out in August Year 9.
(2) The stock of stationery was valued at £3,100. There was also an unpaid invoice for
£615 for printing.
Required
(a) Prepare the following accounts for the year ended 30 June Year 9, including transfers
to the Profit & Loss Account and year-end balances.
(i)
(ii)
(iii)
(iv)
Rent Receivable
Rates
Advertising
Printing and Stationery
(b) Show, in the form of a balance sheet extract, how the balances on these accounts
would appear at 30 June Year 9.
T/15.1
Jack Millard commenced business on 1 January Year 3 and on that date purchased a motor
vehicle for £10,400.
On 31 December Year 3, he wished to determine the depreciation expense for the year just
completed. He is unsure whether to use the:
(a) straight line method – the vehicle would have a 3-year life with an estimated resale
value of £4,100;
(b) reducing balance method – using a rate of 40% on cost.
Required
To help Jack Millard decide between the 2 methods, draw up and complete the following
table:
Depreciation charge in
Profit & Loss Account
for the year ended
31 Dec Year 3
£
Net book value
at 31 Dec Year 3
£
Method
(a)
(b)
253
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Page 254
Appendix 1: Exercises
T/15.2
Charles Day started a business on 1 January Year 4. On that date, he purchased by cheque
a motor van costing £9,600 from Greenaway Motors Ltd. He decided to depreciate this
asset, using the rate of 40% per annum on the reducing balance method. He also purchased,
on the same day, on credit, fixtures and fittings costing £15,000 from P J Shop Fitters Ltd.
He decided to depreciate these fixtures and fittings using the straight line method. He
estimated that they would have a useful life of 15 years, and would have a scrap value of
£2,100.
He kept the asset accounts at cost, and used a provision for depreciation account for each
asset.
Required
Prepare for Charles Day the following accounts for each of Years 4, 5, 6, and 7:
(i)
(ii)
(iii)
(iv)
Motor Van
Provision for Depreciation of Motor Van (showing calculations to the nearest £)
Fixtures and Fittings
Provision for Depreciation of Fixtures and Fittings.
(LCCIEB)
T/15.3
Required
With reference to T/15.2, prepare an extract to show how both assets would appear in
Charles Day’s balance sheet at 31 December Year 7.
(LCCIEB)
254
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Page 255
Appendix 1: Exercises
T/15.4
On 8 February Year 5, Southern Stores bought a computer for use in the office, paying
£8,600 by cheque. It was decided to provide for depreciation by use of the straight line
method. It was estimated that, at the end of 5 years, the residual (scrap) value would be
£600.
On 12 September Year 5, Southern Stores purchased a motor vehicle for use in the business,
paying £10,000 by cheque. The vehicle was to be depreciated at the rate of 40% per
annum, using the reducing balance method.
The business retained the asset accounts at cost and dealt with depreciation using a separate
Provision for Depreciation Account for each asset.The financial year ends on 31 December.
Any asset purchased in the first 6 months of a year has a whole year’s depreciation
provided, while any asset purchased in the second half of the year has only half a year’s
depreciation written off.
Required
(a) Prepare the following accounts for the years ended 31 December Years 5, 6, and 7:
(i)
(ii)
(iii)
(iv)
Computer Equipment
Provision for Depreciation of Computer Equipment
Motor Vehicle
Provision for Depreciation of Motor Vehicle.
(b) Show a balance sheet extract at 31 December Year 7 for both the Computer Equipment
and Motor Vehicle Accounts.
(LCCIEB)
255
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Page 256
Appendix 1: Exercises
T/15.5
D Amos purchased fixtures and fittings for £6,000 by cheque on 1 January Year 3. On 1 July
of the same year, he purchased by cheque a motor vehicle for £18,000. He decided to
depreciate his fixed assets as follows:
(1) Fixtures and fittings – using the straight line method. He estimated that they would
have a working life of 8 years, with a residual (scrap) value of £1,000.
(2) Motor vehicle – using the reducing balance method. He set the rate at 40% on
reducing balance each full year.
He kept the asset accounts at cost and kept accumulated depreciation of each type of asset
in a separate Provision for Depreciation Account. Assets acquired during the year were
depreciated from the date of purchase.
Required
In the books of D Amos, prepare the following accounts for the 3 financial years ended
31 December Year 3, Year 4, and Year 5, balancing the accounts at the end of each year:
(i)
(ii)
(iii)
(iv)
Fixtures and Fittings
Provision for Depreciation of Fixtures and Fittings
Motor Vehicle
Provision for Depreciation of Motor Vehicle.
(LCCIEB)
T/15.6
On 1 January Year 4, Frank Saunders purchased furniture and equipment by cheque for
£11,000. He decided to provide for depreciation on this asset using the straight line
method over 8 years. He estimated that the scrap value at the end of that time would be
£600.
On 14 February Year 4, he purchased a motor van by cheque for £8,400, for use in the
business. He decided to provide for depreciation on this asset at the rate of 40% per annum,
using the reducing balance method. He allowed a full year’s depreciation in the year of
purchase and calculated the depreciation to the nearest £.
On 31 December Year 6, he sold the motor van for £3,200 and was paid by cheque.
His practice is to record and leave the asset accounts at cost and to accumulate the
depreciation in a Provision for Depreciation Account for each asset. His financial year ends
on 31 December.
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Page 257
Appendix 1: Exercises
Required
In the books of Frank Saunders, open the following accounts and enter the transactions for
the years ended 31 December Years 4, 5, and 6:
(i)
(ii)
(iii)
(iv)
(v)
Furniture and Equipment
Provision for Depreciation of Furniture and Equipment
Motor Van
Provision for Depreciation of Motor Van
Disposal of Motor Van.
(LCCIEB)
T/16.1
F Openshaw submitted the following information at 31 March for Years 4, 5, and 6:
Date
Total debtors
before writing off
bad debts
£
Bad debts
to be written off
£
31 Mar
Yr 4
18,640
F Dale
T Wylie
117
163
31 Mar
Yr 5
20,835
G Block
315
31 Mar
Yr 6
17,694
A Dolt
E Fox
78
216
Openshaw provides for doubtful debts at the rate of 2 1/2% of the remaining debtors at the
end of each financial year. At 31 March Year 3, the provision for doubtful debts was £380.
Required
(a) In the books of F Openshaw, prepare the following accounts for the years ended 31 March
Years 4, 5, and 6, including the transfers to the Profit & Loss Account at the end of each
financial year:
(i) Bad Debts
(ii) Provision for Doubtful Debts.
(b) Show extracts from the balance sheets of F Openshaw at 31 March Years 4, 5, and 6,
placing debtors under current assets.
(LCCIEB)
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Page 258
Appendix 1: Exercises
T/16.2
(a) It is the practice of Coniston & Son to write off bad debts as they occur and to
provide for doubtful debts. For the 3 years from the commencement of business to
31 December Year 3, the following information is available:
At year ended 31 December:
Balance of debtors before
writing off bad debts
Bad debts to be written off
Provision for doubtful
debts, as a percentage
of debtors
Year 1
£
Year 2
£
Year 3
£
47,800
800
76,300
1,100
91,400
1,500
3%
4%
2%
Required
(i) Prepare the following accounts for Years 1, 2, and 3, showing the transfers to the
Profit & Loss Account at the end of each year:
●
●
Bad Debts
Provision for Doubtful Debts.
(ii) Show the balance sheet extract in respect of debtors at 31 December each year.
(b) On 7 June Year 4, Coniston & Son received a payment of £129 from S Atkins for an
outstanding debt of £320. Coniston wrote off the balance as a bad debt.
Required
Show the account of S Atkins in Coniston’s ledger.
258
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Page 259
Appendix 1: Exercises
T/16.3*
At 31 December Year 8, AB & Co has debtors totalling £42,560. Debts amounting to £760
have yet to be written off as bad. A specific provision is to be created covering in full the
following debts:
D £620
E £570
F £710
A general doubtful debts provision of 4% of remaining debts is also to be created. No
provision exists as yet.
Required
(a) Show in a statement:
(i) how the 2 provisions are calculated
(ii) the amount of net debtors.
(b) Show as an extract how the item ‘debtors’ would appear in the balance sheet of AB & Co
at 31 December Year 8.
T/16.3/A
(a)
Calculation of debt provisions
£
42,560
760
41,800
Gross debtors
less Bad debts written off
less Specific provision:
D 620
E 570
F 710
less General provision at 4%
Net debtors
(b)
1,900
39,900
1,596
38,304
AB & Co
Balance sheet (extract)
at 31 December Year 8
£
Current assets
Debtors
less Provision for bad and
doubtful debts
£
41,800
3,496
38,304
259
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Page 260
Appendix 1: Exercises
T/16.4
Donald Lisher, a sole trader, maintains a provision for doubtful debts that he adjusts at the
end of each financial year. At 1 January Year 8, the balance on the account was £860.
The following additional information is available:
Year ended
31 Dec Yr 8
31 Dec Yr 9
31 Dec Yr 10
Bad debts
written off
during year
£
1,235
1,640
1,320
Debtor year-end
balances
£
25,300
29,600
28,800
Provision for
doubtful debts
%
4
6
5
On 12 October Year 10, Donald Lisher received a cheque for £240 in respect of a debt
which had been written off in Year 9.
Required
(a) From the above information, prepare for the years ended 31 December Years 8, 9,
and 10:
(i) the Bad Debts Account, including the closing entries;
(ii) the Provision for Doubtful Debts Account, showing the balance carried forward
each year.
(b) Show, in a brief statement, the entries which would be made in the books of
Donald Lisher to record the recovery of £240 for the debt written off in Year 9.
Note
Bad debts written off should not be taken to the Provision for Doubtful Debts Account.
260
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11:18 am
Page 261
Appendix 1: Exercises
T/16.5
The accounting year of R Cleaver, a trader, ends on 31 December.At 31 December Year 3,
his trade debtors amounted to £37,500 and he had a provision for doubtful debts amounting
to 2% of debtors.
During Year 4, Cleaver wrote off debts as follows:
(1) The whole of the debt of £460, due from L Paul, was written off as irrecoverable on
15 August Year 4.
(2) Another debtor, K Sang, who owed £220, paid a contribution of 25%; the balance was
immediately written off as irrecoverable on 26 November Year 4.
At 31 December Year 4, debtors amounted to £41,000 and the provision for doubtful
debts was adjusted to 2.5% of this figure.
In Year 5, bad debts written off amounted to £560. In addition, on 20 October, K Sang
paid the balance of his debt, which had been written off in Year 4. It was the practice of
Cleaver to keep a Bad Debts Recovered Account for recording debts recovered in a year
following the one in which they were written off.
At 31 December Year 5, debtors amounted to £39,000 and the Provision for Doubtful
Debts was adjusted to 2% of this figure.
Required
Prepare the following accounts to include the above information relating to the years
ended 31 December Year 4 and 31 December Year 5:
(i)
(ii)
(iii)
(iv)
(v)
L Paul
K Sang
Bad Debts
Provision for Doubtful Debts
Bad Debts Recovered.
261
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Page 262
Appendix 1: Exercises
T/17.1
The following information is available in respect of A Wolfson, a trader:
CASH BOOK (bank only)
Year 5
1 Sep
5 Sep
10 Sep
15 Sep
23 Sep
25 Sep
28 Sep
Balance b/f
Sales
T Swithin
Sales
K Smart
T Hunt
Sales
£
2,806
1,020
857
1,370
524
413
1,245
Year 5
4 Sep
9 Sep
16 Sep
24 Sep
26 Sep
27 Sep
29 Sep
30 Sep
30 Sep
Purchases (915)
Wages (916)
N Victor (917)
Rent (918)
Wages (919)
N Hills (920)
S Twitchin (921)
Purchases (922)
Balance
£
234
635
526
370
680
416
285
540
?
Bank statement
Year 5
1 Sep
7 Sep
9 Sep
12 Sep
15 Sep
17 Sep
19 Sep
21 Sep
23
26
28
30
Sep
Sep
Sep
Sep
Paid out
£
Balance
Cash: 915
Credit
Cash: 916
Credit
Credit transfer – P Mott
Credit
Standing order – Minster
Publications
Credit transfer – T Lennox
Direct debit – Insurance
Cash: 919
Bank interest
Paid in
£
234
1,020
635
857
271
1,370
96
870
230
680
8
Balance
£
2,806 Cr
2,572 Cr
3,592 Cr
2,957 Cr
3,814 Cr
4,085 Cr
5,455 Cr
5,359 Cr
4,489
4,259
3,579
3,587
Cr
Cr
Cr
Cr
Required
(a) Calculate the missing balance in the Cash Book and enter it in your answer book as
the balance brought down at 30 September Year 5.
(b) Bring the Cash Book up to date by entering in it the items you consider appropriate
from the bank statement. Balance the Cash Book and bring down the new balance at
1 October Year 5.
(c) Prepare the bank reconciliation statement at 30 September Year 5.
262
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Page 263
Appendix 1: Exercises
T/17.2
The following is a copy of F Holme’s Cash Book for April Year 5:
CASH BOOK
Year 5
1 Apr
4 Apr
10 Apr
16 Apr
24 Apr
28 Apr
30 Apr
30 Apr
Balance b/d
Sales
Sales
Sales
Sales
Sales
F Tait
Sales
Cheque
no
Bank
£
3,240
1,250
2,610
1,925
1,368
1,701
450
1,116
Year 5
3 Apr
6 Apr
9 Apr
12 Apr
15 Apr
18 Apr
20 Apr
25 Apr
27 Apr
29 Apr
29 Apr
30 Apr
Purchases
Rates
Electricity
Purchases
Telephone
Stationery
Travelling
Salary
G Stewart
D Usher
Fixtures
Balance c/d
10648
10649
10650
10651
10652
10653
10654
10655
10656
10657
10658
13,660
1 May
Balance b/d
Bank
£
1,060
650
196
1,400
245
98
72
1,057
746
2,360
2,200
3,576
13,660
3,576
He received the following bank statement for April Year 5:
Bank statement
Date
Year 5
1 Apr
3 Apr
4 Apr
5
9
11
12
13
16
17
19
22
Apr
Apr
Apr
Apr
Apr
Apr
Apr
Apr
Apr
23
25
27
29
30
30
Apr
Apr
Apr
Apr
Apr
Apr
Details
Balance
Cash: 10648
Standing order –
Insurance Co
Credit
10649
Credit
10651
10650
Direct debit – Water
Credit
10652
Credit transfer –
John Bates
10654
Credit
Dividends
10655
Credit
Charges
Paid out
£
Paid in
£
1,060
260
1,250
650
2,610
1,400
196
50
1,925
245
360
72
1,368
400
1,057
1,701
60
Balance
£
3,240 Cr
2,180 Cr
1,920
3,170
2,520
5,130
3,730
3,534
3,484
5,409
5,164
Cr
Cr
Cr
Cr
Cr
Cr
Cr
Cr
Cr
5,524
5,452
6,820
7,220
6,163
7,864
7,804
Cr
Cr
Cr
Cr
Cr
Cr
Cr
263
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Page 264
Appendix 1: Exercises
Required
(a) Starting with the balance of £3,576, bring F Holme’s Cash Book up to date by posting
to it the items you consider appropriate from the bank statement. Balance the Cash
Book and bring down the new balance on 1 May Year 5.
(b) Prepare a bank reconciliation statement at 30 April Year 5, commencing with the
bank statement balance of £7,804.
(LCCIEB)
T/17.3
The following information relates to the business of M Rhodes:
Bank statement at 30 June Year 5
Date
Details
Debits
£
1
5
5
8
11
Jun
Jun
Jun
Jun
Jun
13
15
15
19
24
26
29
30
Jun
Jun
Jun
Jun
Jun
Jun
Jun
Jun
Balance
10659
10658
Counter credits
Standing order –
Ajax Insurance
10660
Counter credits
10661
Standing order – L White
Direct debit – Town Council
10663
10665
Charges
Credits
£
230
176
813
242
459
1,121
150
462
517
324
138
74
Balance
£
4,619 Cr
4,389 Cr
4,213 Cr
5,026 Cr
4,784
4,325
5,446
5,296
5,758
5,241
4,917
4,779
4,705
Cr
Cr
Cr
Cr
Cr
Cr
Cr
Cr
Cr
Cheque book counterfoils
1
1
7
11
22
23
23
25
29
Jun
Jun
Jun
Jun
Jun
Jun
Jun
Jun
Jun
10658
10659
10660
10661
10662
10663
10664
10665
10666
A Parry
C Harris
L Goddard
A Parry
D Fletcher
Lines Ltd
Star & Co
A Parry
C Thorpe
£
176
230
459
150
376
324
289
138
247
(continued)
264
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Page 265
Appendix 1: Exercises
T/17.3 (continued)
Paying-in book counterfoils
8 Jun
15 Jun
S Moon
G Race
Rayne & Co
C Mills
T Orchard
£
611
202
129
325
667
£
813
1,121
Note
Cheques are paid into the bank on the day they are received.
Required
(a) Write up the bank account in the books of M Rhodes starting with a debit balance
of £4,619 on 1 June Year 5. Entries should be in date order.
(b) Prepare a bank reconciliation statement at 30 June Year 5, commencing with the bank
statement balance of £4,705.
(LCCIEB)
T/17.4*
You are required to prepare a bank statement from the details below.
Thomas Snodden banks at Wilmster Bank, 46 High Street, Ledbury, Eastshire LE2 5SR –
account number 96015. On 1 September Year 2, he had a balance at the bank of £126.00
(Dr).The following were his transactions with the bank during Setpember Year 2:
4 Sep
6 Sep
9 Sep
12 Sep
14 Sep
17 Sep
20
22
25
27
30
Sep
Sep
Sep
Sep
Sep
Received cheque from R Grafton for £57.00
Drew cheque no 100567 payable to T Lucas for £95.50
This was debited to Snodden’s account on 11 September
The bank made a standing order payment to Moody Publishers for £162.00
Drew cheque no 100568 payable to N Swift for £73.00
This was debited to Snodden’s account on 16 September
Received by credit transfer from K Hanson £214.00
Drew cheque no 100569 payable to T Cavendish for £106.50
This was debited to Snodden’s account on 21 September
Received cheque from N Speedy for £165.00
The bank made direct debit payment to Eastwise Electricity for £89.00
The bank made credit transfer payment to Spacewell Ltd for £105.00
Received cheque from L Morsewell for £235.00
The bank charged interest of £17.00
Note
Any cheques received by Thomas Snodden are paid into the bank on the day of receipt. In
each instance above, the bank credited Snodden’s account on the same day.
265
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Page 266
Appendix 1: Exercises
T/17.4/A
Wilmster Bank
46 High Street
Ledbury
Eastshire LE2 55R
Mr Thomas Snodden
Account No 96015
Date
Year 2
1 Sep
4 Sep
9 Sep
11
14
16
20
21
22
Sep
Sep
Sep
Sep
Sep
Sep
25 Sep
27 Sep
30 Sep
266
Particulars
Paid out
£
Balance b/f
R Grafton
Standing order –
Moody Publishers
162.00
T Lucas: 100567
95.50
Credit transfer – K Hanson
N Swift: 100568
73.00
N Speedy
T Cavendish: 100569
106.50
Direct debit –
Eastwise Electricity
89.00
Credit transfer –
Spacewell Ltd
105.00
L Morsewell
Interest
17.00
Paid in
£
57.00
214.00
165.00
Balance
£
126.00 Cr
183.00 Cr
21.00
74.50
139.50
66.50
231.00
125.00
Cr
O/D
Cr
O/D
Cr
Cr
36.00 Cr
235.00
69.00 O/D
166.00 Cr
149.00 Cr
pages 267-326
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11:18 am
Page 267
Appendix 1: Exercises
T/18.1
Lynn Parton owns a small business. She keeps a Petty Cash Book and uses the imprest system.
The imprest is set at £100.
On 1 June Year 7 the petty cash balance was £70.30 and on that date the imprest was
restored with cash drawn from the business bank account.
During June Year 7, the following amounts were paid from petty cash:
Year 7
2 Jun
4 Jun
5 Jun
6 Jun
10 Jun
14 Jun
18 Jun
22 Jun
25 Jun
29 Jun
Details
Voucher
no
Travelling expenses
Stationery
Postage
Cash purchases
Postage
Cleaning expenses
Stationery
Cash purchases
Postage
Travelling expenses
76
77
78
79
80
81
82
82
83
84
Amount
£
12.30
4.23
1.75
32.30
1.82
7.37
9.34
21.17
2.38
4.54
The imprest amount was restored on 1 July Year 7.
Required
Write up the Petty Cash Book from 1 June to 1 July Year 7. You should use the following
analysis columns:
Travelling
expenses
Stationery
Postage
Purchases
Cleaning
expenses
267
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Page 268
Appendix 1: Exercises
T/18.2
Peter Sharsby uses the petty cash imprest system.The amount of the float is £300. At 1 March
Year 6, the balance of petty cash in hand was £83.20.
The petty cashier dealt with the following transactions during March Year 6:
Voucher
no
Year 6
1 Mar
3 Mar
6 Mar
9 Mar
11 Mar
14 Mar
16 Mar
19 Mar
21 Mar
24 Mar
27 Mar
29 Mar
Drew cash from bank to restore the float
Stationery
Petrol
J Lane – travel expenses
Motor-vehicle repairs
Refund to debtor, A Lucan
Postage
Stationery
Petrol
F Coster – train fare
Postage
Paid to L Vine, creditor
83
84
85
86
87
88
89
90
91
92
93
Amount
£
15.30
23.40
27.50
51.80
32.60
4.30
15.70
22.40
19.10
13.90
27.80
Required
(a) Enter the above transactions in the Petty Cash Book of Peter Sharsby for March Year 6,
and show the balance at the end of the month. Bring down the balance and show the
entry to make up the float (from the bank) on 1 April Year 6.
Peter Sharsby uses the following analysis columns:
Motor-vehicle
expenses
Postage
Stationery
Travelling
expenses
Ledger
(b) In relation to the posting of the total of the motor-vehicle expenses analysis column:
(i) show the entry that will be made in the relevant expense account;
(ii) in which ledger is that account kept?
268
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Page 269
Appendix 1: Exercises
T/18.3*
Ellen Franks keeps her Petty Cash Book on the imprest system. The imprest amount was
set at £250. On 1 July Year 3, the balance of petty cash brought forward was £83.00. The
following transactions took place during July Year 3:
Voucher
no
Year 3
1 Jul
5 Jul
7 Jul
10 Jul
12 Jul
14
17
19
22
24
Jul
Jul
Jul
Jul
Jul
27 Jul
30 Jul
Drew cash from bank to restore the imprest
Stationery
Train fare reimbursed
Postage
Received by petty cashier from L Ward,
in payment for a private telephone call
Motor-vehicle expenses
Postage
T Tarrant – travel expenses
Petrol
Payment of amount owing to
K Tutt in the purchases ledger
Stationery
Postage
Amount
£
69
70
71
17.50
23.70
12.30
72
73
74
75
1.90
35.60
7.20
28.40
11.00
76
77
78
31.00
14.30
7.00
On 1 August Year 3 the float was increased to £300.
Required
(a) Draw up Ellen Franks’ Petty Cash Book using the following analysis columns:
Travel
expenses
Postage
Motor-vehicle
expenses
Stationery
Ledger
(b) Balance the account at 31 July Year 3, bring down the balance of cash at that date, and
show the amount of cash drawn from the bank for the revised imprest on 1 August
Year 3.
(c) Show the Telephone Account in the General Ledger for July Year 3, assuming that the
Telephone Account had been paid by direct debit £97.60 on 6 July Year 3.
269
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Page 270
Appendix 1: Exercises
T/18.3/A
(a) and (b)
Receipts
£
83.00
167.00
1.90
PETTY CASH BOOK
Date
Year 3
1 Jul
1 Jul
5 Jul
7 Jul
10 Jul
12 Jul
Details
27 Jul
30 Jul
Balance b/f
Bank
Stationery
Train fare
Postage
Telephone –
L Ward
Motor-vehicle
expenses
Postage
T Tarrant –
travel
Petrol
K Tutt,
creditor
Stationery
Postage
31 Jul
Balance c/d
14 Jul
17 Jul
19 Jul
22 Jul
24 Jul
Voucher
no
Total
£
69
70
71
17.50
23.70 23.70
12.30
72
73
35.60
7.20
74
75
28.40 28.40
11.00
76
77
78
31.00
14.30
7.00
188.00 52.10
63.90
251.90
63.90
236.10
Travel
expenses Postage
£
£
Motor-v
expenses Stationery Ledger
£
£
£
17.50
12.30
35.60
7.20
11.00
31.00
14.30
7.00
26.50
46.60
251.90
1 Aug Balance b/d
1 Aug Bank
(c)
GENERAL LEDGER
Telephone
Year 3
6 Jul
Bank
£
97.60
Year 3
12 Jul
Petty cash
Note
The question does not require the Telephone Account to be balanced.
270
31.80
£
1.90
31.00
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Page 271
Appendix 1: Exercises
T/18.4
Carol Garner maintains an analysed Petty Cash Book on the imprest system. She restores
the imprest amount to £85 on the first day of each week. The analysis columns in the Petty
Cash Book are headed:
Wages
Postage
Travelling
Sundries
Ledger
At the close of business on Friday, 31 July Year 6, Carol balanced the Petty Cash Book and
carried down the balance of £23.15.The cash held in the petty cash box agreed with this
balance.
The following transactions took place during the 2 weeks that followed:
£
Monday, 3 Aug
Tuesday, 4 Aug
Wednesday, 5 Aug
Thursday, 6 Aug
Friday, 7 Aug
Monday, 10 Aug
Tuesday, 11 Aug
Thursday, 13 Aug
Friday, 14 Aug
Imprest restored
Postage
Window cleaning
Creditor – R Jackson
Postage
Tea and coffee
Travelling expenses
Wages
Postage
Travelling expenses
3.80
4.70
9.75
4.26
1.88
2.93
45.00
1.94
3.22
Imprest restored
Travelling expenses
Advertising
Postage
Travelling expenses
Wages
Postage
Stationery
Postage
1.41
12.00
3.22
1.94
48.00
4.21
2.48
1.30
Required
(a) Write up Carol Garner’s analysed Petty Cash Book for the 2-week period. Balance the
Petty Cash Book and total the analysis columns at the end of each week.
(b) Give 2 reasons why the cash in the petty cash box on Friday, 7 August might not have
agreed with the Petty Cash Book balance.
(LCCIEB)
271
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Page 272
Appendix 1: Exercises
T/19.1
State whether each of the following is capital expenditure or revenue expenditure. You only
have to write one word, either ‘capital’ or ‘revenue’ in each case.
(1) Purchase of a motor van for use within the business.
(2) Purchase of goods intended for resale in the normal course of business.
(3) Purchase of petrol for the motor van.
(4) Purchase of materials to be used in building an extension to the firm’s business premises.
(5) Payment of insurance on the business premises.
T/19.2
Matthew Dawalla owns a restaurant and the following were some of his transactions during
the year ended 31 October Year 7:
(1) Purchase of flour for immediate use in the kitchen.
(2) Purchase, in September Year 7, of a motor van for delivery of prepared foods to
customers.
(3) Payment for advertising.
(4) Payment for carriage inwards in respect of foodstuffs for the kitchen.
(5) Payment of £6,400 for work done on the restaurant premises. £5,100 was for an
extension to the restaurant seating area, while the remainder was for painting and
decorating the restaurant.
(6) Payment for heating and lighting.
(7) Purchase, in July Year 7, of new ovens for the kitchen.
(8) Payment for expenses of running the motor van.
Required
State whether each of the 8 transactions is revenue expenditure, capital expenditure, or
both. If an item is both capital and revenue expenditure, you should state the respective
amounts.
272
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Page 273
Appendix 1: Exercises
T/19.3
JK Distributors Ltd purchases motor vehicles from manufacturers and sells them to other
companies and to the general public. Jameson Partners is a firm of accountants.
Required
Classify the following transactions into either capital expenditure or revenue expenditure.
Transactions by JK Distributors Ltd:
(1) Purchase of motor vehicles for resale.
(2) Purchase of a transporter lorry for moving vehicles.
(3) Payments for the building of a showroom extension.
(4) Salaries and commission paid to showroom sales staff.
(5) Purchase of a computer for stock control purposes.
Transactions by Jameson Partners:
(1) Purchase of motor vehicles for use in the business.
(2) Purchase of an office safe.
(3) Rent paid for use of office premises.
(4) Payment of course fees for staff training.
(5) Payment of staff salaries and travelling expenses.
273
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Page 274
Appendix 1: Exercises
T/19.4
P Arkan is a builder. He designs and builds superior houses to meet individual customer
specification.
The following invoices were received from suppliers in October Year 4:
£
Invoice 1
Invoice 2
Invoice 3
Invoice 4
From Mellow Brick Company:
40,000 high quality bricks
Delivery charge
From Premier Equipment Company:
One earth moving machine
4 replacement tyres for existing machine
From Excel Office Supplies:
One photocopier for use within the firm
10 reams of copier paper
From Arbor Construction Company:
Building an extension to the
cement storage area
Repairs to fencing as instructed:
Fencing panels and other materials
Labour charges
24,800
375
25,175
42,700
890
43,590
1,460
62
1,522
12,400
1,475
1,060
14,935
Required
Analyse the amount of each invoice and apportion it to capital expenditure and revenue
expenditure. Present your answer in a table as follows:
Capital
expenditure
£
Revenue
expenditure
£
Total
expenditure
£
Invoice 1
Invoice 2
Invoice 3
Invoice 4
(LCCIEB)
274
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11:18 am
Page 275
Appendix 1: Exercises
T/19.5*
Show the effect of the way each of the following transactions was recorded in the accounts
of a retailer of electrical equipment. If there was no effect, state ‘no effect’.
Transaction
(1) Purchase of motor vehicle for deliveries
to customers – entered in Purchases Account
Gross
profit
Effect on
Net
profit
Balance
sheet
(2) Invoice for electricity wrongly entered in
Water Supply Account
(3) Payment for repairs to premises entered in
Premises Account
(4) Bill for petrol for delivery vehicle
entered in Motor Vehicle Account
(5) Invoice for legal services in respect of
the purchase of premises entered in
Office Expenses Account
(6) The cost of installing new shop fittings
was charged to Wages Account
T/19.5/A
Transaction
(1)
Effect on
Gross profit
Net profit
Understated
Understated
(2)
No effect
No effect
No effect
(3)
No effect
Overstated
Fixed assets
overstated
Capital overstated
(4)
No effect
Overstated
Fixed assets
overstated
Capital overstated
(5)
No effect
Understated
Fixed assets
understated
Capital understated
(6)
No effect
Understated
Fixed assets
understated
Capital understated
Balance sheet
Fixed assets
understated
Capital understated
275
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Page 276
Appendix 1: Exercises
T/19.6*
This question has reference to the information given in T/19.2 (Matthew Dawalla).
Matthew Dawalla makes no provision for depreciation in respect of fixed assets purchased
in the last 6 months of any financial year.
Using the format shown below, indicate by means of a tick () which of the Trading
Account, Profit & Loss Account, or balance sheet prepared at 31 October Year 7 would be
affected by each of the transactions. In the case of item (5), also state the amount.
Trading
Account
Profit & Loss
Account
Balance sheet
Items
Trading
Account
Profit & Loss
Account
Balance sheet
(1)
Items
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
T/19.6/A
(2)
(3)
(4)
(5)
£1,300
(6)
(7)
(8)
276
£5,100
pages 267-326
15/3/03
11:18 am
Page 277
Appendix 1: Exercises
T/19.7*
Andrew Smithers has recently prepared the following Trading and Profit & Loss Account:
Andrew Smithers
Trading and Profit & Loss Account
for the year ended 30 September Year 3
£
Sales
less Cost of goods sold:
Opening stock
Purchases
less Closing stock
Gross profit
less Expenses:
Rent
Wages
General expenses
Net loss
3,860
49,750
53,610
4,200
4,400
18,900
860
£
73,200
49,410
23,790
24,160
(370)
On reviewing his books of account you find that:
(1) The item ‘Purchases’ includes:
●
●
●
a desktop computer bought for use in the office for £2,200;
a new delivery van bought for use in the business for £7,600;
the purchase of materials for extending the shop premises £2,350.
(2) The sales figure includes the sale of the old delivery van for £1,600. This figure had
been shown in the books at £3,400.
(3) The closing stock includes £300 of materials in hand for work on extending the shop
premises.
(4) Rent accrued £400.
(5) The figure for wages includes £2,100 for building work on extending the shop premises.
Andrew Smithers tells you that he wishes to allow £1,500 first-year depreciation on the
new delivery van.
Required
Prepare a revised Trading and Profit & Loss Account for Andrew Smithers for the year
ended 30 September Year 3.
277
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Page 278
Appendix 1: Exercises
T/19.7/A
Andrew Smithers
(Revised) Trading and Profit & Loss Account
for the year ended 30 September Year 3
£
Sales
(-1,600)
less Cost of goods sold:
Opening stock
Purchases
(-2,200
-7,600
-2,350)
less Closing stock (-300)
Gross profit
less Expenses:
Rent (+400)
Wages (-2,100)
General expenses
Depreciation:
£
Old van
1,800
New van
1,500
Net profit
278
£
71,600
3,860
37,600
41,460
3,900
37,560
34,040
4,800
16,800
860
3,300
25,760
8,280
pages 267-326
15/3/03
11:18 am
Page 279
Appendix 1: Exercises
T/19.8*
John Bradford ended his first year of trading on 31 December Year 4. He has no knowledge
of book-keeping and accounts but has prepared what he calls his profit statement for the
year:
John Bradford
Profit statement at 31 December Year 4
£
Cash takings from customers
Purchases
Goods for resale
Motor vehicle, bought 1 Jan Yr 4
Advertising
Vehicle running costs
Wages paid
Insurances
Heat and light
Cash taken for own use
Profit
14,173
2,200
16,373
838
1,092
2,640
310
429
394
£
22,664
22,076
588
Other information at 31 December Year 4:
(1)
(2)
(3)
(4)
Customers invoiced for £1,082 had not yet paid their accounts.
Wages accrued due £286.
Purchases that had cost £1,730 were still unsold (stock).
John Bradford expects the motor vehicle to last 3 years and to have a trade-in value
then of £700.
Required
(a) State what important distinction John Bradford has failed to make in his treatment of
the motor-vehicle purchase.
(b) Prepare a revised Trading and Profit & Loss Account for John Bradford for the year
ended 31 December Year 4.
279
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Page 280
Appendix 1: Exercises
T/19.8/A
(a) John Bradford has not made the distinction between capital and revenue expenditure.
(b)
John Bradford
Trading and Profit & Loss Account
for the year ended 31 December Year 4
£
Sales
less Cost of goods sold:
Purchases
less Closing stock
Gross profit
Advertising
Vehicle running costs
Wages
Insurance
Heat and light
Depreciation – van
Net profit
** Cash takings
add accrued due
£
23,746**
14,173
1,730
12,443
11,303
838
1,092
2,926
310
429
500
22,664
1,082
6,095
5,208
23,746
T/20.1
After trading for some years, Lorna Freele decides to keep a double-entry set of books. At
1 May Year 7, records show her financial position to be as follows:
Assets
Debtors
Liabilities
Premises £47,000 Office equipment £11,200
Fixtures and fittings £3,800
Motor vehicle £9,700 Stock £8,650
D Crawle £570 F Munster £312 J Tester £423
Office cash £107
Creditors: A Farmer £318 T North £165 Bank overdraft £1,730
Required
(a) In the journal, show the opening entries to record the assets and liabilities of Lorna Freele
at 1 May Year 7.
(b) Post the figures for assets and liabilities as balances in appropriate ledger accounts.
Name the division of the ledger in which each account appears.
280
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Page 281
Appendix 1: Exercises
T/20.2*
The following details are available concerning the business of Walter Masson for the year
ended 30 June Year 4:
Stock at 1 Jul Yr 3
Purchases
Returns outwards
Sales
Returns inwards
Stock, 30 Jun Yr 4
Office expenses
Wages
Rent, rates, and insurance
£
4,600
15,120
140
29,360
410
5,300
1,740
7,300
3,200
Required
Prepare closing entries for Walter Masson at 30 June Year 4, showing transfers to the Trading
Account, Profit & Loss Account, and Capital Account relating to the year ended 30 June
Year 4.
T/20.2/A
Walter Masson
Journal
Year 4
30 Jun
30 Jun
30 Jun
30 Jun
Trading
Stock
Book value of stock at
1 Jul Yr 3
Trading
Purchases
Purchases for year ended
30 Jun Yr 4
Trading
Returns inwards
Returns inwards for year
ended 30 Jun Yr 4
Sales
Trading
Sales for year ended
30 Jun Yr 4
Dr
£
4,600
Cr
£
4,600
15,120
15,120
410
410
29,360
29,360
(continued)
281
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Page 282
Appendix 1: Exercises
T/20.2/A (continued)
30 Jun
30 Jun
30 Jun
30 Jun
30 Jun
30 Jun
30 Jun
Returns outwards
Trading
Returns outwards for year
ended 30 Jun Yr 4
Stock
Trading
Value of stock at
30 Jun Yr 4
140
140
5,300
5,300
Trading
Profit & loss
Gross profit for the year
14,670
Profit & loss
Office expenses
Office expenses for year
ended 30 Jun Yr 4
1,740
Profit & loss
Wages
Wages for year ended
30 Jun Yr 4
7,300
Profit & loss
Rent, rates, and insurance
Rent, rates, and insurance
for year ended 30 Jun Yr 4
3,200
Profit & loss
Capital
Net profit for year transferred
2,430
14,670
1,740
7,300
3,200
2,430
Comment
The ‘sides’ the individual items (eg purchases) appear on in these journal entries correspond
to the transfer entries appearing in the individual accounts concerned.
282
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Page 283
Appendix 1: Exercises
T/20.3
At 31 August Year 5, the end of his financial year, B C Holt’s books included the following
balances:
£
Stock at 1 Sep Yr 4
Purchases
Sales
Purchases returns
Sales returns
Carriage inwards
9,580
58,960
90,440
1,030
2,105
1,760
B C Holt valued his stock at cost, £10,380, at 31 August Year 5.
Required
In the books of B C Holt:
(a) Prepare journal entries, without narrations, to transfer the above balances to the Trading
Account for the year ended 31 August Year 5. The closing stock valuation should also
be journalized.
(b) Prepare the Trading Account for the year ended 31 August Year 5.
(LCCIEB)
283
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Page 284
Appendix 1: Exercises
T/20.4*
C Stanton’s financial year ends on 30 June; the following transactions took place during
June Year 7:
(1) On 1 June, Stanton purchased a new car, for use in the business, for £9,600 from the
Smart Vehicle Company. He was allowed £2,200 for his old car and paid the balance
by cheque.
(2) On 1 June, Stanton paid £360 by cheque for car insurance to 31 May Year 8.
(3) On 11 June, he purchased a new computer for £2,685 on credit from E Byte & Son.
(4) On 19 June,T Wilson paid £65 by cheque as the only payment on his debt of £260.
Stanton decided to write off the balance as a bad debt.
(5) During the month of June, Stanton had taken goods costing £419 for his own use.
On 30 June Year 7, Stanton decided to make adjustments for the following matters, before
preparing the final accounts:
(a) Car insurance premium is prepaid.
(b) Bank charges amounting to £71 had not been entered in the books.
(c) Telephone charges of £124 for the month of June had not been paid.
Required
Prepare the journal entries to record the above transactions and adjustments, including
bank, in the books of C Stanton.
Note
Narrations are not required.
(LCCIEB)
284
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11:18 am
Page 285
Appendix 1: Exercises
T/20.4/A
C Stanton
Journal
Year 7
1 Jun
1 Jun
11 Jun
19 Jun
30 Jun
30 Jun
30 Jun
30 Jun
Motor car
Motor-car disposal
Bank
Insurance
Bank
Office machinery
E Byte & Son
Dr
£
9,600
2,200
7,400
360
360
2,685
2,685
Bank
Bad debts
T Wilson
65
195
Drawings
Purchases
419
Car insurance (Year 7/8)
Car insurance (Year 6/7)
330
Bank charges
Bank
Telephone (Year 6/7)
Telephone (Year 7/8)
Cr
£
260
419
330
71
71
124
124
285
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11:18 am
Page 286
Appendix 1: Exercises
T/20.5*
The following information relates to James Grant, a trader, in respect of the financial year
ended 31 December Year 5:
(1) On 8 January, Grant purchased motor van number 5, for £10,800 from Roundstar
Garages, according to invoice number K/6807. He paid a deposit of £2,000 by cheque,
the balance of the purchase being on credit.
(2) On 12 March, T Hardwicke, a debtor, paid £350 as a first and final instalment on a
debt of £1,400.The balance of the debt was written off as irrecoverable.
(3) On 20 June, Grant took from stock, for his own private use, goods which had been
purchased within the current trading year for £135.
(4) On 15 October, Grant sold motor van number 3 for £4,000, which was paid by
cheque. It had been purchased in Year 2 for £8,800. The Provision for Depreciation
on the motor van Number 3 Account showed a balance of £5,200.
(5) On 31 December, Grant’s debtors totalled £18,600. He decided to adjust the provision
for doubtful debts of £650 to 4% of total debtors.
Required
Prepare journal entries to record the above items, including narrations.
(LCCIEB)
286
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15/3/03
11:18 am
Page 287
Appendix 1: Exercises
T/20.5/A
James Grant
Journal
(1)
Year 5
8 Jan Motor vehicles
Bank
Roundstar Garages
Dr
£
10,800
Cr
£
2,000
8,800
Purchase of motor van no 5, ref invoice
no K/7807. Payment by cheque £2,000
with balance on credit
(2)
12 Mar Bank
Bad debts
T Hardwicke
350
1,050
1,400
Payment of 25% of amount due;
balance of debt written off
(3)
20 Jun Drawings
Purchases
135
135
Goods taken for private use
(4)
15 Oct Disposal
**Motor van
Provision for depreciation
on motor van
Disposal
Bank
Disposal
Disposal
Profit & loss
8,800
8,800
5,200
5,200
4,000
4,000
400
400
Sale of motor van no 3, previously
purchased in Year 2 for £8,800.
Cheque received £4,000
(5)
31 Dec Pofit & loss
Provision for doubtful debts
Increase in provision to 4% of total
debtors of £18,600
94
94
**This journal entry has been set out in this way to show the different elements in the disposal. Other
forms of layout may be acceptable.
287
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Page 288
Appendix 1: Exercises
T/21.1
In the year ended 31 December Year 9, the following errors occurred in the books of
Ching Wong:
(1) Both the Office Expenses Account and Sales Account were overcast by £100.
(2) The purchase of equipment, for use in the business, was debited to the Purchases
Account.
(3) A sale of goods to B Winlock for £346 was entered in the Sales Day Book as £316.
(4) A purchase of goods from T Lister was posted to T Mister’s Account.
(5) A bill for cleaning had not been entered in the books.
(6) A bill for travelling expenses had been entered in the Telephone Account.
Required
Prepare a statement as follows and, against each item, state the type of error, eg ‘error of
omission’:
Type of error
(1)
(2)
(3)
(4)
(5)
(6)
288
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Page 289
Appendix 1: Exercises
T/21.2
The following accounts appeared in the books of a trader:
Purchases Account
Year 5
31 Dec Balance b/d
31 Dec Bank (new fixed
assets)
Year 6
1 Jan
Balance b/d
£
16,220
Year 5
31 Dec Balance c/d
2,140
18,360
£
18,360
18,360
18,360
Fixed Assets (at cost)
Year 5
31 Dec Balance b/d
31 Dec Bank (goods for
resale)
Year 6
1 Jan
Balance b/d
£
19,450
Year 5
31 Dec Balance c/d
1,050
20,500
£
20,500
20,500
20,500
Required
(a) What type or types of error have been made in these accounts?
(b) Would the correction of these errors increase or decrease the gross profit and, if so, by
how much?
T/21.3
Required
Name each of the following errors:
(1) The proceeds from the sale of some office furniture had been posted from the Cash
Book to the credit of the Sales Account.
(2) The proprietor of a business had taken for his own use goods purchased for resale.This
had not been recorded in the books.
(3) An invoice for £271 for goods sold on credit to N Pinter had been entered in the
books as £217.
(4) A payment for electricity had been posted from the Cash Book to the debit of the
Rent Payable Account.
289
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Page 290
Appendix 1: Exercises
T/21.4
The following trial balance was prepared incorrectly for K Masters at 31 December Year 8,
with some balances entered in the wrong column:
Motor vehicles
Debtors
Carriage inwards
Cash at bank and in the office
Rent receivable
Purchases
Sales
Creditors
Drawings
Bad debts written off
Carriage outwards
Motor-vehicle running expenses
Discount allowed
Provision for doubtful debts
Discount received
Provision for depreciation on
motor vehicles
Salaries and wages
Sundry expenses
Lighting and heating
Premises
Capital
Dr
£
28,500
19,084
Cr
£
317
22,315
4,600
137,918
183,217
11,584
14,600
560
687
6,150
765
930
580
4,800
18,886
754
1,566
130,000
369,054
176,391
395,150
Required
Prepare a correct trial balance for K Masters at 31 December Year 8.
(LCCIEB)
290
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Page 291
Appendix 1: Exercises
T/21.5
Laurence Grant failed to agree his trial balance at 30 June Year 5.The following errors were
later discovered:
(1) The Purchases Day Book total of £5,960 had been posted to the Purchases Account
in the General Ledger as £5,690.
(2) The withdrawal by Laurence Grant of £95 in cash for private use had been posted to
the debit of the Office Expenses Account.
(3) The purchase on credit of computer stationery for £135 had been debited to the
Office Equipment Account.
(4) Discount allowed of £157 had been credited to the Discount Received Account.
(5) A cheque for £430 had been correctly debited in the Cash Book but the double entry
had not been completed.
Required
Prepare a statement showing the effect of these errors upon the trial balance of Laurence
Grant.You should set out your answer as follows:
Cause debit total
to exceed credit total by
£
Cause credit total
to exceed debit total by
£
(1)
(2)
(3)
(4)
(5)
Note
If there is no effect on the trial balance, you should state ‘no effect’.
(LCCIEB)
291
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Page 292
Appendix 1: Exercises
T/22.1
Lynn Webster is a sole trader whose financial year ends on 30 September. At 30 September
Year 5, she failed to agree her trial balance and found the following errors and omission:
(1) The payment by cheque of an invoice for £515 for repairs to the office computer had
been recorded in the Cash Book and posted to the Office Equipment Account.
(2) A payment of £390 for advertising had been posted to the Travelling Expenses
Account.
(3) Lynn Webster had taken goods, bought during the year ended 30 September Year 5 for
£186, for her personal use, but no entry had yet been made in the books.
(4) The sale of goods for cash £730 had been entered as a credit to the Cash Account and
a debit to the Sales Account.
(5) The payment of wages, £1,560 in cash, to Webster’s employees for building an
extension to the firm’s offices, had been entered in the Cash Book and posted to the
Wages Account.
Required
Prepare journal entries, including narrations, necessary to deal with the errors in (1), (2),
(4), (5) and the omission in (3).
T/22.2
The following errors occurred in the books of Eric Sawyer, a sole trader, in one accounting
period:
(1) The cost for petrol of £26 was wrongly debited to the Motor Vehicles Account.
(2) The purchase of goods on credit for £86 from T Lawton was recorded in both the
Purchases Day Book and the personal account as £68.
(3) The payment of a subscription to a trade association, £60, was wrongly debited to
the Purchases Account.
(4) The total of one month’s discount-received column in the Cash Book, which was
£54, was posted to the credit side of the Discount Allowed Account.
(5) The total of the stationery analysis column of the Petty Cash Book for February Year 8,
£13.50, was posted to the Postages Account.
(6) A purchase of a new motor van for £10,500 had been debited to Fixtures and Fittings.
Required
Show the correction of each of the above errors by means of a journal entry. Your entries
should include narrations.
292
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Page 293
Appendix 1: Exercises
T/22.3*
Henry James, a sole trader, extracted a trial balance at 30 September Year 6. It did not agree.
On checking the entries in his books, he discovered the following:
(1) A payment of £380 from a debtor, C Bates, had been posted to another debtor’s
account in the name of C Yates.
(2) The total of credit sales for March appeared in the Sales Day Book as £5,680 but this
had been posted in the Sales Account as £6,680.
(3) A credit purchase of £100 had been correctly entered in the Purchases Day Book for
the month of September; it had also, however, been wrongly posted as a cash purchase.
(4) Rent of £500 for the month of May had been paid by cheque but no double entry
had been completed in the Rent Account.
(5) A telephone bill paid by cheque, amounting to £230, had been posted in error to the
Electricity Account.
(6) A cash sale of £300 had been completely omitted from the books.
(7) The purchase of a motor van costing £7,000 had been posted in error to the Purchases
Account.
Required
Prepare the necessary journal entries on 30 September Year 6 to correct the above errors
and omission. Narrations are not required.
T/22.3/A
Henry James
Journal
Year 6
(1) 30 Sep
(2) 30 Sep
(3) 30 Sep
(4) 30 Sep
(5) 30 Sep
(6) 30 Sep
(7) 30 Sep
C Yates
C Bates
Sales
No entry
Cash/bank
Purchases
Rent
No entry
Telephone
Electricity
Cash/bank
Sales
Motor van
Purchases
Dr
£
380
Cr
£
380
1,000
–
100
100
500
–
230
230
300
300
7,000
7,000
293
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Page 294
Appendix 1: Exercises
T/22.4*
The following relates to the business of W Lennon:
Trading and Profit & Loss Account
for the year ended 31 December Year 5
£
Stock at 1 Jan Yr 5
Purchase
add Carriage inwards
less Returns outwards
Gross profit c/d
Discount allowed
Motor-vehicle expenses
Wages
Insurance
Office expenses
Provision for depreciation:
Office equipment
1,120
Motor vehicles
8,500
294
Sales
less Returns inwards
76,300
1,150
77,450
980
less Stock at 31 Dec Yr 5
Net profit
£
12,600
76,470
89,070
13,200
75,870
61,860
137,730
640
8,200
24,300
1,850
2,370
£
138,400
670
137,730
137,730
Gross profit b/d
Discount received
61,860
720
9,620
15,600
62,580
62,580
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Page 295
Appendix 1: Exercises
Balance sheet at 31 December Year 5
Fixed Assets
Premises
Office equipment
Motor vehicles
Current Assets
Stock
Debtors
Cash and bank
less Amounts due within 1 year
Creditors
Cost
£
45,000
5,600
34,800
85,400
Accumulated
depreciation
£
–
1,680
12,850
14,530
Net book
value
£
45,000
3,920
21,950
70,870
13,200
6,300
1,050
20,550
4,100
16,450
87,320
Financed by:
Capital – balance at 1 Jan Yr 5
add Net profit
less Drawings
83,920
15,600
12,200
3,400
87,320
It was later found that the following errors/omissions had been made during the year ended
31 December Year 5:
(1) Stock at 31 December Year 5 had been wrongly valued. It should have been valued at
£12,900.
(2) A bill, not yet paid, for carriage inwards, £100, for Year 6, had wrongly been charged
to Year 5.
(3) No adjustment had been made for prepayment of insurance, £350, at 31 December
Year 5.
(4) £300 paid in wages had been posted wrongly to the Office Expenses Account.
(5) The provision for depreciation of motor vehicles had been wrongly calculated. It
should have been £8,700.
Required
(a) In a statement, show for each of the 5 errors/omissions the effect upon gross profit, net
profit and the balance sheet of:
(i) the error/omission
(ii) correcting the error/omission.
(b) Show, for W Lennon, the revised Trading and Profit & Loss Account and balance
sheet after the necessary adjustments have been made.
295
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Page 296
Appendix 1: Exercises
T/22.4/A: part (a) only
Effect of correcting for
the error/omission
Effect of error/omission
Gross profit overstated
by £300
Net profit overstated
by £300
Balance sheet:
Stock overstated
by
Capital overstated £300
Net profit reduced by £300
Balance sheet:
Stock reduced
by
Capital reduced
£300
(2)
Gross profit and net profit
understated by £100
Balance sheet:
Sundry creditors
by
overstated
£100
Capital understated
Gross profit and net profit
both increased by £100
Balance sheet:
Sundry creditors
by
reduced
£100
Capital increased
(3)
Net profit understated
by £350
Balance sheet:
Current assets
by
understated
£350
Capital understated
Net profit increased
by £350
Balance sheet:
Current assets
by
increased
£350
Capital increased
(4)
Office expenses
overstated
Wages understated
No further effects
Reduced office expenses
Increased wages





















by
£300
No further effects
Net profit overstated
by £200
Balance sheet:
Fixed assets
overstated
Capital overstated
Net profit reduced by £200
by
£200
Balance sheet:
Fixed assets reduced
Capital reduced



(5)
by
£350
Gross profit reduced by £300



(1)
by
£200



Note
It will be clear that the effect of correcting for the error/omission is the reverse of the effect
of the error/omission. Both effects would not be included in any examination question.
They are both included in this instance to emphasize the difference in the wording of the
two parts of the answer to (a). Incorrect or unsuitable wording of answers in this topic can
result in a significant loss of marks.
296
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Page 297
Appendix 1: Exercises
T/22.5
Helen Sagan, a sole trader, prepared a trial balance at 30 September Year 5, which did not
agree.You have found the following errors:
(1) A cash payment for material purchases for £726 had been entered in the Cash Book
as £762.The correct entry had been made in the Purchases Account.
(2) A receipt of £2,320 from a debtor, J Wilson, had been posted to the account of
S Williamson.
(3) A purchase, on credit, of a new machine for £5,300 had been debited to the Machine
Repair Account. Depreciation is not charged on assets in the year they are purchased.
(4) A cheque payment of £856 to a creditor had been entered in the creditor’s account
but had been omitted from the Cash Book.
(5) A cheque payment of £2,000 for rent had been entered in the Cash Book as £200.
This incorrect amount had also been entered into the expense account.
(6) An invoice from P Rees for purchases of £240 had been omitted from the ledger.
Required
(a) Prepare journal entries to correct the errors. Narrations are not required.
(b) Prepare a statement, as shown below, and enter the effect on profit of each of the errors,
including the amount. If there is no effect enter a tick () in the right hand column.
Effect on profit
Error
number
Overstated £
Understated £
No effect
(1)
(2)
(3)
(4)
(5)
(6)
297
pages 267-326
15/3/03
11:18 am
Page 298
Appendix 1: Exercises
T/22.6
This exercise refers to the errors set out in T/22.2.
Required
State the effect of the correction of each of these errors on the draft net profit of Sawyer.
You should set out your answer as follows:
Increase of net profit
£
Reduction of net profit
£
(1)
(2)
(3)
(4)
(5)
(6)
Note
Enter each amount in the appropriate column. If there is no effect on the net profit, you
should state ‘no effect’.
(LCCIEB)
T/22.7
This exercise refers to T/22.1. Despite having failed to agree her trial balance, Lynn Webster
calculated a provisional profit of £5,670.
Required
Prepare a statement as shown below and against each of the items (1) – (5) enter the effect,
with the amounts, on the provisional profit of correcting for the error/omission. If there is
no effect, you should enter a tick () in the column headed ‘no effect’.
Effect of corrections on net profit
Increase £
Reduce £
No effect
(1)
(2)
(3)
(4)
(5)
Underneath your statement, you should state the amount of the revised net profit, after the
necessary adjustments have been made.
298
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15/3/03
11:18 am
Page 299
Appendix 1: Exercises
T/23.1*
J Salmon, a sole trader, prepared the following trial balance from her books at 30 June Year 6:
Motor vehicles at cost
Fixtures and fittings at cost
Purchases and purchases returns
Sales and sales returns
Stock (1 Jul Yr 5)
Discounts
Provision for doubtful debts
Bad debts
Debtors and creditors
Capital
Drawings
Provision for depreciation:
Motor vehicles
Fixtures and fittings
Rent
Motor-vehicle running expenses
Rates and insurances
Salaries
Cash at bank
Cash in hand
Lighting and heating
Dr
£
80,000
82,000
263,500
3,400
15,700
2,300
650
35,000
Cr
£
7,300
370,000
1,600
600
27,400
108,000
28,200
23,000
19,000
12,000
3,360
3,420
12,300
10,720
420
3,930
556,900
556,900
At 30 June Year 6:
(1) Depreciation is to be provided as follows:
Motor vehicles
Fixtures and fittings
25% on cost
10% on cost
(2) Stock was valued at cost £17,400.
(3) The provision for doubtful debts is to be set at 2% of the debtors.
(4) Motor-vehicle running expenses at £510 and lighting and heating at £420 were
accrued.
(5) The rates and insurances were prepaid by £120.
Required
Prepare for J Salmon:
(a) a Trading and Profit & Loss Account for the year ended 30 June Year 6
(b) a balance sheet at 30 June Year 6.
(LCCIEB)
299
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15/3/03
11:18 am
Page 300
Appendix 1: Exercises
T/23.1/A
J Salmon
Trading and Profit & Loss Account
for the year ended 30 June Year 6
£
£
15,700
Stock at 1 Jul Yr 6
Purchases
less Purchases
returns
263,500
£
370,000
3,400
366,600
7,300 256,200
271,900
less Stock at 30 June
Yr 6
Cost of goods sold
Gross profit c/d
Depreciation:
Motor vehicles
20,000
Fixtures and fittings
8,200
Discounts allowed
Bad debts
Provision for doubtful debts
Rent
Motor-vehicle running
expenses (3,360 + 510)
Rates and insurances
(3,420 - 120)
Salaries
Lighting and heating
(3,930 + 420)
Net profit
300
Sales
less Sales returns
17,400
254,500
112,100
366,600
366,600
Gross profit b/d
28,200
2,300
650
100
12,000
Discounts received
112,100
1,600
3,870
3,300
12,300
4,350
46,630
113,700
113,700
pages 267-326
15/3/03
11:18 am
Page 301
Appendix 1: Exercises
Balance sheet at 30 June Year 6
Fixed Assets
Motor vehicles
Fixtures and fittings
Current Assets
Stocks
Debtors
less Provision for
doubtful debts
Prepayments
Cash at bank
Cash in hand
less Amounts due within 1 year
Creditors
Accrued (510 + 420)
Net current assets
Cost
£
80,000
82,000
162,000
Accumulated
depreciation
£
43,000
27,200
70,200
Net book
value
£
37,000
54,800
91,800
17,400
35,000
700
27,400
930
34,300
120
10,720
420
62,960
28,330
34,630
126,430
Financed by:
Capital
add Net profit
less Drawings
108,000
46,630
28,200
18,430
126,430
301
pages 267-326
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11:18 am
Page 302
Appendix 1: Exercises
T/23.2
Hilda Braquette prepared the following trial balance at 31 October Year 5:
Dr
£
Stock at 1 Nov Yr 4
Fixtures and fittings at cost
Provision for depreciation of fixtures
and fittings at 1 Nov Yr 4
Bank
Cash in hand
Debtors and creditors
Motor vehicles at cost
Provision for depreciation of motor
vehicles at 1 Nov Yr 4
Purchases and sales
Discounts allowed and received
Drawings
Motor-vehicle running expenses
Wages
Bad debts
Provision for doubtful debts
Returns inwards and outwards
Rent
Light and heat
Insurance
Office expenses
Capital
Cr
£
6,820
14,000
2,800
3,200
148
10,300
24,000
75,820
2,140
13,200
5,860
43,972
390
1,180
10,400
650
1,080
2,100
215,260
6,920
7,200
161,360
1,580
210
850
34,340
215,260
Additional information at 31 October Year 5:
£
(1)
Stock at cost
(2)
Insurance prepaid
(3)
Accrued due:
Light and heat
Office expenses
£
8,460
240
80
140
220
(4)
Depreciation is provided as follows:
Fixtures and fittings
– 10% per annum on cost
Motor vehicles
– 20% per annum on cost
(5)
Provision for doubtful debts is to be adjusted to 4% of debtors
Required
For Hilda Braquette, prepare:
(a) the Trading and Profit & Loss Account for the year ended 31 October Year 5
(b) a balance sheet at 31 October Year 5.
(LCCIEB)
302
pages 267-326
15/3/03
11:18 am
Page 303
Appendix 1: Exercises
T/23.3
The following trial balance was extracted from the ledger of P Lippis, a sole trader, on
31 March Year 12:
Business premises at cost
Purchases and sales
Capital
Stock at 1 Apr Yr 11
Purchases returns
Fixtures and fittings at cost
Provision for depreciation of fixtures
and fittings
Trade debtors:
R Prince
K Evitts
J Carr
Archway Supplies
Trade creditors:
K Porter
Archway Supplies
Cash in hand
Cash at bank
Wages
Advertising
Heat and light
Insurances
Other expenses
Drawings
Dr
£
85,000
39,800
Cr
£
64,650
93,420
8,310
285
12,700
2,540
480
1,010
180
370
2,210
4,096
47
1,093
8,942
110
1,092
368
459
7,240
167,201
167,201
The following additional information is to be taken into account:
(1)
(2)
(3)
(4)
Stock valued at cost on 31 March Year 12, £7,935.
Accruals at 31 March Year 12: wages £230; heat and light £98.
Prepayment at 31 March Year 12, Insurances £46.
Lippis received a bank statement, showing that there was a balance in his favour
on 31 March Year 12, amounting to £1,140.A creditor had not yet presented a cheque
drawn by Lippis for £79, and the bank applied bank charges amounting to £32.
(5) Depreciation was to be provided on fixtures and fittings at 10% per annum on cost.
(6) Archway Supplies was Lippis’ main supplier. Unusually, Archway purchased goods from
Lippis, and it was agreed that the debtor balance should be a contra against the
creditor balance.
Required
Prepare for P Lippis:
(a) a Trading and Profit & Loss Account for the year ended 31 March Year 12
(b) a balance sheet at 31 March Year 12.
(LCCIEB)
303
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11:18 am
Page 304
Appendix 1: Exercises
T/23.4
At 31 December Year 3, the end of her first year of trading, Hilda Braquette produced the
following list of stock items and asked for your help:
200
Original
cost
£
2.00
Selling
price
£
3.00
(ii)
500
5.00
7.50
20 broken – to be
thrown away
(iii)
1,200
1.00
1.50
40 damaged – saleable
at half price
(iv)
50
3.00
2.50
old stock
(v)
75
4.00
6.00
(vi)
350
3.00
4.50
(vii)
450
2.00
3.00
Item
Quantity
(i)
Comments
Stock
value
£
20 damaged – saleable
at half price
Required
Calculate the stock valuation of each item and total to show the value of Hilda Braquette’s
closing stock at 31 December Year 3.
304
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Page 305
Appendix 1: Exercises
T/23.5
The following balances were included in the trial balance of James Hanson at 31 March
Year 4:
Purchases and sales
Returns
Stock at 1 Apr Yr 3
Debit
£
18,620
238
1,146
Credit
£
29,410
194
At 31 March Year 4, James Hanson counted and valued his stock in hand at cost, £1,382.
This included the following 3 items of stock:
Item 1
Item 2
Item 3
Cost price
£
120
72
80
Net realizable
value
£
140
60
45
Required
(a) Prepare a statement, starting with the stock value of £1,382, showing any necessary
adjustments in respect of the 3 items of stock above, to show a new stock valuation at
31 March Year 4.
(b) Prepare a Trading Account for James Hanson for the year ended 31 March Year 4.
305
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Page 306
Appendix 1: Exercises
T/23.6
The financial year of F Lang, a trader, ends on 31 March. F Lang sells goods at a mark-up
of 33 1/3 % on cost price. On 31 March Year 4, the value of his stock at cost was £12,360.
On 17 March Year 5, he provisionally valued his stock at £14,220.
Between 18 March Year 5 and the end of that financial year, the following took place:
(1) Lang bought goods to a purchase invoice value of £740.
(2) He returned goods to suppliers that had been invoiced to him at £273.
(3) He sold goods to a selling value of £1,320.
(4) Lang took goods that had cost £195 for his own private use.
Required
(a) Prepare a statement adjusting the value of stock at 31 March Year 5 for entry into the
Stock Account at cost price.
(b) Calculate the effect of the adjustment of the value of stock on the amount of the gross
profit £94,800 for the year ended 31 March Year 5.
(c) Prepare the Stock Account for the years ended 31 March Years 5 and 6 respectively,
assuming that the value of stock at 31 March Year 6 was £15,300.
(LCCIEB)
306
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11:18 am
Page 307
Appendix 1: Exercises
T/24.1
The Treasurer of the Southern Jazz Club drew up the following Receipts & Payments
Account for the year ended 31 December Year 19:
£
Balance at bank,
1 Jan Yr 19
Members’ subscriptions
Sale of Festival tickets
Sale of food and drink
3,860
3,520
1,840
2,730
Hire of rooms
Annual subscription to
National Jazz Association
Festival expenses
Printing and postage
Purchase of equipment
Purchase of food and drink
Balance at bank
11,950
£
2,100
150
1,970
868
1,200
2,480
3,182
11,950
The following additional information was available:
(1) Members’ subscriptions in arrears at 31 December Year 19 amounted to £50.
(2) On 1 January Year 19, the Club owned equipment worth £2,600. It was decided that
the equipment owned at 31 December Year 19 should be depreciated by £700.
Required
Prepare the Income & Expenditure Account in respect of the Southern Jazz Club for the
year ended 31 December Year 19.
Note
A balance sheet is not required.
307
pages 267-326
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11:18 am
Page 308
Appendix 1: Exercises
T/24.2*
Walton Cricket Club had the following Receipts & Payments Account for the year ended
31 December Year 8:
Receipts
Balance at bank
Subscriptions
Refreshment takings
Hire of ground
Sale of raffle tickets
£
2,920
8,120
5,200
650
1,010
Payments
Purchases – refreshments
Purchases – equipment
Wages of groundsman
Wages of refreshment staff
Telephone
Secretary’s expenses
Light and heat
Insurance
Repairs/renewals
Purchase – raffle prizes
Balance at bank
17,900
£
3,000
2,460
4,180
1,600
215
468
366
450
1,272
500
3,389
17,900
The following information was also available:
Stock of refreshments
Creditors for refreshments
Subscriptions in arrears
Subscriptions in advance
Pavilion
Sports equipment
Insurance prepaid
At 31 December
Year 7
£
340
590
–
–
8,000
5,600
50
At 31 December
Year 8
£
560
630
180
50
7,000
7,254
80
Required
Prepare, for the Walton Cricket Club, for the year ended 31 December Year 8:
(a) the Refreshments Account
(b) the Income & Expenditure Account.
(LCCIEB)
308
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15/3/03
11:18 am
Page 309
Appendix 1: Exercises
T/24.2/A
Walton Cricket Club
Refreshments Account
for the year ended 31 December Year 8
£
Stock at 1 Jan Yr 8
Purchases (3,000 - 590 + 630)
less Stock at 31 Dec Yr 8
Cost of sales
Wages
Profit on trading
340
3,040
3,380
560
2,820
1,600
780
5,200
£
5,200
Sales
5,200
Income & Expenditure Account
for the year ended 31 December Year 8
Expenditure
£
Wages – groundsman
Telephone
Secretary’s expenses
Light and heat
Repairs and renewals
Insurance
(450 + 50 - 80)
Depreciation:
Pavilion
1,000
Equipment
806
Surplus, excess of
income over expenditure
£
4,180
215
468
366
1,272
420
1,806
1,463
10,190
Income
£
£
Profit from refreshments
780
Subscriptions
8,120
add Arrears
180
8,300
less In advance
50 8,250
Profit on raffles:
Sale of tickets
less Cost of prizes
Hire of ground
1,010
500
510
650
10,190
309
pages 267-326
15/3/03
11:18 am
Page 310
Appendix 1: Exercises
T/24.3*
The Treasurer of the Belvedere Sports Club prepared the following Receipts & Payments
Account for the year ended 30 September Year 11:
Receipts
Balance at bank
Sale of raffle tickets
Sale of refreshments
Subscriptions
£
3,160
810
4,020
4,160
Payments
Purchase of refreshments
Insurance
Printing and stationery
Light and heat
Repairs to equipment
Purchase of raffle prizes
Wages – refreshments staff
Purchase of equipment
Wages – ground staff
Postage
Balance at bank
12,150
£
2,460
250
165
235
430
390
1,710
2,400
1,220
80
2,810
12,150
Additional information:
Subscriptions in advance
Subscriptions in arrears
Stock of refreshments
Insurance paid in advance
Light and heat accrued due
Equipment
30 September
Year 10
£
90
100
1,020
35
30
6,500
30 September
Year 11
£
60
170
1,310
50
54
8,000
Required
Prepare, for the Belvedere Sports Club, for the year ended 30 September Year 11:
(a) a Refreshments Trading Account
(b) an Income & Expenditure Account.
Note
A balance sheet is not required.
310
pages 267-326
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11:18 am
Page 311
Appendix 1: Exercises
T/24.3/A
Belvedere Sports Club
Refreshments Trading Account
for the year ended 30 September Year 11
Stock at 1 Oct Yr 10
Purchases
less Stock at 30 Sep Yr 11
Cost of sales
Wages
Profit on trading
£
1,020
2,460
3,480
1,310
2,170
1,710
140
4,020
£
4,020
Sales
4,020
Income & Expenditure Account
for the year ended 30 September Year 11
Expenditure
Insurance (250 + 35 - 50)
Printing and stationery
Light and heat (235 - 30 + 54)
Repairs to equipment
Wages – ground staff
Postage
Depreciation of equipment
Surplus of income over
expenditure
£
235
165
259
430
1,220
80
900
1,531
4,820
£
** Subscriptions:
add In advance 30 Sep Yr 10
In arrears 30 Sep Yr 11
Income
Profit on refreshments
Subscriptions
Profit from raffle:
Sale of tickets
less Cost of prizes
90
170
£
£
140
4,260**
810
390
420
4,820
£
4,160
260
4,420
less In arrears 30 Sep Yr 10
In advance 30 Sep Yr 11
100
60
160
4,260
311
pages 267-326
15/3/03
11:18 am
Page 312
Appendix 2: Summarized answers to selected
exercises
Goods +350 Bank -350
Cash +290 Goods -290
Office furniture +318 D Jackson, Creditor +318
Loan,T Walls -1,500 Bank -1,500
Bank +965 F Wiles -965
Postage +11 Cash -11
Bank -617 T Gates -617
1.1
(1)
(2)
(3)
(4)
(5)
(6)
(7)
1.2
(i) Computer -3,600 Bank +3,600
(ii) Computer -3,600 Debtor +3,600
(iii) Computer -3,600 Bank +2,000 Debtor +1,600
1.3
Assets £23,660 Capital £16,190 Other liabilities £7,470
1.5
(i) 31 Oct Yr 3: Assets £22,905 Capital £16,045
Other liabilities £6,860
(ii) 30 Nov Yr 3: Assets £22,145 Capital £16,045
Other liabilities £6,100
(1)
(2)
(3)
(4)
(5)
(6)
Debited
Purchases
Cash
Equipment
T Ball
D Trill
Office furniture
Credited
T Ball
Sales
Bank
Returns outwards
Sales
Creditor,T Doyle
(1)
(2)
(3)
(4)
(5)
(6)
Debited
A Darby
Returns inwards
Bank
T Zuck
Creditor, F Lane
Returns inwards
Credited
Sales
A Brittle
A Darby
Returns outwards
Bank
A Darby
(1)
(2)
(3)
(4)
(5)
(6)
Debited
Purchases
Creditor
Office equipment
Rent
Cash
Bank
Credited
Cash
Bank
Office Services Ltd
Cash
Sales
F Tracey
2.1
2.2
3.1
312
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11:18 am
Page 313
Appendix 2: Summarized answers
3.2
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Debited
Bank
J King
Telephone
Cash
Insurance
Purchases
Returns inwards
Credited
T Ward (loan)
Sales
Bank
Office furniture
Bank
R Veal
B Trent
4.1 (a) Cr balance £1,215
4.1 (b) Debit balance – on debtor’s account; representing an asset
4.6
Trial balance totals £31,780
5.3
Gross profit £17,210
Net profit £5,090
5.4
Gross profit £27,180
Net profit £6,900
7.1
Gross profit £18,030
Net profit £7,270
7.3
Gross profit £85,260
Net profit £23,250
7.4
Gross profit £18,170
Net profit £6,850
7.6
Gross profit £82,350
Net profit £14,800
Balance sheet:
9.2
£
Fixed assets
162,500
Current assets
40, 894
Amounts due in more
than 1 year
26,000
Creditors
16,394
Capital
161,000
Multiple choice: (1) (b) and (d)
(2) (a) and (c)
(3) (b) and (d)
10.1 Balances at 31 Mar Yr 5: Cash £117 Bank £978 (Dr)
Discount Allowed Account
Discount Received Account
Dr £18
Cr £16
10.2 Balances at 31 May Yr 6: Cash £423 Bank £8,259
Discount totals: Discount allowed
Discount received
Dr £80
Cr £71
313
pages 267-326
15/3/03
11:18 am
Page 314
Appendix 2: Summarized answers
10.3 Balances of Cash Book before adjustment: Cash £99
Bank £383 (Dr)
Balances after adjustment: Cash £99 Bank £200 (Dr)
10.4 (a) Bank balance at 31 May Yr 11:
£1,198 (Dr)
(b) Discount Allowed Account
Dr £25
Discount Received Account
Cr £47
Both recorded in the General (Nominal) Ledger
11.1 (a) Sales Day Book total for August Year 6 £2,133
11.2 (a) Sales Day Book total for September Year 6 £1,672
11.3 (a) Purchases Day Book total for October Year 8 £1,930
11.4 Balances at 31 Jul Yr 2: Cash £263 Bank £2,129
Discount totals: Dr
Cr
Discount allowed
Discount received
£60
£30
12.1 (a) (i) Sales Day Book total
(ii) Returns inwards Day Book total
£1,305
£152
12.2 (a) (i) Purchases Day Book total
£1,141
(ii) Returns Outwards Day Book total
£109
12.3 (a) Purchases Day Book total
Sales Day Book total
Returns Outwards Day Book total
Returns Inwards Day Book total
£988
£1,349
£127
£174
12.4 (a) Purchases Day Book total
Purchases Returns Day Book total
Sales Day Book total
£1,436
£64
£1,336
(b) To encourage prompt payment.
12.5 (a) Purchases Day Book total £15,155
14.1 (a)
Rates
Telephone
Insurance
Rent receivable
Wages
314
To P/L 31 Dec Yr 5
1,510 Cr
262 Cr
700 Cr
4,000 Dr
46,470 Cr
Balance b/d 1 Jan Yr 6
450 Dr
47 Cr
60 Dr
160 Dr
840 Cr
pages 267-326
15/3/03
11:18 am
Page 315
Appendix 2: Summarized answers
14.1 (b)
M Paine
Balance sheet (extract) at 31 December Year 5
£
Current Assets
Prepayments: Rates
Insurance
Rent receivable
450
60
160
670
14.2 (a)
(i) Rent
(ii) Commission receivable
(iii) Telephone
14.2 (b)
£
Amounts due within 1 year
(current liabilities)
Accruals: Telephone
Wages
To P/L 31 Dec Yr 10
4,950 Cr
65,800 Dr
1,010 Cr
Balance b/d 1 Jan Yr 11
1,350 Dr
4,700 Dr
300 Cr
L Reinholdt
Balance sheet (extract) at 31 December Year 10
£
Current Assets
Rent in advance
Commission due
To P/L 31 Dec Yr 5
620 Cr
780 Cr
Insurance
Stationery
Telephone
Rent payable
Rent receivable
Advertising
Insurance
Office cleaning
Rent receivable
14.6 (a)
Rent receivable
Rates
Advertising
Printing/stationery
300
Balance b/d 1 Jan Yr 6
95 Dr
160 Dr
45 Cr
56 Cr
740 Dr
150 Dr
{
572 Cr
3,570 Cr
900 Dr
14.5 (a)
(i)
(ii)
(iii)
(iv)
£
Amounts due within 1 year
(current liabilities)
Telephone – accrual
1,350
4,700
6,050
14.4 (a)
15.1
47
840
887
To P/L 30 Jun Yr 5
360 Cr
560 Cr
1,640 Cr
2,220 Dr
Balance b/d 1 Jul Yr 5
190 Cr
50 Dr
280 Cr
190 Cr
To P/L 30 Jun Yr 9
2,630 Dr
3,300 Cr
2,400 Cr
2,185 Cr
Balance b/d 1 Jul Yr 9
740 Cr
840 Dr
580 Dr
3,100 Dr
615 Cr
{
Depreciation charge Net book value
(a) £2,100
£8,300
(b) £4,160
£6,240
315
pages 267-326
15/3/03
11:18 am
Page 316
Appendix 2: Summarized answers
15.2 Balances at 1 Jan Yr 8: (ii) Provision for depreciation of motor van
(iv) Provision for depreciation of fixtures
and fittings
£8,356 Cr
£3,440 Cr
15.4 Balances at 1 Jan Yr 8: (ii) Provision for depreciation of computer
equipment
£4,800 Cr
(iv) Provision for depreciation of motor vehicle £7,120 Cr
15.5 Balances at 1 Jan Yr 6: (1) Provision for depreciation of fixtures
and fittings
£1,875 Cr
(2) Provision for depreciation of motor vehicle £12,816 Cr
15.6 Balance at 1 Jan Yr 7:
(ii) Provision for depreciation of furniture
and equipment
(v) Disposal of Motor Van Account:
debit entry – P/L profit on sale
16.1 (a) (ii) Provision for doubtful debts:
To P/L Account
31 Mar Yr 4
£79 Cr
31 Mar Yr 5
54 Cr
31 Mar Yr 6
78 Dr
Balance 1 Apr Yr 6 £435 Cr
16.2 (a) (i) (2) Provision for doubtful debts: To P/L Account
31 Dec Yr 1
£1,410 Cr
31 Dec Yr 2
1,598 Cr
31 Dec Yr 3
1,210 Dr
Balance 1.1.4 £1,798 Cr
16.4 (a) Provision for doubtful debts:
(b)
Journal
Debtor
Bad debts recovered
Cash/bank
Debtor
£
240
£
240
240
16.5 (iv) Provision for doubtful debts:
316
To P/L Account
31 Dec Yr 8 £152 Cr
31 Dec Yr 9
764 Cr
31 Dec Yr 10 336 Dr
240
To P/L Account
31 Dec Yr 4
£275 Cr
31 Dec Yr 5
245 Dr
Balance 1 Jan Yr 6 £780 Cr
£3,900 Cr
£1,386
pages 267-326
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11:18 am
Page 317
Appendix 2: Summarized answers
17.1 Cash Book (bank) balance: before adjustment £4,549 Dr
after adjustment £3,632 Dr
17.2 (a) Cash Book (bank) balance after adjustment £3,966 Dr
17.3 Cash Book (bank) balance after adjustment £3,793 Dr
18.1 Total outlay £97.20 Travelling expenses £16.84 Stationery £13.57
Postage £5.95 Purchases £53.47 Cleaning expenses £7.37
Balance b/d 1 Jul Yr 7 £2.80 Reimbursement £97.20
18.2 (a) Total outlay £253.80 Motor-vehicle expenses £97.60
Postage £18.20 Stationery £31.00 Travelling expenses £46.60
Ledger £60.40
Balance b/d 1 Apr Yr 6 £46.20 Reimbursement £253.80
(b) (i) To debit of Motor Vehicle Expenses Account
(ii) General (Nominal) Ledger
18.4 (a) Week 1: Total outlay £77.48 Wages £45.00 Postage £10.00 Travel £6.15
Sundries £6.58 Ledger £9.75 Reimbursement £77.48
Week 2: Total outlay £74.56 Wages £48.00 Postage £8.73 Travel £3.35
Sundries £14.48
(b) Any 2 from:
●
●
●
●
theft from box;
cash in box incorrectly counted;
incorrect amount paid out;
amount paid out without being recorded, ie without a voucher.
19.1 (1) Capital (2) Revenue (3) Revenue (4) Capital (5) Revenue
19.2 (1) Revenue (2) Capital (3) Revenue (4) Revenue
(5) £5,100 Capital £1,300 Revenue (6) Revenue (7) Capital (8) Revenue
19.3
(1)
(2)
(3)
(4)
(5)
JK Distributors
Revenue
Capital
Capital
Revenue
Capital
Jameson Partners
Capital
Capital
Revenue
Revenue
Revenue
317
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Page 318
Appendix 2: Summarized answers
Capital
expenditure
£
19.4
Invoice
Invoice
Invoice
Invoice
1
2
3
4
42,700
1,460
12,400
Revenue
expenditure
£
25,175
890
62
2,535
Total
expenditure
£
25,175
43,590
1,522
14,935
20.3 (b) Gross profit £29,445
21.1 (1) Compensating error (2) Error of principle (3) Error of original entry
(4) Error of commission (5) Error of omission (6) Error of commission
21.2 (a) Errors of principle
(b) Increase the gross profit by £1,090
21.3 (1) Principle (2) Omission (3) Original entry (4) Commission
21.4 Totals £382,102
Cause debit total
to exceed credit total
21.5
(1)
(2)
(3)
(4)
(5)
Cause credit total
to exceed debit total
£270
No effect
No effect
£314
£430
22.5 (b)
Profit overstated
(1)
(2)
(3)
(4)
(5)
(6)
(1)
(2)
(3)
(4)
(5)
(6)
318
No effect
£5,300
£1,800
£240
Increase of net profit
22.6
Profit understated
No
No
No
No
Reduction of net profit
£26
£18
effect
effect
effect
effect
pages 267-326
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Page 319
Appendix 2: Summarized answers
Increased
net profit
22.7
(1)
(2)
(3)
(4)
(5)
Reduced
net profit
£
515
No effect
186
1,460
1,560
3,206
515
Provisional net profit
add Net adjustment
Adjusted net profit
£
5,670
2,691
8,361
23.2 (a) Gross profit £86,850 Net profit £15,456
(b) Balance sheet: Net assets £36,596
Closing capital
£36,596
23.3 (a) Gross profit £24,760 Net profit £12,205
(b) Balance sheet:
Net assets
£98,385
Closing capital £98,385
23.4 (i) £400 (ii) £2,400 (iii) £1,190 (iv) £125
(v) £300 (vi) £1,050 (vii) £890 Total £6,355
£
1,382
23.5 (a)
Pre-adjusted stock value
Item 1 – no change
Item 2
(12)
Item 3
(35)
Revised stock value
(47)
1,335
(b) Gross profit £10,935
£
23.6 (a) Provisional value
add Purchases
less Returns
740
273
less Sales (£1,320 less 25%)
less Drawings
£
14,220
467
14,687
990
13,697
195
13,502
319
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Page 320
Appendix 2: Summarized answers
(b) Pre-adjusted gross profit
deduct reduction in value
of closing stock
(14,220 -13,502)
Revised gross profit
£
94,800
718
94,082
24.1 Deficit (on income/expenditure)
£128
Closing accumulated fund
£6,332
320
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Page 321
Appendix 3: Glossary
Account A record of transactions by category (such as purchases) or by person or
organization.
Accumulated fund The capital account of a club or society.
Allowance An amount set against a previous purchase or sale.
Assets Resources or items owned by the business.
Bad debt A debt which is expected never to be paid; that is, an irrecoverable debt.
Balance The amount on one side of an account that exceeds the amount on the other
side ‘to balance’.The book-keeper finds and enters the difference and brings it down.
Balance sheet A form of financial statement.
Bank current account This account is used for the regular banking and withdrawal of
money.
Bank deposit account A relatively stable account; withdrawals are usually infrequent.
Bank reconciliation statement A statement that accounts for the difference between
the bank statement balance and the adjusted Cash Book balance.
Bank statement A statement issued by a bank showing the customer’s account as
recorded by the bank.
Capital The amount of the owner’s financial stake in the business.
Capital expenditure Expenditure that is expected to be of benefit to the firm over the
long term. It is generally incurred on the purchase, alteration, or improvement of fixed
assets.
Carriage An expense incurred in, or charge made for, the delivery of goods.
Carriage inwards A payment made for having purchases delivered. It should be added to
purchases in the Trading Account.
Carriage outwards A payment to a carrier for delivering goods to customers. It should
be shown in the Profit & Loss Account.
Cash discount An allowance for the early settlement of an account.
Cash purchases Goods bought and paid for immediately (in cash or by cheque).
Cash sales Goods sold with immediate payment (in cash or by cheque).
Cheque A written instruction to a bank to make payment.
Cheque clearance the passing of a cheque through the bank system, with payment
completed.
321
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Page 322
Appendix 3: Glossary
Commission Payment or money received (paid) for carrying out (benefiting from) a
service, for example on sales, or providing (receiving) advice. Commission is commonly
calculated as a percentage.
Compensating error When errors cancel each other out.
Contra Used for entries in the Cash Book where a debit bank entry is matched by a credit
cash entry and vice versa.
Cost of goods sold Opening stock plus purchases less closing stock for a given period.
Counter credits Payments into a bank account (a number of cheques, for example)
amounting to a stated sum, which are acknowledged by the bank as a credit into the
account.
Credit note Issued by the seller, granting credit for the return of goods or for deficiency
in supply.
Credit purchases Goods bought, with payment to be made at a later date.
Credit sales Goods sold, with payment to be received by an agreed future date.
Credit transfer A direct means of transferring money through the bank system, initiated
by the paying party.
Creditor A person (or business) to whom money is owed by a business.
Current assets Short-term assets, which are directly involved in the trading activities of
the firm.
Current liabilities Amounts payable within one year.
Debtor A person (or business) who owes money for goods or services supplied by a
business.
Deficit An excess of expenditure over income (for a given period).
Depreciation The estimate of the fall in value of fixed assets over a period of time.
Direct debit Credit transfer in reverse: it is the direct transfer of money through the
banking system, initiated by the payee.
Discount allowed A discount granted to a debtor for early payment.
Discount received A discount granted by a creditor for early received payment.
Dishonoured cheque A cheque that the drawer has failed to honour.
Donation A gift of money.
Doubtful debts As in ‘provision for doubtful debts’: debts that may never be recovered
and for which an allowance is made.
Drawer The party who first signs a cheque, that is, on whose bank account the cheque is
drawn.
322
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Page 323
Appendix 3: Glossary
Drawings Money, goods, or services withdrawn from the business for the owner’s personal
benefit.
Effective purchase price (or selling price) The list price less trade discount.
Error of commission When a transaction is entered in a wrong account of the same
class.
Error of principle When a transaction is entered in the wrong class of account.
Expense Outlay or cost.
Expense accrual An amount due in respect of an accounting period that remains
unpaid at the end of that period.
Final accounts Used as a broad term to include the Trading and Profit & Loss Account
and the balance sheet.
Fixed assets Longer-term assets bought for use within the business.
Gross profit An excess of sales income over cost of goods sold.
Horizontal balance sheet Two-sided presentation, with assets on the balance sheet on
the left and capital/liabilities on the right.
Impersonal accounts Accounts concerning things rather than people, such as assets or
expenses.
Imprest system A system in which a fixed float is reimbursed periodically.
Income accrual Income other than sales revenue, outstanding at the end of the period
for which it was due.
Income prepayment Income received in advance of the due period.
Invoice A document issued on a credit sale, prepared by the seller and sent to the buyer.
It gives details of the goods supplied, the amount to be paid and the terms of sale.
Ledger The set of accounts belonging to a business. In a traditional manual system, these
would be kept in a book or series of books.
Liabilities Amounts owing to persons outside the business.
List price The price of goods before the deduction of a trade discount.
Longer-term liabilities Amounts payable in more than one year.
Net profit Gross profit less other expenses.
Net realizable value Selling price less any costs of getting the goods into a saleable
condition.
Nil balance No balance remaining on a given account.
323
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Page 324
Appendix 3: Glossary
Nominal accounts Income and expense accounts.
On account Payment towards an amount owing; a part payment.
Opening entries Journal entries recording the opening balances of a new set of accounts.
Overdrawn account Occurs when more funds have been withdrawn than put into the
account; that is, a deficit.
Payee The party to whom a payment is due to be made.
Personal accounts Accounts of people or organizations with whom the business deals.
Posting Entering transactions or period totals in accounts from day books (including the
Cash Book).
Prepayment A payment made in advance of an accounting period or due date.
Prime entry As in ‘books of prime entry’: the point at which a transaction is recorded
for the first time, prior to entry in the ledger.
Private Ledger Normally used for keeping accounts of a highly confidential nature, such
as the Capital Account.
Profit The surplus of income over costs, usually calculated for a given time period.
Provision An accounting allowance for an estimated known or possible fall in the value
of an asset.
Purchases Goods bought on credit or for cash, which are intended to be sold later.
Purchases Ledger Comprised of suppliers’ accounts, that is, ledger creditors.
Real accounts Comprised of assets.
Receipts & Payments Account A summarized version of the Cash Book of a club or
society.
Reducing balance depreciation A fixed percentage is written off the reduced balance
of the asset each year.
Reimbursement Makes good the total of outlays in a given period.
Returns inwards The return of previously sold goods by the customer, for which an
allowance is given.
Returns outwards The return of previously bought goods, to the supplier, who makes
an allowance.
Revenue Income.
Revenue expenditure Expenses incurred in running the business and in maintaining
fixed assets.
324
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Page 325
Appendix 3: Glossary
Running balance The balance on the account is shown, updated, after each transaction
entry. A running balance is presented in columnar format.
Sales Ledger Comprised of customers’ accounts, that is, debtors.
Set off One amount set against another, to reduce the amount owed or receivable.
Source document The basis of an entry in the accounting system, such as a sales invoice.
Standing order A direct transfer between bank accounts, involving fixed amounts at
regular intervals.
Straight line depreciation A fixed proportion is written off the original cost of the asset
each year.
Terms of sale The conditions for settlement of an account, such as a period of credit
allowed or the rate of any cash discount.
Trade discount The amount allowed as a reduction of the list price when goods are sold
by one business to another business.
Transaction on credit Taking ownership of an asset now but paying for it at a later date.
Trial balance A periodic check that the total of the debit balances equals the total of the
credit balances.
Unpresented cheque A cheque not yet presented to the bank for payment.
Vertical balance sheet A balance sheet presented to read downwards, like a story.
325
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Page 326
Notes
Lesson 11
1
In practice, an invoice may be raised for all sales, both cash and credit. From the audit
viewpoint, it is better to have all sales evidenced by an invoice. A retailer is unlikely to
enter directly each small sale transaction by debiting the Cash Book and crediting the
Sales Account. A summarizing method is likely to be used, eg a till roll acting as a day
book.
Lesson 12
1
If the account were to be settled before a return is made, payment would then be made
on the gross figure.
Lesson 19
1
Note that the relevant Financial Reporting Standard allows development expenditure
to be capitalized, provided there is substantial belief that future product income will
arise as a result of the development expenditure.
Lesson 20
1
326
In a computerized system, entering purchases of fixed assets into a journal may not be
necessary. All purchases can be dealt with through the Sales Journal (or Sales Day
Book), with coding to ensure that revenue and capital purchases are properly separated.