prelims

15/3/03

12:36 pm

Page iii

How to Pass

Book-keeping

FIRST LEVEL Teacher’s Guide

Keith F Bird
MSc BSc (Econ) ACIS

prelims

15/3/03

12:36 pm

Page iv

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

prelims

15/3/03

12:36 pm

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

v

prelims

15/3/03

12:36 pm

Page vi

Contents

Appendix 1: Exercises, some worked solutions, and support material Appendix 2: Summarized answers to selected exercises Appendix 3: Glossary Notes

201 312 321 326

vi

prelims

15/3/03

12:36 pm

Page vii

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

prelims

15/3/03

12:36 pm

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

viii

and other significant figures such as gross profit. Other answers or parts of answers. asset totals. may be established by reference to the text of the book as well as by reference to the fully worked solutions in Appendix 1.prelims 15/3/03 12:36 pm Page ix Introduction results of certain calculations. ix . too detailed for inclusion. such as account or journal entries. and trial balance totals. key account entries. net profit. It is advisable to make full use of the Glossary.

sales. 2. 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. and 3 210 231 237 246 272–84 x . 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 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.prelims 15/3/03 12:36 pm Page x Cross-references to 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 22 152 164 180 189 201 210 22 23 23 24 Appendices 1.

eg use of bank balance to buy fixed assets) The effect upon the accounting equation of the dual-type transaction.3 1.2 1.4 Explanation and use of the terms debtor.2 2. listing points on the whiteboard or overhead projector as appropriate. normally. recording business transactions and their effects. asset. the name of the ‘other’ account/day book involved in that particular transaction/ entry Completion of debit and credit entries recording individual transactions 2.1 2. The varied backgrounds and experiences of class members should be drawn on whenever possible. 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. ie assets: ownership v. 1 . 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. ie date together with. external sources of funds The business as an entity The dual effect of a business transaction Double-entry recording of transactions Extended Syllabus references 1.4 The underlying purpose of this lesson is to develop recognition of the need for. and purpose of. Always relate the discussion to a particular aim. creditor. 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. liability.1 1.pages1-59 15/3/03 11:14 am Page 1 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. including a brief discussion of the students’ responses. Understanding the two-fold aspect of any transaction (benefit and detriment.3 2.

for example: Cash: availability and movements Amounts owed by the business Amounts owed to the business The possessions . Step 2 Aim: to recognize the key areas of information that need to be recorded From the answers to the questions in Step 1. Ask them to write down the resources that they would need. provide information for making decisions about the future.pages1-59 15/3/03 11:14 am Page 2 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. deal with the tax authorities. such as: ● ● ● ● ● ● ● to to to to to to to run (more) effectively and efficiently. broadly. know what the business is earning and spending. 2 . 1 Ask them to imagine that they are establishing a business. such as a shop or factory. identify areas of information that will be required. 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. know what money is coming in and going out. make decisions about the future. control the business: to make adjustments as necessary.‘assets’ Amount of money invested in the business Purchases Sales Expenses Profit Capital Step 3 Aim: to recognize the resources needed and. the means of obtaining them: proprietor versus external sources While the students remain in pairs. the students are likely to give broadly based answers.

000 less £3. in establishing a business. and motor vehicles. The means of financing a business may be expressed as ‘the accounting equation’: eg Assets = capital + liability (eg a loan) Assets £15. the accounts are to be kept for the business and they are separate from the owner’s accounts. the equation may be expressed as: eg Assets less liabilities = capital Assets £15. list these on the whiteboard in two categories. Explain how the assets might be obtained. (c) borrow money. those that are: (a) measurable in money terms. (b) put his or her money into the business. As a result. Show that. and that (c) = liability. It will be dealt with at a later stage. machines. ie obtain a loan. as skills as part of wage payments.You may illustrate the concept like this: invests in Business accounts withdraws from Personal accounts 2 Explain. with reference to Step 3. for example.000 3 . that the money a proprietor invests to set up and run a business is usually supplemented by borrowed money. Show that category (a) is recorded in the accounts as assets. contacts. Category (b) is less easily recorded. but may be. and experience. eg skills. so that assets can be bought.000 + liability £3. premises.pages1-59 15/3/03 11:14 am Page 3 The accounting equation 2 As the students suggest the resources.000 Alternatively. ie the proprietor’s stake. eg cash. and (b) less measurable. 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. a proprietor might: (a) treat his or her own motor vehicle to be for use within the business.000 = £12.000 = capital £12. Emphasize that (a) + (b) = capital.

inserting the missing figure in each of the columns.530 5.900 8. It is important not to confuse the students with transaction moves that are too rapid. a typewriter (classed as office equipment) is bought by drawing a cheque on the bank for £150.) (c) On 9 March.pages1-59 15/3/03 11:14 am Page 4 The accounting equation 3 Ask the students to work through the following exercise. stage by stage.060 2.000 Capital Loan from J Black £ 7. goods are bought from T Smith on credit for £500.000 2 Explain the term ‘business transaction’. Assets £ 2.830 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.300 1. receiving a cheque in exchange.120 Liabilities £ 1.) (b) On 4 March. with payment by cheque. (Purchase of an asset.920 3.040 780 0 (1) (2) (3) (4) (5) 6. Show.000 8. Ensure they fully understand the effect of each transaction before you move onto the next. Lim sells some of the goods that had cost £200 for the same amount.000 1. eg: F Lim Balance sheet at 1 March Year 3 £ Office furniture Motor vehicle Cash at bank 800 5. with immediate payment.500 4.430 Capital £ 1. The transactions (which are defined in brackets) of F Lim in Year 3 are as follows: (a) On 2 March.) 4 . (Sale of asset. the effect of transactions. (Purchase of an asset on credit. upon a balance sheet. using the following example.

500 Here.) (e) On 16 March.300 500 1.300 300 1.200) Cash at bank (+ 200) 800 150 5.000 500 8. K Woolf. (Receipt of money from a debtor.750 8.000 1.150) 1. there has been a switch between two assets.000 8. (Sale of asset on credit.500 This balance sheet shows that both the assets and liabilities have increased. Lim sells some goods that had cost £200 to K Woolf ‘on credit’ for the same amount.750 8.300 Cash at bank (.000 Capital Loan from J Black 7.) 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. Lim sends a cheque for £300 towards the amount owing to T Smith. 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.pages1-59 15/3/03 11:14 am Page 5 The accounting equation (d) On 12 March.000 500 8. 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 (.000 This example shows that only the assets have changed. 5 .000 1. Lim receives a cheque for £200 from his debtor.950 8.500 Capital Loan from J Black Creditor – T Smith £ 7. (Payment of an amount owing.500 Capital Loan from J Black Creditor – T Smith £ 7.000 1.) (f) On 21 March.

a change of assets can be seen. 6 .000 Creditor – T Smith (-300) 200 8.300 100 1.200 £ Capital 7.000 500 8.pages1-59 15/3/03 11:14 am Page 6 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 5.200 Capital Loan from J Black Creditor – T Smith £ 7.650 8.200 From this balance sheet.200 Here.000 1000 200 8.300) 800 150 5. a reduction in assets matched by a reduction in liabilities can be seen.000 1.950 8. there is a change of assets: an increase in bank and the removal of the debtor balance from the balance sheet. 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 (.850 8. 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 5.300 100 200 1.500 Capital Loan from J Black Creditor – T Smith £ 7.500 From this balance sheet.300 Goods (-200) 100 Debtor – K Woolf (+ 200) 200 Cash at bank 1.000 Loan from J Black 1.

2. credit sales debtor creditor on account goods sold with payment to be received by an agreed future date a person or organization to whom goods have been sold on credit and from whom money is due a person or organization from whom goods have been bought on credit and to whom money is owed payment towards an amount owing.3 in the Appendix (page 201) and ask them to work through them.The purchase is paid for by: (a) drawing on the bank account. reference should be made to the Glossary on pages 321–5.000 4. Consequently: Assets £ + 6.2.000 Motor vehicle Bank Liabilities Birclays Finance Limited £ + 4. Explain the terms to the students. 10 Explain that a transaction may involve a combination of assets or liabilities. part payment It is vital that students understand the meaning of terms as they are used. a motor vehicle is bought for £6.000 . 7 . Updating the balance sheet each time a transaction occurs takes up too much time.000 11 Emphasize the equation: assets = capital + liabilities 12 Give the students each a copy of exercises T/1.000. 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.pages1-59 15/3/03 11:14 am Page 7 The accounting equation 9 A list of terms and their definitions follows.1. For example. keeping separate accounts is a quicker and clearer method of updating records. and (b) a loan from Birclays Finance Limited. and T/1.000 4. T/1. For the following lessons.

By making sure that the logic is clear. Always ensure that.pages1-59 15/3/03 11:14 am Page 8 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. 5 Explain the form of entries for T-type accounts thoroughly. you may show the following layout: Asset account increases + Liability account decreases Capital account decreases increases + increases + decreases - 4 Emphasize that the purpose of debit and credit is to allow for the two-fold effect of each transaction. helping the students to avoid making mistakes. 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 . for each transaction. which are as follows. the account entries will have meaning. on the overhead projector or whiteboard: Assets Liabilities Capital an increase a decrease an increase a decrease an increase a decrease debit credit credit debit credit debit Alternatively. students understand the logic of the entries.

000 Year 6 4 Jul 26 Jul Capital Year 6 1 Jul 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 Goods £ 360 Bank £ 10. Exercise (i) Gladys Lane sets up in business on 1 July Year 6 by placing £10. For each transaction: (a) emphasize the transaction effect. she buys office equipment. paying £400 by cheque.000 into a new business bank account. she buys goods from Landau Limited for £360 on credit. Solution Bank Year 6 1 Jul Capital £ 10.000 6 Work through the exercise below with the students. (b) stress how the double entry is achieved.000 Office equipment Landau Ltd £ 400 360 9 . (ii) On 4 July Year 6.pages1-59 15/3/03 11:14 am Page 9 The accounting equation Bank Year 6 1 Jul Capital £ 10. (iv) On 26 July Year 6.000 Capital Year 6 1 Jul Bank £ 10. Gladys Lane pays the amount owing to Landau Limited by cheque. (iii) On 7 July Year 6.

9 Stress that. 8 Remind the students that. marks may be lost if account entries are poor. but should be clearly spaced without being too far apart. they need to: (a) record the date correctly. 10 . 10 Ask the students to work through exercises T/1. in making the entries.4 and T/1.5 in the Appendix (page 202).pages1-59 15/3/03 11:14 am Page 10 The accounting equation 7 Emphasize that entries in accounts should not be cramped together. when ‘Cheque’ is not the name of the account. and (b) correctly enter the name of the related account in the ‘details’ column.An example of an avoidable error is writing the word ‘Cheque’ instead of ‘Bank’ for the name of the matching account. in the examination.

This approach applies because this session deals with the entries concerning purchases and sales. for use in the business. sales.2. 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. How to Pass Book-keeping. motor vehicles. 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.3. is to explain the reasons for particular book-keeping methods and to build up understanding of the subject progressively.pages1-59 15/3/03 11:14 am Page 11 Lesson 2: Purchases.3. is not included under goods: they are shown separately. etc.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.2. both inwards and outwards.1 for cash 5. for selling in due course. 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) 5.3 5. Later.4 5. 11 . First Level.6 The approach adopted in the students’ book. This approach may mean using a simplified method on a certain matter at one stage to avoid introducing too many points at once. that simplified method might need to be modified as more features are covered.1 for cash 5.2 on credit The effects on (double-entry) accounts of the sale of goods/services: 5.5 5.1 5.2 The various possible accounting meanings of the term purchases The effects on (double-entry) accounts of purchases of goods: 5. The buying and selling of office furniture.

Purchases Year 3 15 Mar Bank £ 295 Bank Year 3 15 Mar Purchases £ 295 12 . and sales with a separate account for each. 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. goods were bought on 15 March Year 3 for £295 and paid for by cheque. and returns 2 Goods are now to be divided into: ● ● purchases. (b) Purchases ‘on credit’ which are bought with payment to be made at a later date. (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. that they are: (a) goods bought to sell. which can be understood as immediate payment.The payment may be in cash or it may be by drawing on a bank account. 4 You may also give the students the alternative terms below. Example In the account entries given below. ie as part of trading. sales.This division gives more information and helps to keep control of the business.pages1-59 15/3/03 11:14 am Page 12 Purchases. (a) Purchases ‘for cash’ which are bought with immediate payment. 3 Describe the various meanings of the term ‘purchases’.

3 Work through the following exercise with the students. carefully reviewing each double entry before moving on to the next one. so a credit entry is made in the account for Johnson. 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. 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) 13 . Purchases Year 3 19 Mar L Johnson £ 614 L Johnson Year 3 19 Mar Purchases £ 614 A liability has arisen. who is a ‘creditor’. sales.pages1-59 15/3/03 11:14 am Page 13 Purchases. Example In the account entries that follow. 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. as shown below. at 19 March Year 3. goods were bought on credit. from L Johnson for £614.

Transfers between the Bank Account and the Cash Account are made periodically. has been entered in the Goods Account. Sales Year 3 23 Mar L Fell Year 3 23 Mar Sales £ 260 £ 260 14 . Example At 23 March Year 3. Sales Year 3 21 Mar Cash Cash Year 3 21 Mar Sales £ 312 £ 312 Emphasize that the entry in the Sales Account corresponds to what. goods were sold for £312 cash. 6 Sales on credit Show the students the following example to illustrate the account entries made for sales on credit. Remember to point out that the account only includes the sale of goods that the firm trades in. Note The Cash Account is for recording the receipt and payment of bank notes or coins. goods were sold to L Fell on credit for £260.The account includes both cash sales and credit sales. ie a credit entry. 5 Sales for cash Show the students the following example to illustrate the account entries made for sales for cash. sales.pages1-59 15/3/03 11:14 am Page 14 Purchases. so far. 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. Example At 21 March Year 3.

ensuring that the concept of double entry is fully understood. 8 Ask the students to work through the exercise below. show the following summary of the entries below for a credit sale (preferably on the overhead projector): (a) When a credit sale is made. (b) When payment is received from the debtor. and ● credit the Sales Account. sales. Sales Year 7 6 Mar Cash 15 Mar J Bean Cash Year 7 6 Mar Sales £ 327 J Bean Year 7 15 Mar Sales £ 512 Bank Year 7 31 Mar J Bean £ 512 Year 7 31 Mar Bank £ 512 £ 327 512 15 . Review the transactions one by one (see below). Note Point out that the Purchases Account and the Sales Account have now replaced the Goods Account. the book-keeper should: ● debit the customer’s (debtor’s) account. the book-keeper should: ● debit the Bank Account or Cash Account (depending on how the debtor pays.pages1-59 15/3/03 11:14 am Page 15 Purchases. and returns 7 To reinforce the students’ understanding. and ● credit the debtor’s account. 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. whether by cheque or cash).

so it is termed ‘returns inwards’. Returns inwards Year 3 27 Mar L Fell £ 260 L Fell Year 3 23 Mar Sales £ 260 Year 3 27 Mar Returns inwards £ 260 16 . goods are returned to L Johnson for which £70 is allowed. L Fell returns the goods sold to him on 23 March. This occurrence is the reverse of a sale. 3 Show that the returns are recorded in a separate account. 2 Explain that an allowance is made by the supplier. for which an allowance is given. called the Returns Outwards Account. 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. Returns outwards Year 3 24 Mar L Johnson L Johnson Year 3 24 Mar Returns outwards £ 70 Year 3 19 Mar Purchases £ 614 £ 70 4 Explain that the £70 credit in the Returns Outwards Account offsets the £614 previously shown on the debit of purchases. Ask why this might be so. sales. For example.Their accounts should look like the one below. 5 Explain that the opposite can occur: ie goods that have been sold may be returned by a customer. Ask the students to explain the two entries in Johnson’s account. Ask the students to show the two entries for the returns inwards. using this example: At 24 March Year 3. on 27 March Year 3.pages1-59 15/3/03 11:14 am Page 16 Purchases. ie that the amount of the return is set against the purchase amount.

or show on the overhead projector. exercise T/2.2 in the Appendix (page 203). Ask the students to work through the exercise. Neither of these will be recorded in the Purchases Account. parts do not fit. Ask the students to work through the exercise. and returns 6 Hand out copies of.1 in the Appendix (page 203). 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. which involve assets for use in the business. together with the answers. 17 . otherwise the information would be ‘hidden’ in the Purchases or Sales Account.1. they are not what was shown in the catalogue. drawing attention to items (c) and (f ). 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. they were damaged in transit. sales. in T/2. Step 4 Aim: to strengthen understanding of lesson content Below are a series of questions that you should ask the students. 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. If a question is worded as it is above. or show on the overhead projector. 8 Hand out copies of.pages1-59 15/3/03 11:14 am Page 17 Purchases. the students should assume that the amount of the original sale is fully allowed. exercise T/2. 7 Review student answers. The example 27 March merely states that the goods previously sold are returned.

6 Hand out copies of. 18 . 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. Stress that. returns inwards or sales returns. provided an allowance is given. or show on the overhead projector. that they may be called: ● ● returns outwards or purchases returns. Ask the students to work through them.pages1-59 15/3/03 11:14 am Page 18 Purchases.4 in the Appendix (pages 203 and 204).3 and T/2. or are costly to send back. exercises T/2. 5 Check that the students know the alternative names for the accounts. sales. the book-keeping effect is the same as if the goods are actually returned.

3 The book-keeping entries for drawings 18. Point out that the aim of setting up a business is to make a profit.2 The meaning of the term drawings. allowing for any drawings or the introduction of additional capital 18. 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.4 The possible effect of drawings upon the amount of capital This lesson is diverse in its content. rent of the premises.pages1-59 15/3/03 11:14 am Page 19 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. and advertising. the various forms of drawings 18. these subject areas need not be a cause of major difficulty. With careful explanation and the familiarity that follows from practice. such as: ● ● ● employee wages. ie a surplus: sales less expenses = profit 19 .1 Profit (or loss) as the difference between opening and closing capital balances. All the topics are ones that can feature as elements in examination questions.

One account for each category of expenditure helps to provide more information and improve control.1 and T/3. 20 . In a combination-type transaction. develop the concept of ‘paying as you go’. insurance on a motor vehicle. Step 5. office expenses. Step 2 Aim: to be familiar with combination-type transactions and to be able to make appropriate book-keeping entries 1 In Lesson 1. ie insurance ‘cover’ for a fixed period of time. heating and lighting. Ask the students to work through them. Use the following example to illustrate a combination-type transaction.pages1-59 15/3/03 11:14 am Page 20 Expenses: profit or loss 2 When you explain about recording expenses in the accounts. wages. renting premises and purchasing a building. costing £110 for the next 6 months. office cleaning. an expense account is debited. similarly. a purchased asset is debited to the asset account. for instance. 4 Explain that it is necessary to have several expense accounts. for example. the effect on one account side will be matched by a combination of two (or possibly more) effects on the other side. 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. is paid by cheque. reference was made to the possibility of a transaction involving a combination of assets and/or a combination of liabilities. Illustrate the concept by contrasting. 3 Liken expenses such as rent to very temporary assets. eg insurance.2 in the Appendix (page 204) on the overhead projector. 5 Copy and hand out or show exercises T/3. The following example illustrates the basic account entries relating to an expense item: Example At 28 March Year 3. which ties up money.

3 in the Appendix (page 205) on the overhead projector.000 was made by cheque and the balance on credit.800 Motor vehicle £ 2. ie to pay for personal living expenses. Assets £ + 6.000 + 4.000 2 Copy and hand out or show exercise T/3. then capital is reduced. 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.800 + 4. 2 Drawings are recorded in a separate account.800 . If the owner’s withdrawals are more than the business’s profits. Use the example overleaf to demonstrate this point.800 Bank Year 6 14 Apr Lagonda Garages Year 6 14 Apr Motor vehicle £ 4.2.pages1-59 15/3/03 11:14 am Page 21 Expenses: profit or loss Example At 14 April Year 6. Explain that the owner may draw out money in anticipation of the profits for the year.800 from Lagonda Garages. a motor vehicle was purchased for £6. 21 .800 Increased by amount of motor vehicle Bank balance is reduced Liabilities Creditor – Lagonda Garages £ + 4. Ask the students to work through the exercise. further enabling the accounts to provide as much information as possible.800 The accounts will appear as follows: Motor Vehicle Year 6 14 Apr £ Bank and Lagonda Garages 6. A payment of £2.

Joe Seng. For example. exercise T/3. 22 . Cash Year 3 6 Apr Drawings Year 3 6 Apr Cash £ 170 Drawings £ 170 3 Explain that. Ask the students to work through the exercise. give the students the following formula: start-of-year capital *or profit after deduction of drawings plus profit* (or loss) = end-of-year capital 2 Hand out copies of.pages1-59 15/3/03 11:14 am Page 22 Expenses: profit or loss Example At 6 April Year 3. the owner may take some of the business’s goods for personal use. or show on the overhead projector.4 in the Appendix (page 205). the Drawings Account will be closed off to the Capital Account. 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. 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. withdrew £170 in cash for his own use. at the end of the year. the owner.

2.4 The significance of the term running balance account 3. including an alternative format.This checking is done by the preparation of a trial balance. including: 3.1 The meaning of the term account balance 3.2.3 The significance of any particular account balance.5 The preparation of accounts in running balance form 3.2 The preparation of a trial balance from a list of account balances This lesson deals with the practical matter of the layout of accounts. It is worthwhile giving time to this topic: marks may be lost in the examination if accounts are presented poorly. 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: 23 .2 Balancing the T-type ledger account. a debit balance on an expense account 3.pages1-59 15/3/03 11:14 am 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. and ruling off.1 bringing the balance down for the start of the next accounting period 3. eg a credit balance on a creditor account.1 The purpose of the trial balance 11.2 dealing with the nil balance 3. of accounts 11.7 The procedure for other end-of-period balancing. The lesson also discusses a straightforward method of checking that all double entries have been completed satisfactorily.

1 and T/4.To fail to bring down the balance is to break the double-entry rule. 4 Hand out copies of. just two lines under the figures.pages1-59 15/3/03 11:14 am Page 24 Balancing accounts: the trial balance X expense account Dr Year 3 Entries totalling £ 680 Year 3 Entries totalling Cr £ 600 Here. which should always be done and not merely entered on one side. or show on the overhead projector. 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 £ 370 370 Year 6 12 July Returns inwards 29 July Bank £ 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. Ask the students to work through them.2 in the Appendix (page 206). exercises T/4. 24 . The full balancing of this account at 31 March Year 3 is as follows: X expense account Year 3 Entries £ 680 Year 3 Entries 31 Mar Balance c/d 680 1 Apr Balance b/d 80 £ 600 80 680 The balance is first carried down (c/d) and then brought down (b/d). there is a debit (Dr) balance of £80.

4 in the Appendix (page 207) with the students. page 207). annually in some other cases. prepare debtor and creditor accounts in running-balance format. so far. 25 . 4 Ask the students to show T/4. the format used for the accounts has been two-sided. It is used by banks in the (monthly) statements they issue to customers. 5 Ask the students to work through the exercise below.Then compare running-balance format with the two-sided layout. the running-balance format. However. 3 Explain the format. It is an example of the bank account as kept by the customer of the bank.3 as a two-sided layout. Exercise Required Using the information in T/4. (a) Enter the transactions in appropriate accounts. which is a three-column layout. either ‘Dr’ or ‘Cr’. Stress that the notation. ie the format previously used in this course. 2 An example of an account in running-balance format is included in the Appendix (see T/4.2 (page 206). emphasizing that as each transaction is entered the balance on the account is brought up to date. Step 3 Aim: to be able to prepare a trial balance 1 Work through exercise T/4. Point out that this example is not a specimen of the statements issued by banks. shows the balance after each transaction is entered. and so on.3. must be shown beside the balance figure. 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.pages1-59 15/3/03 11:14 am Page 25 Balancing accounts: the trial balance Step 2 Aim: to appreciate and to be able to apply the running-balance format 1 Emphasize that. following the instructions below.This layout does not reveal the balance easily or quickly.

prove that. no marks will be given for either entry for 10 April. It does not.pages1-59 15/3/03 11:14 am Page 26 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 of the debit balances should agree with the total of the credit balances.This limitation will be considered further in Lesson 21 (see entry 11. exercises T/4.The total should be £27.5 in the Extended Syllabus). Ask the students to work through them. 4 Show the class the following account. in the margin. 26 . 3 Hand out copies of. a candidate has entered the transaction twice – a common mistake.5 and T/4. One entry cancels the other for returns outwards. however.The examiner can only conclude that the candidate does not know how to deal with returns outwards. or show on the overhead projector. the balance on each account – either debit or credit.6 in the Appendix (page 208). A trial balance has been produced. For example. 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. (c) Next ask the students to enter in pencil. then entries have been made accurately. If the totals of the two sides of the trial balance are in agreement. transactions could have been omitted entirely. (d) Now list these balances. 2 Explain that the trial balance is used to check that double entry has been done correctly. As a result.220.

and profit.5 The calculation of costs of goods sold 19.7 The difference between trading income and other income 19.2 The basic structure of income.8 The difference between gross profit and net profit 19. as appropriate 19. a broadly used book-keeping term that covers.12 The double entries for expense amounts between the Profit & Loss Account and the individual expense accounts This lesson reviews the structure of income. and net profit – gross profit less other costs. Establishing a profit or loss and showing how they are reached are achieved through ‘final accounts’. cost. and their relationship to one another. 27 . which involves establishing either a profit or a loss.6 The transfer of a balance at period end to Trading Account or Profit & Loss Account.1 The Trading and Profit & Loss Accounts as part of the double-entry system 19. and profit The preparation of Trading and Profit & Loss Accounts Extended Syllabus references 3. cost. that they are: ● ● gross profit – the excess of sales income over cost of goods sold. in part. the Trading and Profit & Loss Account. costs.pages1-59 15/3/03 11:14 am Page 27 Lesson 5: Trading and Profit & Loss Accounts Topic summary ● ● Structure of income. and profit in a business 19. It also deals with the concluding stage of a period’s activities. Step 1 Aim: to be able to prepare a Trading and Profit & Loss Account 1 Explain the different classes of profit.

eg interest earned on money lent or rent receivable. 28 . give them each a copy of the trial balance of T Avis at 31 December Year 5 to work through. see T/5. and profit as it is shown in Figure 5. and profit 3 Ask the students to work through 2 small exercises on the structure of costs. Work through the example of T Avis with the students as set out below. ‘Other income’ is the income arising from sources other than normal trading activities.The trial balance is labelled T/5.2 in the Appendix (page 210). 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.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 Gross profit Other income Running expenses Net profit Figure 5.1* in the Appendix (page 209).pages1-59 15/3/03 11:14 am Page 28 Trading and Profit & Loss Accounts 2 Draw the students attention to the structure of income.1 The structure of income. costs. costs.1.

For every entry made in the account.320 Year 5 31 Dec Trading £ 5. 5 Prepare the following Trading and Profit & Loss Account with the class.100 8.These would appear as follows: Purchases Year 5 Sundries £ 5.260 8. 3 The significant accounts at this stage are the Purchases and Sales Accounts.320 4 Stress the word ‘account’ in Trading and Profit & Loss Account: it is part of the doubleentry system. which is: purchases less closing stock both stated at cost price The closing stock has yet to be brought into the accounts.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 29 . There is no opening stock in this instance because Year 5 was the first year of trading for T Avis.320 2.420 3.160 Sales Year 5 31 Dec Trading £ 6.160 Sales Year 5 Sundries £ 6. using the data in T/5.420 Sales Stock at 31 December Year 5 Gross profit b/d £ 6.260 6 Show the double-entry effect in the Purchases and Sales Accounts: Purchases Year 5 Sundries £ 5.160 3.pages1-59 15/3/03 11:14 am Page 29 Trading and Profit & Loss Accounts 2 The first stage of working through the trial balance involves preparing a Trading Account.320 Year 5 Sundries £ 6. Preparing a Trading Account requires a calculation of the cost of goods sold. there must be a corresponding entry elsewhere in the account system.

it is usual to deduct stock on the debit side in the Trading Account instead of entering the stock on the credit side.320 6.320 Gross profit b/d Rent receivable 3.pages1-59 15/3/03 11:14 am Page 30 Trading and Profit & Loss Accounts 7 The entry for stock (at 31 December Year 5) requires careful explanation. 31 December Year 5 Cost of goods sold Gross profit c/d Rent payable Office expenses Lighting and heating Net profit £ 5. The effect on gross profit is the same.320 700 360 420 2. a new account is opened: Stock Year 5 31 Dec Trading £ 2.To complete the double entry.230 3.160 2.260 6. becomes: T Avis Trading and Profit & Loss Account for the year ended 31 December Year 5 Purchases less Stock. together with the Profit & Loss Account.100 8 It has been stated that purchases less closing stock equals the cost of goods sold. only a credit entry has been made. the Trading Account.710 9 While compiling the above Profit & Loss Account.710 Sales £ 6.260 450 3.100 3. To reflect this fact. So far. Therefore.060 3. the expense and income accounts are closed off as follows: Rent Payable Year 5 Sundries £ 700 Year 5 31 Dec Office Expenses Year 5 Sundries £ 360 Year 5 31 Dec Profit and loss £ 360 Profit and loss £ 700 Lighting and Heating Year 5 Sundries £ 420 Year 5 31 Dec Rent Receivable Year 5 31 Dec Profit and loss £ 450 Year 5 Sundries £ 450 Profit and loss £ 420 30 .

230 6.4 in the Appendix (pages 211 and 212) on the overhead projector. Capital Year 5 31 Dec 31 Dec £ Drawings Balance c/d 800 5. Because the businesses are new.230 5.This method is considered further in Lesson 23. The double entry for net profit is a credit to the Capital Account: ie profit increases capital.3 and T/5. 10 The Drawings Account is closed off to Capital Account. Both exercises involve businesses in their first year of trading.000 2.pages1-59 15/3/03 11:14 am Page 31 Trading and Profit & Loss Accounts The double entry for gross profit is the credit to the Profit & Loss Account. Ask the students to work through them. instead of as a deduction on the left-hand side. students lose a mark because they fail to show the cost of goods sold.230 Year 6 1 Jan Drawings Year 5 Sundries £ 800 Year 5 31 Dec Capital £ 800 Balance b/d Year 5 1 Jan Bank 31 Dec Profit and loss: net profit £ 4. 11 Copy and hand out or show exercises T/5. a topic that is dealt with in Lesson 7. As a consequence of this error. Explain that the usual practice is to value closing stock at its cost price.430 6. 31 .430 Note Many examination answers show closing stock as a credit entry in the Trading Account. there is no opening stock.

1 fixed assets 20.5. they should be able to prepare one that is meaningful. together with the Asset and Liability Accounts. These accounts and the closing stock are shown in the following balance sheet. Second.5 The appropriate grouping of items within the balance sheet: 20. 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). ie easily understood by the reader.5. the naming of accounts which might appear under each of these headings 20. 32 . the recognition that it stands outside the double-entry system 20. 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. If it has not already been done.3 capital (or proprietor’s interest) 20. the accounts of those items that have already been closed off (eg transferred to Profit & Loss Account) should be ticked.5. in particular.5. the students need to be able to appreciate the meaning of the contents of a balance sheet.2 current assets 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). First.5 amounts payable within 12 months (current liabilities) Two aspects of study concerning the balance sheet require attention.5.4 The preparation of a balance sheet in effective format 20.1 The function of the balance sheet and.4 longer-term liabilities 20.pages1-59 15/3/03 11:14 am Page 32 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. Those left are Capital and Drawings.

Using the question-and-answer method. Note The accounts that have been entered in the balance sheet have not been closed off. 33 . ie the balances remain on the accounts.600 2. possibly for many years.340 Capital Placed in bank account add Net profit less Drawings Liability Creditors £ £ 4. Grouping the items: ● ● ● gives meaning to the balance sheet. some of which can be quickly turned into cash (‘liquidity’). 3 Compare the balance sheet with the Trading and Profit & Loss Account.000 2. 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. review the terms ‘fixed assets’ and ‘current assets’.100 750 1. shows different timescales among assets. that it is to show the financial position of the business at the date the books are made up.040 50 6. shows long-term versus short-term liabilities.230 800 1.pages1-59 15/3/03 11:14 am Page 33 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 £ 800 1.Ask the students for examples of each. 2 In discussing this. It is not itself part of the double-entry system.340 2 Draw out the purpose of the balance sheet.430 910 6. The balance sheet is only a list of balances. it is a ‘statement’.430 5. which is a record of performance over a past fixed period (usually a year). others represent money tied up. showing that it is comprised of significant elements and is not just an array of items. refer to the balance sheet above. 4 Explain that the two sides of the balance sheet should agree in total if the double-entry rule has been followed fully.

or short-term bank loan. such as a 2-year loan (2 years to repayment from the date of the balance sheet). longer-term liabilities: ie amounts payable in more than 1 year.600 2. Fixed Assets Land and buildings Fixtures and fittings Machinery Motor vehicles from highly fixed to less fixed Current Assets Stock Debtors Bank Cash increasing liquidity Other assets will be introduced in due course. eg creditors. T Avis Balance sheet at 31 December Year 5 Fixed Assets Fixtures and fittings Motor vehicle Current Assets Stock Debtors Bank Cash £ £ 800 1.pages1-59 15/3/03 11:14 am Page 34 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. grouping and arranging the items in the way shown below. bank overdraft. 4 Explain that.400 2.340 £ 2. amounts due within 1 year (or ‘current liabilities’). the more easily it can be turned into cash: eg compare the bank balance with stock.The sequence appears as follows: ● ● ● capital.040 50 Capital Placed in bank account add Net profit less Drawings Amount due within 1 year (current liabilities) Creditors 3. 5 Review the normal sequence for capital and liabilities on the right-hand side of the balance sheet.340 34 .430 910 6.000 1. the more permanent the assets are likely to be.430 5.100 750 1. 6 Present the balance sheet of T Avis. the more ‘fixed’ they are considered to be. The more ‘liquid’ an asset. eg compare land and buildings with motor vehicles.230 800 £ 4. with fixed assets. Demonstrate the sequence as shown below.940 6.

2*. 35 .3*.1*. T/6. The items need to be suitably grouped and also in a suitable sequence within each group.pages1-59 15/3/03 11:14 am Page 35 The balance sheet 7 Stress the importance of a good balance-sheet layout.Ask the students to work through them.4* in the Appendix (pages 212–15). and T/6. or show on the overhead projector. Marks are lost when a balance sheet is presented poorly. T/6. 8 Hand out copies of. exercises T/6.

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. and ruling off.11 19.7 19. with related items being suitably brought together 19. 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.10 The transfer of a balance at period end to Trading Account and Profit & Loss Account.3 19.6 19. However.13 This lesson is concerned with some very practical and detailed matters that appear. 36 . 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. in particular. The Stock Account is also a major point of weakness. as appropriate The procedure for other end-of-period balancing.9 19. Sales Account.pages1-59 15/3/03 11:14 am Page 36 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. Carriage. to be given limited attention during the course of study. would seem to be neglected. candidates may have difficulty in correctly recording the Stock Account itself.6 3. from the answers elicited in examinations.

Conversely. Returns Outwards.640 20. The aim of showing returns as deductions is to provide a neater and more informative picture of what has happened. and Returns Inwards Accounts. the matching entry would be expected to appear to the credit of the Trading Account. Example A trader in Year 3 has total returns outwards and returns inwards of £450 and £610 respectively. Inform the students that the layout shown for returns in J Blunt’s Trading Account will always be followed from now onwards.640 is the sum of the net sales. returns inwards appears as a deduction – from sales – on the credit side of the Trading Account.400 760 20.660 12. 37 .pages1-59 15/3/03 11:14 am Page 37 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.640 Sales less Returns inwards £ 21.980 20.The Returns Accounts might appear as follows: Returns Outwards Year 3 31 Dec Trading £ 450 Year 3 Sundries Returns Inwards Year 3 Sundries £ 610 Year 3 31 Dec Trading £ 610 £ 450 With the debit transfer (to the Trading Account) entry in the Returns Outwards Account.760 2. 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. the entry does not appear as a credit. This type of division has not yet been brought fully into the Trading Account. but as a deduction – from purchases – on the debit side.640 Point out that £9.760 is the sum of the net purchases and that £20.100 7. However.300 540 9.

230 23.200 13.850 1.530 36.300 37. 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. carriage is added to the cost of purchases and is included in the Trading Account. or charge made for. Instead of paying an inclusive price for purchases that covers carriage. 38 .300 36.300 870 16.850 1.pages1-59 15/3/03 11:14 am Page 38 Final accounts: more features 2 Ask the students to work through the exercise below. ie on purchases.430 3.530 Sales less Returns outwards £ 37. a separate charge is made. that carriage is an expense incurred in. the delivery of goods.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. Therefore.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. 2 Make the distinction clear between carriage inwards and carriage outwards: (a) Carriage inwards Carriage on goods coming into the firm.320 36.

710 1. page 216). Step 3 Aim: to be able to record opening and closing stock figures in the Stock Account and final accounts 1 So far. T Avis has prepared a trial balance at the end of his second year of trading. Ask the students to work through the exercise.230 520 12.980 10. The layout of purchases including adjustments (using different figures) is as follows: £ 12. exercise T/7.pages1-59 15/3/03 11:14 am Page 39 Final accounts: more features (b) Carriage outwards Carriage on goods going out of the firm. ie there has been no opening-stock figure.730 Purchases add Carriage inwards less Returns outwards less Closing stock Cost of goods sold 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. It is regarded as a cost of distributing goods to customers and is entered as a separate item in the Profit & Loss Account. or show on the overhead projector. From the second year. 39 .1 in the Appendix (page 216). the closing stock at 31 December Year 5 becomes the opening stock at 1 January Year 6.800 430 13. with the class. these studies have been limited to the first year of trading.2 in the Appendix. and the balance sheet.Work through the Trading and Profit & Loss Account. 2 Use the situation of T Avis as an example again (see T/7. ie on sales. there will be 2 stock figures: for example.

420 3 Show the Stock Account for T Avis for his first and second years as follows: Stock Year 5 31 Dec Year 6 1 Jan 31 Dec Year 7 1 Jan Trading Balance b/d Trading Balance b/d £ 2.450 1.100 2.570 12.350 11.450 Year 5 31 Dec Balance c/d Year 6 31 Dec Trading 31 Dec Balance c/d £ 2.170 1.pages1-59 15/3/03 11:14 am Page 40 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 add Carriage inwards less Returns outwards less Stock at 31 Dec Year 6 Cost of goods sold Gross profit c/d Rent payable Office expenses Lighting and heating Carriage outwards Net profit 9.100 240 5.690 340 9.450 40 .570 12.230 70 Capital Balance at 1 Jan Year 6 add Net profit less drawings £ £ 5.420 1.100 2.020 Balance sheet at 31 December Year 6 £ Fixed Assets Fixtures and fittings Motor vehicle Current Assets Stock Debtors Bank Cash £ 900 1.340 4.670 Amount due within 1 year Creditors 4.450 9.600 2.750 7.450 2.570 1.050 480 12.570 450 4.500 2.570 3.260 430 9.430 1.920 7.100 2.450 2.340 1.020 Gross profit b/d Rent receivable £ 2.000 3.100 590 610 380 1.100 2.100 Sales less Returns inwards £ 13.

Solution Stock Year 6 31 Mar Trading 1 Apr Balance b/d £ 31. 5 Draw attention to the entry at 31 December Year 5 (encircled). which are highlighted by Figure 7.270 Year 7 31 Mar Trading 1 Apr Balance b/d 7 Copy and hand out or show exercises T/7. as shown above. 2 Draw the students’ attention to points (a) to (c) overleaf.680 31.680 34. Note The stock at 1 April Year 6 is the same as the stock at 31 March Year 6.680 34.This entry is frequently entered at 1 January Year 6.pages1-59 15/3/03 11:14 am Page 41 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. The correct way to enter it is as 31 December Year 5 initially and then to carry it down.270 Year 6 31 Mar Balance c/d Year 7 31 Mar Trading 31 Mar Balance c/d £ 31.5 in the Appendix (page 218). 41 .680 £34. It is a ‘holding’ account only.1.680 31.3 and T/7.270 34.4 in the Appendix (page 217) on the overhead projector. 6 Ask the students to work through the following exercise: Exercise Stock at 31 Mar Year 6 Stock at 31 Mar Year 7 £31.1 (overleaf) on the overhead projector. No transactions are entered into this account. 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 7.270 Required Show the Stock Account for the period 31 March Year 6 to 1 April Year 7. See also T/7.

into the Trading Account or Profit & Loss Account is part of double entry. The various amounts are channelled through the final accounts to establish a net profit (or net loss). to complete the double entry. (c) The net profit. They retain their balances. The balance sheet is merely a list of items and is not part of 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. eg for purchases or insurance. ie balances c/d on each account (a) Balance sheet Figure 7. (b) Transferring a balance. ready for the next trading period or year.pages1-59 15/3/03 11:14 am Page 42 Final accounts: more features (a) The accounts for which balances are recorded in the balance sheet have not been ‘closed off ’.1 The end-of-year procedure 42 . Each amount is being carried in the final accounts instead of in the ledger account. 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 (a) Balanced.

100 590 610 450 480 340 380 900 1. Ask the students to work through the exercise.020 Cr £ 13. exercise T/7.430 21.pages1-59 15/3/03 11:14 am Page 43 Final accounts: more features 3 The preparation of final accounts is an important element of the First Level Book-keeping Syllabus.6 in the Appendix (page 219). It is therefore important that students become practised at systematically answering final accounts questions at an early stage. (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.050 T T T BS BS P/L P/L P/L P/L T T P/L BS BS BS BS T BS BS 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 (exp) (exp) (exp) (inc) (exp) Note Stock at 31 December Year 6 was valued at £2.100 1. BS.170 1. Encourage the students to adopt the following method when answering such examination questions: (i) to read through the question to get an overall understanding.750 1.230 70 2. T Avis Trial balance at 31 December Year 6 Dr £ 9.600 1. or show on the overhead projector. 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). 5 Hand out copies of.100 21.450 T.260 430 1. Leave the codes out and ask the students to enter them alongside the items in the trial balance. 43 . especially noting the ‘required’ part of the question.020 Key: BS balance sheet T Trading Account P/L (exp) Profit & Loss Account (expenditure) P/L (inc) Profit & Loss Account (income) 5. (iii) to tick each item or figure as it is recorded in the final account concerned.

Dividing the ledger and classifying accounts commonly give students difficulty. or from transaction details.7 The distinction between personal. real. Careful explanation and plenty of practice can help students to achieve success in this topic. Cash Book.These accounts may be kept in a book or series of books (as in a manual system) or on computer disc. Creditors Ledger. and the reasons for the division. eg Debtors Ledger. Encourage the students to identify the possible advantages of a division.pages1-59 15/3/03 11:14 am 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 4.4 Alternative names for the different ledgers. General Ledger 4.6 The naming of (ie classification of ) the different types of ledger account and explaining the accounts within it 4.2 The various possible reasons for subdividing the ledger 4. and nominal accounts 4.5 The possible use of a Private Ledger 4.9 From a list of accounts. 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. Purchases Ledger.8 How the Sales Ledger might be subdivided 4. Nominal Ledger 4. the naming of the ledger(s) in which each would be recorded The ledger is the set of accounts of business. by asking them 44 .3 How the ledger might be subdivided. eg Sales Ledger.

The possible divisions of the ledger may be as shown below. ie Creditor Accounts (c) the receiving and paying out of money (d) the remaining accounts (unless a Private Ledger exists) (e) accounts requiring confidentiality.The purpose of a Private Ledger is to maintain confidentiality. 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). 2 Explain that the reasons for dividing the ledger are that: • smaller units are managed more easily. For example. with access limited to only a few members of staff. 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. • the division provides useful information because parts of the ledger are specialized. ie Debtor Accounts (b) suppliers’ personal accounts. 45 . 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. 3 Ask the students to work through the exercise below.pages1-59 15/3/03 11:14 am Page 45 The division of the ledger questions. you could ask the students what advantages there could be to having a separate ledger for customers (ie debtors). Accounts (a) customers’ personal accounts. • it helps to keep control of the various accounts. Point out that not all firms have a Private Ledger.

3 Draw the students’ attention to the difference between: (a) the Sales Ledger and the Sales Account (b) the Nominal Ledger and the Nominal Account a name for the various income and expense accounts the account in the General Ledger which records the income receivable from the sale of goods.1* and T/8. which is the arrangement of accounts into distinct classes.pages1-59 15/3/03 11:14 am Page 46 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’. exercises T/8.1 The classification of accounts 2 Hand out copies of. Ask the students to work through them. ACCOUNTS Impersonal (of things rather than of people) Personal Debtors Capital Creditors Drawings Real Asset accounts (including cash and bank) Nominal Income and expense accounts Figure 8.2* in the Appendix (pages 220 and 221). or show on the overhead projector. whether for cash or on credit an alternative name for the General Ledger the ledger containing debtor accounts 46 .

however. 2 Hand out copies of. especially when more detail needs to be included concerning fixed assets. Ask the students to work through the exercise. which can greatly help candidates. eg by sales territories.Therefore. A large Sales Ledger might be subdivided for any of the reasons stated in point 2 on page 45. on a product basis – by product categories. you could ask the students why the Sales Ledger might be divided according to sales territories/areas and what advantages might result from this. 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. by type of customer. See also T/8. For example. Explain. The ways in which the Sales Ledger can be divided are: (a) (b) (c) (d) (e) alphabetically – by the customers’ names. 47 . 2 The balance sheet of T Avis at 31 December Year 6 is presented overleaf in vertical format. numerically – in which each customer is allotted a number.pages1-59 15/3/03 11:14 am Page 47 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. More space is provided by this layout. encourage the students to lay out their work well. or show on the overhead projector. exercise T/8.3* in the Appendix (page 221). eg trade customers. students who omit the words ‘net current assets’ will not be penalized. that a vertical layout offers more scope for presentation. Note Knowledge of ‘working capital’ (net current assets) is not required by the First Level syllabus. However. geographically (or territorially) – by area or region. 3 Point out that it is usual to deduct ‘Amounts due within 1 year’ (current liabilities) from current assets to obtain ‘net current assets’. Suggest that those who are in employment try to find out how the ledger is divided or subdivided within the organizations they work for.4 in the Appendix (page 222). or according to the level of credit allowed. as distinct from private individuals. Use the students’ experience to review this topic by asking them questions.

230 70 4.670 4 Hand out copies of.5* in the Appendix (page 223). Remind the students to apply the examination method outlined in Lesson 7 (page 43). the ‘Amount due in more than 1 year’ is deducted.430 1. 5 Explain that after the total amount of fixed assets and net current assets has been established.500 2.170 5. or show on the overhead projector.450 1. Ask the students to work through the exercise.340 1.750 3.170 1.600 2.670 £ 900 1.pages1-59 15/3/03 11:14 am Page 48 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 Financed by: Capital – balance at 1 Jan Year 6 add Net profit less Drawings 5.100 240 5.This way of positioning entries is preferred by the LCCIEB to the alternative of placing longer-term liabilities as an addition underneath capital. exercise T/8. 48 .920 1.

4 counter credits 7.6 drawee 7.5.2 The main types of bank account and their key features The key aspects of the following methods of payment and receipt of money.1 7.2.5 7.1 DD or D/D – direct debit 7.6.1 bank paying-in book 7.4.2 CT or C/T – credit transfer 7.4 Div – dividend Significance of the following terms: 7.3 cheque book counterfoils/stubs 7.2 banker’s order 7.4. and the differences between them: 7.6.6.5.2.4.1 cash 7.2.5.2.2 interest payable on a bank loan or overdraft 7.pages1-59 15/3/03 11:14 am Page 49 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 7.3 bank charges as charged by a bank for operating an account Naming of and use of the following abbreviations: 7.4 standing order 7.6.6 49 .1 interest receivable (by the customer) on a bank account 7.2 cheque 7.5.5 direct debit Significance of the term bank overdraft: how an overdraft might arise The differences between: 7.3 7.6.4 7.3 STO or S/O – standing order 7.7 remittance (continued) 7.6.6.5 drawer 7.2.3 credit transfer 7.

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. for example.You could also ask what factors might delay the clearance of a cheque. withdrawals are infrequent 50 . Review the key features of each: Deposit Account normally for earning interest on the balance. 1 Bank accounts Ensure that students are aware of the 2 main types of bank account: the Current Account and the Deposit Account. you could ask them about the type of bank accounts they have. however. eg the immediate banking of cash as against the delayed banking of cash 8. together with specimen paying-in slips. You can obtain literature from a bank. Reconciliation between the bank statement and the Cash Book is dealt with in Lesson 17 (page 132). eg cheque or credit transfer.There is.4 8. This knowledge can be drawn upon by asking the students questions at appropriate points in the lesson. 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. and methods of payment. and if any features vary from those of the 2 basic types of account.6 Transfers between the cash and bank accounts (contra entries) The variations of entry arising on and from the sale of goods for cash.pages1-59 15/3/03 11:14 am Page 50 Bank facilities Cash Book: 2 columns Extended Syllabus references (continued) 8. a need to know: • • • • the nature of 2 types of bank account: the Current Account and the Deposit Account.17 The periodic balancing of the Cash Book. For example. the main methods of payment through a bank. that describes the accounts that are available.7 The book-keeping entries required on the transfer of funds between the Bank Current Account and the Bank Deposit Account 8. how the bank account affects the Cash Book. the process of cheque clearance (in outline).

pages1-59 15/3/03 11:14 am Page 51 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. ie the party making payment. Albion Bank. ie the party to whom the cheque is payable. In the simplified form of cheque shown below: ● ● ● T Royle is the drawer. Illustrate this information about cheques by displaying Figure 9. instructs Bank to pay to Drawer Payee or to drawer himself Figure 9. Albion Bank plc York East branch Pay 7 May Year 4 P Sempster Three hundred and and thirty pence sixty pounds £360-30 T Royle 51 .1 on the overhead projector.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.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. • who the parties to a cheque are.

1 (page 225).2 The journey of a ‘drawn’ cheque 52 . First Level. Emphasize that there is a time delay before the 2 accounts involved (drawer’s and drawee’s) are adjusted.2. It is often referred to in questions requiring the preparation of a Cash Book. pages 74–5). Chester branch) – also in the Appendix: T/9. For example.York East branch) payable to P Semster (who holds an account at Derbyshire Bank. 4 Cheque clearance Explain what cheque clearance is. later on. in preparing bank-reconciliation statements (see the student’s book How to Pass Book-keeping. A cheque is cleared when the drawee bank has indicated that it will pay the amount stated on the cheque. in the journey of a drawn cheque illustrated in Figure 9. a cheque is drawn by T Royle (an account holder at Albion Bank. 3 Paying-in slip Tell students that the paying-in slip is used for paying cash or cheques into a bank account. Year 4 7 May T Royle (drawer) cheque sent to P Sempster (payee) receives cheque T Royle credits bank account P Sempster debits bank account 8 May pays cheque into account with Derbyshire Bank Chester branch 9 May cheque sent to Derbyshire Bank clearance centre sent (with other cheques) to 10 May 10 May Albion Bank clearance centre Albion Bank York East branch charged against account of T Royle 11 May Figure 9.pages1-59 15/3/03 11:14 am Page 52 Bank facilities Cash Book: 2 columns Explaining what the different cheque numbers are will be useful in making cash-book entries and.

7 Explain the following terms: • interest receivable (by the customer) on a bank account – normally only if the balance is above a certain minimum. or (ii) multiple settlement.pages1-59 15/3/03 11:14 am Page 53 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. Ask the students to work through them. page 226). • to certain persons or firms. an overdraft occurs when withdrawals exceed deposits. Note Explain the terms: bank loan bank overdraft an amount made available for an agreed period. and • bank commission (charges). • at stated dates. 53 . 8 Give each student a copy of the multiple-choice questions (T/9. although with the written agreement of the debtor: • for either fixed or variable amounts. etc amounting to the sum stated. Counter credits may cover a number of cheques. eg one instruction to the bank to make a number of payments to different accounts (of persons or organizations). eg payment of one bill. interest is charged from day to day on the varying balance. for regular payments: • of fixed amounts. it may be with or without prior agreement with the bank. which are charged by a bank for operating an account.2 in the Appendix. • interest payable on a bank loan or overdraft. It relates to payments into a bank account. • when the time intervals between payments vary. interest is charged on the full amount of the loan regardless of how much is drawn. ‘credit transfer in reverse’: initiated by the creditor. (b) standing order (c) direct debit 6 Counter credits This term literally means the recognition of credit at the bank counter.

related accounts. 2 Show the students cash and bank accounts.pages1-59 15/3/03 11:14 am Page 54 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. 54 . cash and bank. 1 Explain that.416 1 Oct Balance b/d 718 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. as they have been introduced so far on the overhead projector. are merely positioned beside each other. Make sure you enter the items in correct date order.416 Year 2 5 Sep 11 Sep 19 Sep 30 Sep Cleaning K Mills Postage Balance c/d £ 18 37 19 136 210 1 Oct Balance b/d 3 Show the 2 accounts combined. in a 2-column Cash Book. Carefully tick ( ) the original items as they are entered in the newly presented Cash Book. be due to candidates’ unfamiliarity with presenting their work in columnar form. Practice in answering questions requiring columnar form should solve any difficulty the students might have. eg: Cash Year 2 1 Sep Balance b/d 7 Sep Sales 26 Sep R Layburn £ 43 116 51 210 136 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. in part.

which is used where a double entry is complete within the Cash Book. 4 Hand out copies of. 5 Ask the students why it is necessary to keep a separate record in the Cash Book. or dealing with. (b) The volume of work in dealing with the receipt and payment of money might also justify a separate record. 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 Cash £ 270 Bank £ Bank C The ‘C’ means contra. 6 Ask the students why it is necessary to keep cash and bank accounts together in columnar format. money from other aspects. 7 Explain that the transfer of cash into the bank would result in: ● ● cash reduced – credit cash bank increased – debit bank.pages1-59 15/3/03 11:14 am Page 55 Bank facilities Cash Book: 2 columns CASH BOOK Year 2 1 Sep 7 Sep 8 Sep 12 Sep 25 Sep 26 Sep Cash Bank £ £ 43 726 116 315 290 85 51 Year 2 4 Sep 5 Sep 11 Sep 16 Sep 19 Sep 20 Sep 28 Sep 30 Sep Cash Bank £ £ 240 18 37 176 19 215 67 136 718 210 1.There are two answers: (a) A golden rule in accounting is to separate.416 718 Stress the importance of entering the items in date order. the handling of. Ask the students to work through the exercise.3* in the Appendix (page 227). or show on the overhead projector. exercise T/9. This action lessens the chance of an employee taking advantage of the system. if possible.The answer is that they are so closely related that transfer sometimes takes place between them.416 Balances b/d Sales T Wells Office furniture J Telby R Layburn Rent Cleaning K Mills T Laite Postage Insurance V Barnes Balance c/d 210 1 Oct Balance b/d 136 1. 55 .

On 6 April. 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. the general practice is to bank cash.pages1-59 15/3/03 11:14 am Page 56 Bank facilities Cash Book: 2 columns 9 Cash might also be taken out of the bank. This method prevents complications and confusion as to the double entry is less likely.4* in the Appendix (page 228). 13 Explain that for reasons of security. the initial entry must be followed by a complete set of contra entries such as credit cash/debit 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. In particular check that: (a) each transaction is dated. For example. 12 Ask the students if they can spot any bad business practice being followed by W Towcester. If cash is banked on the day that it is received. ie where the double entry is completed. on 9 May Year 6. which loses marks. The answer is that there is some bad business practice. (c) the appropriate wording is entered in the middle ‘details’ column. (b) transactions are entered in strict date order. the method shown in W Towcester’s Cash Book above – direct entry in the debit bank column – is strongly recommended. Ask the students to work through the exercise. on the day of receipt. 56 . the account entries should be recorded as if a cheque had been banked immediately. For examination purposes. A common fault in answers to examination questions on this topic is failing to make the complete contra. exercise T/9. If the entry has been recorded in this way. which always contains the name of the corresponding account. which is a security risk. W Towcester is keeping too much cash in the office at one time. 11 Check that the students are making the entries correctly in the answer to exercise T/9. £470 cash was received for sales. or show on the overhead projector.W Towcester receives £590 in cash from sales and banks the cash the same day. if possible.4. first as a debit in the cash column and then separately bank the amount. none of which was banked until 9 April.

subject to a limit. exercise T/9. £985 is received from cash. 16 Hand out copies of. £900 of which was banked on the same day. For example. If a cheque for £9. It is simpler and less prone to error. This transaction would be recorded as follows: Method A CASH BOOK Year 6 5 Jun Cash £ 85 Bank £ 900 Cash £ Bank £ Sales If treated as 2 transactions. • the customer (intentionally or otherwise) has drawn more out of the account than it contains. the Cash Book would appear as follows: 57 .The balance changes from debit to credit and from asset to liability (the amount owed to the bank). 5 June Year 6.5* in the Appendix (page 229). 2 Tell the students that the effect of an overdraft is to create a ‘minus’ or negative balance from the customer’s viewpoint.9. or show on the overhead projector.000 had been drawn from F Swaine’s account on 30 November Year 5. page 229 to the Cash Book of F Swaine (see T. 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. the entry would be recorded as follows: Method B CASH BOOK Year 6 5 Jun 5 Jun Cash £ 985 Bank £ 900 Year 6 5 Jun Cash £ 900 Bank £ Sales Cash C Bank C Method A is to be preferred.pages1-59 15/3/03 11:14 am Page 57 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. 3 Illustrate the significance of a bank overdraft and its effect by referring in the Appendix. Ask the students to work through the exercise.5/A).

Thus.000 11.The Current Account is recorded in the Cash Book.500 Motor vehicle 4.040 Carriage 43 Cash C 130 Wages 290 Drawings 150 F Glubb 460 S Royal 9. The Deposit Account.455 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. this will help prevent students from wrongly showing a concluding credit balance for cash. however.000 from the Current Account into the Deposit Account. has money paid into it or withdrawn from it infrequently. Particularly stress the second point.830 1.340 14. 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. if there were a transfer on 12 April Year 4 of £2.830 1 Dec Balance b/d 87 1 Dec Balance b/d 4 Point out that: ● ● The credit balance for bank will appear in the balance sheet of F Swaine as a liability. Cash never has a credit balance.500 860 130 315 210 700 1. ie under the heading of ‘Amounts due within 1 year’. the Deposit Account is kept in the General Ledger because entries are infrequent. Negative cash is an impossibility.000 Balance c/d 87 12.pages1-59 15/3/03 11:14 am Page 58 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 Cash Bank £ £ 12.200 Wages 270 Purchases 1.455 Capital Cash C Sales Bank C T Dart Sales Balance c/d 12.340 14. the entries would be recorded as follows: 58 .

59 .000 Cash £ Bank Deposit a/c Bank £ 2. be the reverse of those shown above. of course.000 If there were a withdrawal from the bank Deposit Account into the bank Current Account the entries would.pages1-59 15/3/03 11:14 am Page 59 Bank facilities Cash Book: 2 columns CASH BOOK Year 4 12 Apr General Ledger Bank Deposit Account Year 4 12 Apr £ Bank (Current a/c) 2.

Understanding what cash discount means is the key to solving at least part of the students’ difficulty.18 The periodic posting of discount-column totals from the Cash Book to the Discount Allowed and Discount Received Accounts in the General Ledger 8.2 One of the topics that causes students difficulty is discounts. and posting discount totals to the General Ledger Extended Syllabus references Use of the 3-column Cash Book (the bank columns recording the Bank Current Account only) 8.5 The differences in book-keeping entries regarding the withdrawal of funds from the bank.9 The impact of cash discount upon the seller (discount allowed) and the buyer (discount received) respectively 8.pages 60-104 15/3/03 12:21 pm 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. as between: 8. A debtor is entitled to a cash discount only when the payment condition is met.5. 60 .10 The double-entry effect of discount allowed and discount received respectively 8.5. including entries for discounts.3 The posting of individual transactions from the Cash Book to the ledger 8. ‘Cash discount’ is a rather misleading term: it is really an allowance given to encourage payment within a certain period of time.1 that for use in the business – a contra entry 8.2 that for private use – drawings 8.11 The purpose and use of discount columns in the Cash Book 8.8 Cash discount as part of the terms of sale 8.

Example (a) On 3 June Year 6.pages 60-104 15/3/03 12:21 pm Page 61 Cash Book: 3 columns – cash discount Step 1 Aim: to appreciate the significance of cash discount 1 Discuss the purpose of cash discount. It is the first of these two conditions with which students will be concerned. for example.The terms of sale might state. For example. also serves to attract the would-be purchaser. if the price of the goods is £250 and the cash discount for payment within 10 days is 2%. if payment is made within 10 days of buying the goods. 61 . 2 Explain that the term ‘cash discount’ is misleading. if payment is made within 7 days of purchase. If. 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 an allowance given to encourage the purchaser to pay an account within a certain period of time. the purchaser pays the account 13 days after the date of purchase. although it may be part of the terms of sale. Explain that its purpose is to induce prompt or early payment by a customer who has been sold goods on credit. that: ● ● a period of credit of one month is allowed. a cash discount of 2 1/2 % will be allowed. as part of the seller’s ‘terms of sale’. he or she must: (a) pay by a certain date (10 days after the date of sale. 4 Copy and hand out. ie £250. By receiving payment early. For example. a cash discount of 2% will be allowed. X sells goods on credit to Y for £480. ie the buyer has to meet certain conditions to receive the discount. Y pays the account on 8 June Year 6. Cash discount. the simple examples below. then he or she foregoes any entitlement to cash discount and must pay the full list price. the seller is able to use the money to purchase and then sell more goods. in the example above) (b) pay in a duly acceptable form (eg in cash or with a cheque drawn on a reputable bank). Ask the students to work through them. It is conditional. The allowance is calculated as a percentage (%) of the price of the goods. in the example above. Y is entitled to the cash discount because he or she has paid the account within the conditional 7-day period. The terms of sale allow a period of credit of one month but. or display on the overhead projector.

He or she has to pay the full list price of £350. the discount is described as ‘discount received’. However. if payment is made within 14 days of purchase. the seller/creditor. a trader. £100. can be both ‘allowers’ and ‘receivers’ of cash discount. for Y.50 62 .50 discount = £97. Illustrate discount allowed with the example below. A sells goods on credit to B for £350. 5 Make it clear to the students that the term ‘cash’ covers payments in actual cash. the discount is described as ‘discount allowed’. L Green meets this condition and so pays £100 less the £2. as both buyers and sellers of goods. foregoing entitlement to the cash discount.pages 60-104 15/3/03 12:21 pm Page 62 Cash Book: 3 columns – cash discount Selling price less 21/2% cash discount Payment made £ 480 12 468 Example (b) On 7 August Year 6. In Example (a). This situation can be illustrated thus: Sale of goods on credit Purchase of goods on credit debtor creditor discount allowed discount received Firms. Example On 1 July Year 3. for X. B pays the account on 5 September Year 6. The terms of sale allow a period of credit of one month but. which expires on 7 September Year 6. the purchaser/debtor. and through the banking system. B settles the account after a lapse of more than 14 days. B has taken advantage of most of the period of credit. 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. a cash discount of 2 1/2% will be allowed. The terms of sale allows a 2 1/2 % discount for payment within 14 days. L Green owes A Brown.

Exercise On 2 May Year 5. F Trill pays his account by cheque on 30 May Year 5. which holds the balance of the discount allowed until it is transferred to the Profit & Loss Account at the end of the period.50 Book-keeping action 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.£97. a trader.pages 60-104 15/3/03 12:21 pm Page 63 Cash Book: 3 columns – cash discount In account terms.50 Cash Discount allowed £ 97.50 2.£2. sells goods worth £720 on credit to F Trill.50 . It also represents a ‘holding’ account.50 . the transaction would appear as follows: Transaction effect (a) Cash Debtor: L Green (b) Discount allowed Debtor: L Green + £97. Solution CASH BOOK Year 5 30 May Cash £ F Trill Bank £ 702 Cash Bank £ £ 63 . B Hall.50 Hand out copies of. Illustrate the account on the overhead projector or board as follows: CASH BOOK Year 3 9 Jul Cash £ 97. Required Record these transactions in the books of B Hall.50 Bank £ Cash Bank L Green L Green Year 3 1 Jul Balance b/d £ 100 Year 3 9 Jul 9 Jul Discount Allowed Year 3 9 Jul L Green £ 2. or show on the overhead projector.The terms of sale allow a 2 1/2% cash discount for payment within one month.50 + £2. the following exercise and ask the students to work through it.

pages 60-104 15/3/03 12:21 pm Page 64 Cash Book: 3 columns – cash discount F Trill Year 5 2 May Sales £ 720 Year 5 30 May Bank 30 May Discount allowed £ 702 18 Discount Allowed Year 5 30 May F Trill £ 18 2 Discount received Remind the students that discount received represents discount from the buyer’s viewpoint. The terms of sale allow 2% cash discount for payment within 14 days and A Brown meets this condition. ie by receiving cash discount the buyer pays less to settle the account. the transaction would appear as follows: Transaction effect (a) Bank Creditor: T Wells (b) Creditor: T Wells Discount received .£490 . Illustrate the account entries on the overhead projector or board as follows: 64 . 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. It also serves as a ‘holding’ account.Thus. Illustrate discount received with the example below.£490 . A Brown pays only £500 less the £10 discount = £490 In account terms.£10 + £10 Book-keeping action 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. which holds the balance of the discount received until it is transferred to the Profit & Loss Account at the end of the period.

50 Year 5 29 Jun £ 840 Cash Bank £ £ 808. the following exercise.50 CASH BOOK Cash Bank Year 5 29 Jun B Hall Laken Ltd Year 5 29 Jun Bank 29 Jun Discount received £ 808. B Hall pays the account by cheque on 29 June Year 5. Required Record this transaction in the books of B Hall.50 Discount Received Year 5 29 Jun Laken Ltd £ 31. B Hall buys goods worth £840 on credit from Laken Ltd.50 Therefore the amount to be paid = £840 . Exercise On 3 June Year 5. Ask the students to work through it.50 = £808.The terms of sale allow 3 3/4 % cash discount for payment within one month. or display on the overhead projector.50 65 .£31.50 31.pages 60-104 15/3/03 12:21 pm Page 65 Cash Book: 3 columns – cash discount CASH BOOK Cash £ Bank £ Year 3 10 Jul Cash £ T Wells Bank £ 490 T Wells Year 3 10 Jul 10 Jul Bank Discount received £ 490 10 Year 3 1 Jul Balance b/d £ 500 Discount Received Year 3 10 Jul T Wells £ 10 Hand out copies of. Solution The amount of cash discount = £840 × 3 3/4 /100 = £31.

50 Disc Rec’d Cash Bank £ £ £ 10 490 Year 3 9 Jul L Green Year 3 10 Jul T Wells Point out that the entries in the personal (debtor/creditor) accounts are unchanged. 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. discount amounts can be collected in the discount columns and the totals transferred periodically into the General Ledger as shown below. including entries for discounts. CASH BOOK Disc All’d Cash Bank £ £ £ 2. 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. these numbers should be stated in the answer beside the name of the payee in brackets.50 97. eg a payment of £315 by cheque number 235212 to F Smith would appear as: CASH BOOK Dr Cr Disc Cash Bank Year 4 £ £ £ 17 Feb F Smith (212) 315 66 . If cheque numbers are included in a question. ie in respect of cheques drawn by the firm for which the entries in the Cash Book are being recorded. 2 Show the Cash Book entries for A Brown that would be recorded in place of those shown on pages 63 and 65. Because these entries remain unchanged.pages 60-104 15/3/03 12:21 pm Page 66 Cash Book: 3 columns – cash discount Step 3 Aims: to be able to prepare a 3-column Cash Book. Cheque numbers appear only on the credit side of the Cash Book. it is common practice to include the number of each cheque in the Cash Book.The discount entry can then be made when entering either the receipt or payment of money. It makes less work to have discount columns in the Cash Book. It is sufficient for the students to show the last 3 numbers only.

Work through it with the class. Solution to T/10.1 CASH BOOK Disc All’d Cash Bank £ £ £ 93 1. This exercise illustrates the use of the 3-column Cash Book.812 Year 5 1 May 11 May 24 May 28 May Bal’s b/d R Vine A Croft Bank C Year 5 13 May Stationery 18 May T Dole (214) 21 28 30 31 May May May May 18 1 Jun Bal’s b/d 173 117 1.pages 60-104 15/3/03 12:21 pm Page 67 Cash Book: 3 columns – cash discount 4 Display exercise T/10. as well as the immediate postings to ledger accounts and the end-of-the-month transfer of column totals to the respective discount accounts.040 7 343 11 429 80 Disc Rec’d Cash Bank £ £ £ 56 7 273 190 80 291 117 978 173 1.1 in the Appendix (page 230) on the overhead projector.812 978 SALES LEDGER A Croft Insurance (215) Cash (216) C W Kone (217) 9 Bal’s c/d 16 Year 5 1 May Balance b/d £ 440 440 Year 5 24 May Bank 24 May Discount allowed £ 429 11 440 R Vine Year 5 1 May Balance b/d £ 350 350 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 Year 5 11 May Bank 11 May Discount allowed £ 343 7 350 (continued) 67 .

stationery. (d) Sometimes discount columns have been omitted from the Cash Book when the entries should be included. use of the word ‘sundries’ in each discount account. it means a number of entries amounting to the sum stated. 68 . page 49). They make the entry in Dr cash but then either debit or credit the bank column. that: ● ● ● ● the total of each discount column is transferred – to the same side (Dr or Cr) in the ledger. 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. (c) Showing a credit balance of cash. which is impossible. (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.pages 60-104 15/3/03 12:21 pm Page 68 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. If a Cr cash balance emerges there is something wrong with the entries. Note Explain that the word ‘sundries’ has a general application and has been used elsewhere in this text. eg to personal accounts. In this subject. (e) Cash discount added to the amount of a cheque. there is no balancing of discount columns. or insurance.This type of entry is the equivalent of a deficit of cash. prompt postings are made of other items.

Tell the students that they must keep the entries in strict date order. ● post the column totals to the wrong side of each discount account. and this amount should be recorded in the discount allowed column of the Cash Book.3 and T/10.3 certain information picked up from the bank statement is to be entered after an initial balancing. before they start work on the exercise. 69 . In T/10. and record of movements of cash is required. information from the bank paying-in book. For example.These terms indicate that a cash discount has been either received or allowed. for T/10.2 in the Appendix (page 231) and ask them to work through it. they: ● post individual items. However. ie a balance is found between the totals of the 2 columns. 7 Give the students each a copy of exercise T/10. Hand out copies of exercises T/10.4 in the Appendix (pages 232–3) to the class and ask the students to work through them. (g) When the candidates post entries to the discount accounts (in the General Ledger) they may make one of two errors. which is quite wrong and defeats the purpose of having the discount columns. They require information from different sources to be brought together. Both these exercises are from past LCCIEB First Level Book-keeping papers.3. 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’. cheque-book counterfoils.pages 60-104 15/3/03 12:21 pm Page 69 Cash Book: 3 columns – cash discount (f ) The discount columns are balanced. For example a cheque for £720 received in settlement of an amount of £750 means that a cash discount of £30 has been allowed.

So often. the part played in book-keeping by the invoice and the credit note 5.5 Making postings of period day-book totals to the Purchases. and Returns Inwards Day Books 6.12 The differences between trade discount and cash discount and the different book-keeping effects 5. Trade discount also has to be considered.4 Making individual postings from the day books to personal accounts 6.2 The alternative names used for these various day books 6.The problem arises largely from failure of students to understand the function of the day books.3 The recording of individual transactions in the day books 6.1 The function of Purchases.8 The significance of trade discount 5. Entries in the day books require an authorized source such as an invoice or copy invoice. day books are prepared as if they are ledger accounts.pages 60-104 15/3/03 12:21 pm 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 Use of the term source document: in particular. 70 . Returns Outwards. Sales.7 Day books is a topic that sometimes results in the loss of examination marks. from list price to obtain net price 6. Sales.9 The calculation of trade discount. and Returns Accounts in the General Ledger 8.

pages 60-104

15/3/03

12:21 pm

Page 71

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

Unit price £ 7 12 20

Total £ 280.00 240.00 200.00 720.00

40 20 10

Moveable shelves Lockable containers Storage cabinets

less trade discount at 12 / %

12

90.00 630.00

Terms: 21/2% cash discount for payment within 30 days Figure 11.1 A specimen invoice

71

pages 60-104

15/3/03

12:21 pm

Page 72

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 A Trumble Sales £ 433

72

pages 60-104

15/3/03

12:21 pm

Page 73

Purchases and Sales Day Books

R Maundy Year 4 7 Apr Sales £ 630 W Trent Year 4 20 Apr Sales £ 290 F Skane Year 4 26 Apr Sales £ 375 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 monthly posting of total to GENERAL LEDGER – Sales Account (CREDIT)

Customer accounts (DEBIT) Figure 11.2 Credit sales procedure

73

pages 60-104

15/3/03

12:21 pm

Page 74

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

74

pages 60-104

15/3/03

12:21 pm

Page 75

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 SALES LEDGER V Lympne Year 7 5 Jan Sales £ 600 600 Year 7 31 Jan 31 Jan Bank Discount allowed £ 585 15 600 V Lympne £ 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.

75

pages 60-104

15/3/03

12:21 pm

Page 76

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

GENERAL LEDGER – Purchases Account (DEBIT) Figure 11.3 Procedure for credit purchases

PURCHASES LEDGER – Supplier Accounts (CREDIT)

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 Purchases £ 630 £ 416

Purchases

76

which demonstrates a basic misunderstanding of the function of the day book. (a) The day books are shown in account format. Ask them to work through the exercise.pages 60-104 15/3/03 12:21 pm Page 77 Purchases and Sales Day Books T Roman Year 4 20 Apr B Porter Year 4 23 Apr GENERAL LEDGER Purchases Year 4 30 Apr Sundries £ 1.938 Purchases £ 364 Purchases £ 528 Point out that the sale to R Maundy. in the Sales Day Book of Tempster & Fall.3 in the Appendix (page 235) on the overhead projector. Compare this procedure with that for the copy invoice from which entries are made in the seller’s day book. Ask the students to work through the exercise.The amount is the same. line by line. This exercise should help to reinforce the students’ knowledge about the 3-column Cash Book. Only period totals are supposed to be posted to the Purchases and Sales Accounts. 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. becomes a purchase in the Purchases Day Book of R Maundy. in the Purchases Account and/or Sales Account. 5 Display exercise T/11.4 in the Appendix (page 236) on the overhead projector or hand out copies of it to the students. 4 Inform the students that each entry in the Purchases Day Book is made from an invoice received from the seller. 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. 77 . 7 Display exercise T/11. (b) The transactions that have been recorded in the day books are repeated. (c) The deduction of cash discount in the day books. or hand out copies of it to the students.

Returns Outwards.6 8.7 6.3 6. should be treated with care by candidates.1 6. previously introduced in Lesson 2.1 Use of the term source document: in particular. 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. respectively.4 6. 78 . and Returns Accounts in the General Ledger The reason for maintaining separate Returns Accounts instead of entering to the credit or debit. page 11.2 6.5 6. as well as about the relevant price to apply to the returned goods. 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. Sales.pages 60-104 15/3/03 12:21 pm 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. the part played in book-keeping by the invoice and the credit note The function of Purchases. Candidates’ examination answers often show confusion between inward and outward returns.

an allowance against the relevant invoice. The reasons might include. the seller will send a credit note to the buyer. 2 Explain that when making the allowance.1. whether or not the goods are actually returned. the goods were damaged before arrival. 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 £ 12 Total £ 120. which you can show on the overhead projector. Stress that the seller grants. for which a part allowance may be made. An example of a credit note is shown in Figure 12. etc. and various possible reasons for the seller granting an allowance.00 10 Lockable containers less trade discount at 121/2% Damaged in transit Figure 12. some of the goods were faulty.00 105. for example: ● ● ● ● the wrong goods were sent. both inwards and outwards.00 15.pages 60-104 15/3/03 12:21 pm Page 79 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. 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.1 An example of a credit note 79 . and the buyer receives. the goods did not match those described in catalogues.

4 Ask the students why a firm needs to have detailed records of returns. 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. by having separate books for returns.pages 60-104 15/3/03 12:21 pm Page 80 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. Seller issues CREDIT NOTE Sent to COPY CREDIT NOTE CUSTOMER RETURNS INWARDS DAY BOOK (of seller) RETURNS OUTWARDS DAY BOOK (of customer) Figure 12. this must be deducted at the same rate on the credit note. 80 .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. Effectively. 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. Step 2 Aim: to appreciate the function of the Returns Inwards and Returns Outwards Day Books 1 Show that.2. the entries in the day books represent a reversal of purchase and sales entries. to carry transaction detail instead of the ledger accounts. the procedure (in outline) is as illustrated in Figure 12. If the entries were made in the other day books. They serve to reduce the detail recorded in the ledger and allow staff to specialize in the work they do. In addition. 3 Point out that the Returns Day Books serve basically the same purpose as the 2 day books considered in Lesson 11. when the seller has agreed to make an allowance against the return of goods. The answer is that the record is important for dealing with individual customers or suppliers. there would be a danger of information on returns being hidden.

pages 60-104 15/3/03 12:21 pm Page 81 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. page 72. entry by entry: SALES LEDGER A Trumble Year 4 2 Apr Sales £ 433 Year 4 11 Apr 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 Returns inwards £ 105 £ Returns inwards 87 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. on the board or overhead projector. 81 . below. shown in Lesson 11. RETURNS INWARDS DAY BOOK 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 Credit note no 2 Record the following postings to ledger accounts. 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.

3 illustrates the part played by the Returns Inwards Day Book in the account system.pages 60-104 15/3/03 12:21 pm Page 82 Returns Day Books 4 Figure 12. 6 Hand out copies of. 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 GENERAL LEDGER SALES LEDGER Customer (debtor) accounts Figure 12. exercise T/12. or show on the overhead projector. (b) end-of-month posting of the total to the Returns Inwards Account = debit. 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: 82 .3 The returns inwards procedure 5 Explain that the double entry is made by means of: (a) prompt postings to the customer accounts = credit. Ask the students to work through the exercise.1 in the Appendix (page 237). Show the figure on the overhead projector.

shown in Lesson 11 (page 76). Note The credit entry in Tempster & Fall’s account was previously posted from the Purchases Day Book of R Maundy.pages 60-104 15/3/03 12:21 pm Page 83 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 N Nathan Year 4 24 Apr £ Returns outwards 38 GENERAL LEDGER Returns Outwards Year 4 30 Apr Sundries £ 270 Purchases £ 630 3 Point out that the 3 debit entries in the Purchases Ledger equal. in practice.4 (overleaf) illustrates the part played by the Returns Outwards Day Book in the account system. (b) end-of-month posting of total to Returns Outwards Account = credit. have credit entries for purchases previously made. The accounts of Jolly and Nathan would. 83 . 4 Figure 12. Show the figure on the overhead projector. the amount of the end-of-month credit entry in the Returns Outwards Account. 5 Explain that the double entry is made by means of: (a) prompt postings to supplier accounts = debit. in total.

exercise T/12.2 in the Appendix (page 237). Buyer receives CREDIT NOTE entered in RETURNS OUTWARDS DAY BOOK daily postings Memorandum only end-of-month posting of total Returns Outwards Account Supplier (creditor) accounts PURCHASES LEDGER GENERAL LEDGER Figure 12.The term includes the 4 day books already considered. Ask the students to work through it. it is also a component of the double-entry system. before it is entered in the ledger.pages 60-104 15/3/03 12:21 pm Page 84 Returns Day Books 6 Hand out copies of.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. The Cash Book can serve 2 roles. 84 . it is a book of prime entry but. for cash sales or cash purchases. Thus. or show on the overhead projector. as part of the ledger.

3 PURCHASES DAY BOOK Year 6 3 Oct 17 Oct 24 Oct R Varney T Langton R Varney To Purchases Account SALES DAY BOOK Year 6 5 Oct 11 Oct 21 Oct K Petts J Beaver K Petts To Sales Account RETURNS OUTWARDS DAY BOOK Year 6 8 Oct 27 Oct 30 Oct £ R Varney T Langton R Varney To Returns Outwards Account RETURNS INWARDS DAY BOOK Year 6 15 Oct 19 Oct K Petts J Beaver To Returns Inwards Account £ 102 72 174 56 37 34 127 £ 357 448 544 1. The exercise involves preparation of all 4 day books. Solution to T/12.3.3 in the Appendix (page 238) on the overhead projector and work through it with the class.349 £ 420 296 272 988 (continued) 85 . 27. unless stated otherwise.This applies to the transactions on 8. 15. 19. it can be assumed. the amount of the discount (or a due proportion. when only some of the goods are returned) must be deducted at the ‘returns’ stage. Note When a question states ‘Returned goods to £26’. and 30 October Year 6 in exercise T/12. that the seller has agreed to make an allowance.pages 60-104 15/3/03 12:21 pm Page 85 Returns Day Books Step 6 Aim: to reinforce learning and practice in regard to the use of day books 1 Display exercise T/12. In the case of returned goods. together with the postings to the ledger accounts. when a trade discount has previously been allowed at the purchases or sales stage.

pages 60-104 15/3/03 12:21 pm Page 86 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 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 Returns inwards £ 102 Purchases £ 296 GENERAL LEDGER Purchases Year 6 31 Oct Sundries £ 988 Sales Year 6 31 Oct Returns Outwards Year 6 31 Oct Returns Inwards Year 6 31 Oct Sundries £ 174 £ Sundries 127 Sundries £ 1.175 (£799 + £376) = sales of £1.349 less returns inwards of £174. and that the total debtor balances of £1.349 Check that the total creditor balances of £861 (£602 + £259) = purchases of £988 less returns outwards of £127. 86 .

In this question. exercise T/12.pages 60-104 15/3/03 12:21 pm Page 87 Returns Day Books 2 Hand out copies of. 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.The alternative names are: Returns Inwards Day Book or Sales Returns Day Book Returns Outwards Day Book or Purchases Returns Day Book 87 . (d) transactions repeated. 3 Hand out copies of.1 It should be deducted from the net figure only if payment is made within the required period.Ask the students to work through it. (c) day books shown in account form. a minimum level of purchase is necessary to qualify for a trade discount. Ask the students to work through it. Cash discount is calculated on the net purchase or sales figure. or show on the overhead projector. exercise T/12. This question is mainly a test of knowledge about discounts.The points below might be helpful for the students. individually.5 in the Appendix (page 240). (b) failure to deduct trade discount when this had been allowed in the original purchase or sale transaction.4 in the Appendix (page 239). the entries are straightforward. 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 Stevens F Robins J New P Harper K Burton (b) Traders allow cash discount to encourage prompt or early payment. 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. (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. or show on the overhead projector.

particularly in the adjustments of final accounts. in respect of an account period.pages 60-104 15/3/03 12:21 pm Page 88 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. second. 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.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. Therefore explain accrual and prepayments carefully. It is an important topic: first.4 13.3 13. and make sure that the students have plenty of practice in answering questions on this topic. An expense accrual is an amount payable.2 13. because it may be the main subject of a question.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. because it can also occur in other topics in an examination. that remains unpaid at the end of 88 .1 13.

pages 60-104 15/3/03 12:21 pm Page 89 Accruals and prepayments – expenses that period.000 Year 4 1 Jan Balance b/d 500 5 Show the correct Rent Account (above) on the overhead projector or board.000 credit entry is matched by a debit of that amount to the Profit & Loss Account. At 31 December Year 3. 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. 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. The true charge for the rent for Year 3 is: 4 quarters at £500 per quarter = £2. 4 The problem with the example is that this Rent Account records the rent for only 3 quarters. 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.000 Jacqui Tillot’s Profit & Loss Account for Year 3 should show £2.000. The ‘correct’ charge for the year is thus made in the Profit & Loss Account. Example Jacqui Tillot commenced in business at 1 January Year 3. Left as it is. She pays £500 rent ‘in arrears’ at the end of each quarter. 6 Explain that the £2. whether or not the expense accounts have been paid.This may require making adjustments in the expense accounts. the rent for the fourth quarter will probably be paid early in Year 4. the fourth quarter’s rent is still unpaid. The £500 in respect of the fourth quarter should be treated as a liability. 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. 89 . 2 Illustrate accrual by showing the example below on the overhead projector or board.The students’ aim is to relate the expenses to the periods (usually years) in which the benefit is obtained from the expenditure.000 2.

200 1.400 90 . 9 Ask the students to work through the following exercise.200 At 31 December Year 5.800 3.800 Year 6 1 Jan Balance b/d 1. the debt is cleared early in Year 4. which clears the account. Required Prepare the Salaries Account for the 3 months ending 31 December Year 5. Solution Salaries Year 5 31 Oct Bank 30 Nov Bank 31 Dec Balance c/d £ 1.pages 60-104 15/3/03 12:21 pm Page 90 Accruals and prepayments – expenses 7 Show the students that early in Year 4.400 were unpaid. 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. Exercise Douglas Miller commenced in business at 1 October Year 5. the credit balance (brought down) at 1 January Year 4 represents the amount owing at that date. The transfer ensures that the ‘true’ charge is made in the Profit & Loss Account. which would appear as a liability in the balance sheet at 31 December Year 3.200 1.200 1. He paid monthly staff salaries in arrears by cheque as follows: Year 5 31 Oct 30 Nov £ 1. Review the key entries.800 Year 5 31 Dec Profit & loss £ 3. 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. salaries for December amounting to £1. duly balanced at that date. 8 It is essential that the students grasp the meaning of these account entries.400 3.

A prepayment is the opposite of an accrual. the transfer to the Profit & Loss Account in the expense account will still be credited. 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. 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. ie as an asset. duly balanced at 31 December Year 7.pages 60-104 15/3/03 12:21 pm Page 91 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.325 Year 8 1 Jan Balance b/d 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 is brought down as a debit balance. The difference is in the balance. Solution Rent Year 7 2 Jan 28 Mar 26 Jun 1 Oct 28 Dec £ Bank Bank Bank Bank Bank 450 450 475 475 475 2. However.850 475 2. which results in a total transfer of £1.850. Example James Jewell commenced in business at 1 January Year 7.325 Year 7 31 Dec Profit & loss 31 Dec Balance c/d £ 1. 2 Illustrate prepayment on the overhead projector or board with the following example. 91 .

pages 60-104 15/3/03 12:21 pm Page 92 Accruals and prepayments – expenses 4 Explain that. which covers the insurance for the half-year ended 30 September Year 6 The amount of £210 is paid by cheque. 5 Emphasize the rule about prepayment and accrual: if a prepayment. Year 6 1 Jan 23 Mar 29 Sep The balance on the account is £80. the opening balance = Debit if an accrual. 92 . prepare John Sim’s Insurance Account for the year ended 31 December Year 6. It is more usual to have an opening balance as well as a closing balance. 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 £ 80 190 210 480 105 Year 6 31 Dec Profit & loss 31 Dec Balance c/d £ 375 105 480 Balance b/d 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. so far. the opening balance = Credit Example From the following details. showing the transfer to the Profit & Loss Account. representing one quarter’s insurance paid in advance The amount of £190 is paid by cheque. Balance the account at the year end. the examples given have had no opening balance since they illustrate the first year of trading.

and. These elements may be shown as a single example (see Figure 13. The students may find it helpful to practise constructing simple diagrams (in double-entry account form) that position the various items. If 3 of the elements are known. the respective amounts of the 4 elements as outlined in point 6 above.The example may be described as a situation of initial accrual and closing prepayment. and sample figures can be copied on to a number of other transparencies. 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. (iv) the amount owing or prepaid at the end of the year.pages 60-104 15/3/03 12:21 pm Page 93 Accruals and prepayments – expenses 6 Point out that expense accounts involving accrual. Insert the figures progressively by placing the transparencies on top of one another. (iii) the amount to be transferred to the Profit & Loss Account.The diagrams can be adapted to each situation. first. 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. Amount accrued b/d Amount paid during year Transfer to Profit & Loss Account Amount prepaid c/d Amount prepaid b/d Figure 13. the fourth can be found by preparing an expense account based on the relevant structure. 93 . second. such as initial prepayment and closing accrual (see point 8 below). the particular combination of opening and closing balances. ie the ‘true’ cost for the year.1). Each situation will be determined by.1 A pictorial example of an expense account 7 Display the example on the overhead projector. (ii) the amount paid during the year. prepayment. 8 Ask the students to construct simple diagrams (like the one above) that show the following situations. The basic structure can be copied on to a transparency and used as the master diagram.

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. Exercise Cleaning materials bought in the year ended 31 December Year 4 cost £870.750 Year 4 1 Jan Balance b/d 250 Year 3 31 Dec Profit and loss 31 Dec Balance c/d £ 2.750 Stress that any such balance should not be included with the stock-in-trade.750 2. Example Stationery bought in the year ended 31 December Year 3 cost £2. 11 Copy and hand out or display the following exercise on the overhead projector. The cleaning materials bought in the year ended 31 December Year 5 cost £920. or cleaning materials. the value placed on the stock must be carried down as a balance on the expense account.500 250 2. This total is charged to the Profit & Loss Account and the amount remaining (stock) is carried forward as an asset balance. which are separate from ordinary ‘purchases’ that are for resale. The stock of cleaning materials at 31 December Year 5 is worth £150.pages 60-104 15/3/03 12:21 pm Page 94 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.£250 = £2.750 . Solution The amount used is £2. Stationery Year 3 Jan–Dec Sundries £ 2.The stock of cleaning materials at 31 December Year 4 is worth £130. Ask the students to work through it. 10 Illustrate the two points above with the following example. Purchases for use in the business might include stationery. 94 . 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. packing materials.500.750. but should be shown separately as part of the item ‘prepaid expenses’. Any stock of such items at the end of an accounting period represents a form of prepayment.

Solution Cleaning Materials Year 4 Jan–Dec Sundries £ 870 870 Year 5 1 Jan Balance b/d Jan–Dec Sundries Year 6 1 Jan 130 920 1. the Insurance Account has a balance of £90 (Dr). Adjustments to deal with this mismatch may be necessary at the end of the accounting period. 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. 95 . Note The stock at 31 December Year 4 (the closing stock) is also the stock at 1 January Year 5 (the opening stock).pages 60-104 15/3/03 12:21 pm Page 95 Accruals and prepayments – expenses Required Show the Cleaning Materials Account for the 2 years ended 31 December Year 5.050 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. duly balanced at that date. The charge to the Profit & Loss Account for insurance for Year 5 is: £90 + £220 = £310. 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. Required Show the Insurance Account for the year ended 31 December Year 5.050 Balance b/d 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. The remaining £110 is carried forward as a prepayment.050 150 Year 5 31 Dec Profit & loss 31 Dec Balance c/d Year 4 31 Dec Profit & loss 31 Dec Balance c/d £ 740 130 870 900 150 1. Example At 1 January Year 5. The insurance premium was paid by cheque £330 on 28 April Year 5 for the (insurance) year to 30 April Year 6.

Mar Apr. Aug. In examination answers. which is sometimes done inconsistently.pages 60-104 15/3/03 12:21 pm Page 96 Accruals and prepayments – expenses Insurance Year 5 1 Jan 28 Apr Year 6 1 Jan £ Balance b/f Bank 90 330 420 110 Year 5 31 Dec Profit & loss 31 Dec Balance c/d £ 310 110 420 Balance b/d 13 Copy and hand out or display exercise T/13. the other £120 is carried forward as a prepayment for Year 5. marks can be awarded for what is correct. ie £180 × 4/12 = £60. Jun Jul. You should first calculate the amount of the charge for Year 4 for each expense. charging an incorrect proportion to the Profit & Loss Account from the insurance premium paid on 31 August Year 4. ie debits. Sep Oct Thus the accrual of 2 months’ rent at 31 December Year 4 is 2 × £250 = £500. if workings are shown clearly. ie credit. The following are major weaknesses shown by candidates in answers to exercise T/13. Therefore the total insurance charge for Year 4 is £65 + £60 = £125. 96 .1 concerns 3 expense accounts: 2 accounts (rent and insurance) have opening prepayment balances.1 (an LCCIEB past examination question): ● ● ● failure to calculate correctly the charge to the Profit & Loss Account in the Rent Account. 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. Draw the students’ attention to these weaknesses as appropriate. the other (advertising) has an opening accrual balance.Work through it with the class. being confused about applying double-entry rules. May. Exercise T/13.1* in the Appendix (page 241) on the overhead projector. Prepayment balance 1 Jan Yr 4 Payment 28 Feb 31 May 31 Aug 30 Sep = = = = = Period of rent (Year 4) Jan Feb. With regard to insurance: ● ● ● the initial prepayment of £65 covers the period 1 January to 31 August. It is clear that the monthly rent is £230 from January to September and £250 from October to December.

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 – £60.020 Gross profit Rent receivable £ 3. at the financial year end.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.pages 60-104 15/3/03 12:21 pm Page 97 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. 4 Trading and Profit & Loss Account The effect of the adjustments is limited to the Profit & Loss Account. while other expenses will be in arrears.100 .570 450 4. some expenses will be paid in advance of the forthcoming year. ie ‘accrued’. Adjustments may therefore be necessary when preparing final accounts.440 60 1.100) Office expenses Lighting and heating (610 + 60) Carriage outwards Net profit £ 1. This often occurs because the firm’s financial year and the payment year for the expense do not correspond.380 4.000 590 670 380 1. so only that need be shown on the overhead projector.340 100 1. 2 This topic can be developed with reference to the final accounts of T Avis in Lesson 7 (page 40). T Avis Profit & Loss Account for the year ended 31 December Year 6 Rent payable (1.380 97 .

230 70 5. T/13.3.810 3. 7 Copy and hand out or display exercises T/13. If there is more than one prepayment. 98 . Ask the students to work through them.210 5. the individual amounts should be shown. It is advisable.4 in the Appendix (pages 243–5).020 less Amounts due within 1 year Creditors Accrual 1.710 Financed by: Capital – balance at 1 Jan Yr 6 add Net profit less Drawings 5.710 Note Period-end prepayments should be shown under current assets.170 100 1.600 2.380 1.430 1.500 2.2. and positioned after ‘debtors’ but before ‘bank’. 6 Point out that period-end accruals should be shown under ‘amounts due within 1 year’. If there is more than one accrual.100 280 5. to record the separate amounts (in brackets) beside the total figures.pages 60-104 15/3/03 12:21 pm Page 98 Accruals and prepayments – expenses 5 Balance sheet To illustrate the remaining effects of the adjustments mentioned in point 3 (page 97). however. T/13.750 60 1.450 1. 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 Current Assets Stock Debtors Prepayment Cash at bank Cash in office £ £ £ 900 1.Then candidates can be sure of obtaining marks for the parts that are correct. these do not have to be listed individually.

Careful explanation of this topic is essential and students should be encouraged to practise working through exercises.7 13. eg the Rent & Rates Account 20. with distinctive balances.9 13.10 13.8 13. 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.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.12 The recording of 2 areas of expense within the one expense account. 99 .pages 60-104 15/3/03 12:21 pm Page 99 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 13.11 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. 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.

192 Year 7 1 Jan Balance b/d 580 5 Explain that although accrued income should be included with the current assets in the balance sheet. even though payment has not yet been received. Example Edward Smith is a trader and. it is safer to show accrued income as a distinct item otherwise a mark may be lost. in the Income Account. the accrual should be shown as a current asset. but not yet received. carried down as a debit balance (representing an amount to be received early in the next period). the accrual should be: ● ● included in the transfer to the Profit & Loss Account. In an examination answer.192 2. he receives a commission on services he carries out. The account for Year 6 should appear as follows: Commission Receivable Year 6 31 Dec Profit & loss £ 2.192 Year 6 30 Mar 2 Jul 4 Oct 31 Dec £ Bank Bank Bank Balance c/d 512 470 630 580 2. it is common practice in business to include it with debtors. 6 Copy and hand out or show the following exercise on the overhead projector or board.pages 60-104 15/3/03 12:21 pm Page 100 Accruals and prepayments – income 2 Point out that as the income is earned in a given year. 4 Illustrate income accrual by displaying the following example on the overhead projector or board. 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. Explain to them also that. it should be included as income for that year. in the balance sheet. 3 Tell the students that. Ask the students to work through it. 100 . During the year ended 31 December Year 6. however. in addition to his normal business income from the sale of goods. for the quarter ended 31 December Year 6 was £580.

During the year ended 31 December Year 5.650 2. 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 650 650 675 675 2. carried down as a credit balance.pages 60-104 15/3/03 12:21 pm Page 101 Accruals and prepayments – income Exercise Hilary Truelove receives rent from subletting business premises.650 Year 6 1 Jan Year 6 14 Jan Balance b/d 675 Bank 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. complete with year-end balancing and with as many entries as possible for Year 6. 2 Tell the students that. in the Income Account at the end of the financial year. 101 . 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. the advance payment should be: ● ● deducted from the amount of income for the year.

as candidates. fifth payment really relates to Year 8 and should be carried forward into that year. 3 Illustrate income prepayment by showing the following example on the overhead projector or board. adjusted or true income is 4 × £250 = £1.1 and T/14. the prepayment should be shown under ‘amounts due within 1 year’. with distinctive balances 1 Explain that. account for Year 7 should appear as follows: Rent Receivable Year 7 31 Dec Profit & loss 31 Dec Balance c/d £ 1.000. Example Rent is received on sublet premises as follows: Year 7 12 Jan 6 Apr 4 Jul 29 Sep 21 Dec 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 The The The The unadjusted income for Year 7 is 5 × £250 = £1. in the balance sheet.250 Balance b/d 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’. Step 3 Aim: to be able to prepare an account that includes two areas of expense.000 250 Year 7 12 Jan 6 Apr 4 Jul 29 Sep 21 Dec Year 8 1 Jan £ Bank Bank Bank Bank Bank 250 250 250 250 250 1.250. the students might be required to prepare an expense account that includes two areas of expense.2 in the Appendix (pages 247–8). eg Rent & Rates Account.250 250 1. 5 Copy and hand out or show on the overhead projector exercises T/14.pages 60-104 15/3/03 12:21 pm Page 102 Accruals and prepayments – income Explain to them also that. 102 . Ask the students to work through them.

3* in the Appendix (page 249) on the overhead projector. 4 Copy and hand out or show exercise T/14.700 3.800 31 Dec Year 5 1 Jan Balance b/d (rates) 780 Year 5 1 Jan Balance b/d (rent) 3.120 780 15.200 3. 5 Common errors made by candidates concerning income and expense accounts Candidates sometimes: (a) lack a grasp of the rules of double entry.pages 60-104 15/3/03 12:21 pm Page 103 Accruals and prepayments – income 2 Illustrate this type of acccount by showing the example below on the overhead projector or board. £780 of rates were prepaid and £2.120 3. £780 of rates were prepaid and £3. Ask the students to work through it.200 3 Emphasize strongly that different categories of expense should be combined only if the examination questions require it.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) £ 780 8. Example At 1 January Year 4.200 of rent was owing. the following payments were made: Rent Rates £ 8. 103 . The following amounts were due to be paid for Year 4: Rent Rates £ 9.700 3.700 9. (b) adjust actual individual payments or income in some instances. T/14.700 of rent payable was accrued.3* is a question requiring the preparation of a combined type of expense account.120 At 31 December Year 4. instead of apportioning expense or income at the end of the period.200 3. During Year 4.200 15.800 Year 4 1 Jan 31 Dec Balance b/d (rent) Profit & loss rent rates Balance c/d (rates) £ 2. eg payments credited to the expense account and income debited to the Rent Receivable Account.

pages 60-104 15/3/03 12:21 pm Page 104 Accruals and prepayments – income (c) make entries inconsistently. T/14.5 and T/14.6 in the Appendix (pages 250–3) on the overhead projector. eg payments are partly debited or partly credited within an Insurance Account. (d) make adjustments according to the calendar year instead of according to the firm’s financial year.Ask the students to work through them. Point out that they should look out for differences between the financial year and the calendar year.4. often within the same account. 6 Copy and hand out or show exercises T/14. (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.5. (e) overbalance accounts – each time an entry is made (in extreme cases). particularly when working through T/14. 104 . income is partly debited or partly credited within the Rent Receivable Account.

net book value 105 .9 The accounting entries relating to the sale or scrapping of a depreciated fixed asset.6 The effective presentation of fixed assets to show.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. using a Provision for Depreciation Account 14. through basic calculation. if appropriate: cost. meaning.3 Calculation of the amount of annual depreciation and the effect on the book value of a fixed asset. using the reducing balance method 14. using an Asset Disposal Account 14. 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 14.2 The basis of the straight line (or fixed instalment) method of depreciation 14. between use of the straight line method and use of the reducing balance method 14.8 A comparison.6 Calculation of the amount of annual depreciation and the effect on the book value of a fixed asset.5 The basis of the reducing balance (or diminishing balance) method of depreciation 14.7 The accounting entries for the reducing balance method of depreciation.11 Significance of the terms aggregate depreciation and net book value and their use in the balance sheet 20. using the straight line method 14.pages 105-157 15/3/03 11:16 am Page 105 Lesson 15: Depreciation of fixed assets Topic summary ● ● ● ● ● ● ● The need to allow for fixed asset depreciation The calculation of depreciation by the straight line method and the reducing balance method The purpose. aggregate depreciation.4 The accounting entries for straight line method depreciation. using a Provision for Depreciation Account 14.10 The entries in the Profit & Loss Account and balance sheet relating to fixed assets and their depreciation 14.

However. at a later date. 3 Explain that if fixed assets are hired. They do.pages 105-157 15/3/03 11:16 am Page 106 Depreciation of fixed assets Depreciation of fixed assets. is a topic that might occur as a question in its own right or as an element in a question. that their fall in value may be due to: ● ● being used (‘wear and tear’) the availability of newer superior or more efficient assets. be sold for the price they were purchased at. 4 Discuss the varying ways in which depreciation applies. is the estimate of the fall in value of fixed assets over a period of time. 106 . as recorded. This lesson is important also in that it introduces the concept of the provision. generally fall in value. 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. 2 Point out that if fixed assets never fall in value and could. 5 Emphasize that depreciation. so that by failing to take account of this: ● ● profit would be overstated fixed assets in the balance sheet would be overstated in value. eg the newer assets might run more cheaply or use less fuel. much like a charge for owning the assets. particularly on final accounts. Illustrate this point with the following example. depreciation is charged. like accruals and prepayments. however. effectively a cost).The First Level Syllabus is concerned with two depreciation methods only: (i) the straight line method (ii) the reducing balance method. 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. for assets that are owned. a charge for hiring would appear in the Profit & Loss Account. eg leases on premises as opposed to ownership of motor vehicles.

£1. therefore any resulting figure is necessarily an estimate.The fall in value – the cost of ownership and use of the asset – is: £9. For example.500 = 6 Explain that the calculation for depreciation is necessarily an estimate because: ● ● of the problem of estimating the ‘working life’ of an asset. is being estimated.500 = amount of depreciation £13. ie the number of years of use the amount that will be received on eventual sale of the asset. 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. point 6 above. 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. This will have to be ‘written down’ over the period of 4 years until it is sold. It involves: ● ● ● ● an estimate of the number of years of use (working life).000 less estimated disposal or sale amount £1. 107 . perhaps several years ahead 7 Point out that. an estimate of the eventual sale (disposal) value. is estimated to have a working life of 4 years. simplified methods of measurement are used.000 .000. the original cost less sale value = total amount to be written down. for use in a business.The calculation follows from what was stated in Step 1 about estimation.000.000 = £8. a motor vehicle that is purchased on 1 January Year 4 for £9. At the end of that time it is believed that it will be sold for £1.000. 2 The straight line method This is also known as the ‘fixed instalment method’. often.pages 105-157 15/3/03 11:16 am Page 107 Depreciation of fixed assets Example original cost of asset £15.

000 and depreciation is to be provided at 40%.000 6 Note The same result would be obtained by depreciating the total amount to be written down (£18. bought for £10. The calculations for the first 4 years would be as follows: 108 .000 is estimated to have a working life of 8 years and at the end of that time to have a zero resale value. The reduced balance is the cost of the asset less depreciation to date.000 = £3. is estimated to have a working life of 5 years and to have a resale value at the end of that time of £1. Example (b) Calculate the annual depreciation charge in each of the following cases: (i) a motor vehicle.000) by 162/3% each year.500.500 = £1.000.500 .pages 105-157 15/3/03 11:16 am Page 108 Depreciation of fixed assets Example (a) A machine. Explain that a fixed percentage is written off the reduced balance each year. (ii) a machine bought for £32.£1. Solution (i) £10.000 per annum 8 3 Reducing balance method This method is also known as the ‘diminishing balance method’. Illustrate this method by showing the example below on the overhead projector or board.000 = £4. 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. £32.500.800 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. The annual depreciation charge would be: £20.£2.000. Example A machine is bought for £15. bought for £20.000 .

400) Year 4 depreciation (40% of £3. the depreciation charges are greatest.6 times that of Year 4.600 5.000 3. when repair bills should be low.160 3.240 1.296 1. The answer should be that. Step 3 Aim: to have a basic understanding of the purpose. With the straight line method. 4 Ask the students what advantage the reducing balance method has compared with the straight line method. A provision for depreciation is one example.000) Year 3 depreciation (40% of £5.pages 105-157 15/3/03 11:16 am Page 109 Depreciation of fixed assets Cost of machine Year 1 depreciation (40%) Year 2 depreciation (40% of £9. 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’. ie provision takes into account the cost of owning and using fixed assets. 5 Copy and hand out or show exercise T/15. Depreciation in Year 1 is nearly three times that of Year 3 and over 4.240) £ 15. This has the effect of smoothing out charges over the life of the asset.000 6.1 in the Appendix (page 253) on the overhead projector.000 9. Ask the students to work through the exercise. depreciation charges are low. in the early years. 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.400 2. creating a provision has the advantage of: ● ● helping to ensure that profits are not overstated. 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. 109 . In later years. However. Such a provision builds up when a charge is made year by year for the estimated depreciation. depreciation charges are relatively high in later years when repair bills increase.944 Note that the amounts charged as depreciation fall quite strikingly. when repair bills are likely to rise. meaning. 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.

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. Example A machine. Note Any questions requiring the use of this method will state the percentage rate of the write down to be applied. 110 .000. If. 2 Emphasize that the LCCIEB requires this method to be used in examination answers. 3 Illustrate the correct method of showing the depreciation of fixed assets by displaying the example below on the overhead projector or board. they break the rules of double entry. a separate provision for depreciation account is maintained that accumulates the amount of depreciation year by year.750 per annum 4 4 The reducing balance method is based in this instance on a 50% write down. the future of a business is in considerable doubt.000 on 1 January Year 1. It is assumed that the business will continue to operate for at least the period over which depreciation provisions are being built up. In doing so. the net realizable value of assets might fall below the net book value. 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. Far too many candidates make the mistake of recording depreciation in both the Asset Account and the Provision Account. however.pages 105-157 15/3/03 11:16 am Page 110 Depreciation of fixed assets A provision is usually shown in the balance sheet as a deduction from the amount of the relevant asset. The financial year ends on 31 December. The straight line method is calculated as follows: £80.000 = £75.000 .000 = £18. without any adjustment for depreciation.£5. ie depreciation calculations are based upon the business as a ‘going concern’. after which it will be sold for £5. so requiring extra depreciation to be charged to the Profit & Loss Account. is expected to have a working life of 4 years. purchased by cheque for £80.

250 56.000 5.000 40.750 18.000 10.000 10.pages 105-157 15/3/03 11:16 am Page 111 Depreciation of fixed assets The calculation for the reducing balance method is as follows: Cost of machine Year 1 depreciation Year 2 depreciation Year 3 depreciation Year 4 depreciation £ 80.750 Year 1 31 Dec Profit & loss* Year 2 1 Jan Balance b/d 31 Dec Profit & loss* £ 18.750 * or Depreciation expense 111 .000 40.250 Year 3 1 Jan Balance b/d 31 Dec Profit & loss* Year 4 1 Jan Balance b/d 31 Dec Profit & loss* 37.000 The accounts for each of the methods appears as follows: Machine Year 1 1 Jan Bank £ 80.500 Year 3 31 Dec Balance c/d 56.000 20.750 37.000 5.750 56.500 18.500 37.250 56.750 37.000 20.000 Straight line method Provision for depreciation on machine Year 1 31 Dec Balance c/d Year 2 31 Dec Balance c/d £ 18.500 18.250 18.

This feature will be dealt with in Step 7. 112 . Instead of being part of Capital Account (Cr balance).The two are shown here for comparison.000 5.000 10. An examination question might require both methods to be shown. 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.000 20.000 60.000 70. Emphasize that a provision account always has a credit balance. a firm would use only one method.000 70.000 * or Depreciation expense Note In reality.000 Year 3 1 Jan Balance b/d 31 Dec Profit & loss* Year 4 1 Jan Balance b/d 31 Dec Profit & loss* 60.000 70. which is fundamentally wrong. 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). The provision accounts are left open in Year 4 to deal with the sale of the machine. 5 Common error made by candidates concerning depreciation The common error is to show the provision for depreciation with a debit balance.000 60.000 60. provision for depreciation has a credit balance.000 Year 1 31 Dec Profit & loss* Year 2 1 Jan Balance b/d 31 Dec Profit & loss* £ 40. the difference between the asset balance and the provision balance is the ‘book value’ or ‘net book value’ of the asset.000 Year 3 31 Dec Balance c/d 70. the amount is shown as a provision (Cr balance).000 40. the provision for depreciation builds up (accumulates) the amounts of depreciation year by year.pages 105-157 15/3/03 11:16 am Page 112 Depreciation of fixed assets Reducing balance method Provision for depreciation on machine Year 1 31 Dec Balance c/d Year 2 31 Dec Balance c/d £ 40.

Fixed Assets Premises Fixtures and fittings Motor vehicles Cost £ 120.pages 105-157 15/3/03 11:16 am Page 113 Depreciation of fixed assets 7 Copy and hand out or show exercise T/15. resulting in the net book value.2 in the Appendix (page 254) on the overhead projector.800 147. Ask the students to work through the exercise.500 17.300 12.200 9. 113 . First Level candidates may find the further stage in the process (ie recording depreciation in a Depreciation Expense Account) somewhat confusing.000 5. £137.000 9.300 Accumulated depreciation £ 4. The LCCIEB will accept either entry. 3 Balance sheet Usually leads to each fixed asset (or class of fixed asset) being shown at cost less total depreciation to date. The account serves as a collection point for depreciation charges and is especially useful when a business has a number of depreciation provision accounts. the Provision for Depreciation Account is credited.200 5. 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 to carry the debits of asset write down is standard practice. shown in Step 4 in the details column. is to be added in due course to the other assets in the balance sheet.400 Net book value £ 120. state ‘Profit & loss’ or ‘Depreciation expense’. 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.600 137. 4 Show the following typical layout of fixed assets in a balance sheet on the overhead projector or board. 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. 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).900 The total of the net book value.900.

L Johns purchased a machine for £30. 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. Exercise On 1 April Year 5. 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. 114 . He decided to depreciate it at the rate of 40% using the reducing balance method.The question will state what to do when a fixed asset is purchased part of the way through a firm’s financial year.Ask the students to work through the exercise. including: (a) charging depreciation for the part of the year the asset is owned. He keeps a provision for depreciation account.480 6 Copy and hand out or show exercise T/15. 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.000. as an extract.3 in the Appendix (page 254) on the overhead projector.520 Net book value £ 6. eg if the financial year ends on 31 December. There are various ways in which candidates can answer the question. Ask the students to work through the exercise. (c) providing depreciation for the whole year on assets held at the end of the year.000 Accumulated depreciation £ 23. Required Show.pages 105-157 15/3/03 11:16 am Page 114 Depreciation of fixed assets 5 Copy and hand out or display the following exercise on the overhead projector. (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.

200 2 For asset sales during a financial year there are also different ways of dealing with depreciation.Thus. using the reducing balance method 20% per annum. assets sold during the period will have no provision for depreciation made for that last period. eg: (a) ignoring part periods and calculating a full period’s depreciation only on those assets owned at the end of the period. During Year 1. 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.600 2. Example The financial year of Sands & Co ends on 31 December. a half year’s depreciation is charged for assets purchased in the second half of the financial year.000 6. 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 The assets are depreciated using the following bases: Motor vehicles Fixtures and fittings 40% per annum. show the amount of the depreciation on each asset for each of the years ended 31 December Year 1 and 31 December Year 2.pages 105-157 15/3/03 11:16 am 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. Ask the students to work through the exercises.160 Fixtures and fittings £ 600 1. Solution Depreciation Year 1 Year 2 Motor vehicles £ 3.4 and T/15. Required In a statement. whereas assets bought during the period will have a full period’s depreciation provision. (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.5 in the Appendix (page 255–6) on the overhead projector. 115 . 3 Copy and hand out or show exercises T/15. (b) calculating the depreciation provision according to the proportion of time the asset was owned (probably calculated to the nearest whole month).

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.250.200. 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.The data are taken from the example in Step 4 on page 111. ● 3 Illustrate the calculation and account entries for an asset sold at a profit by displaying the example below on the overhead projector. 116 .The straight line method has been used to calculate depreciation.pages 105-157 15/3/03 11:16 am 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. the Provision for Depreciation Account has a credit balance of £56. At that date. Example The machine is sold on 31 December Year 3 for £27.

500 18.000 80.000 Balance b/d 80.450 Profit & Loss Account for the year ended 31 December Year 3 Profit on sale of machine * or Depreciation expense £ 3. 117 .pages 105-157 15/3/03 11:16 am 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 £ 80.250 23. excluding bank account.000 Year 3 31 Dec Disposal of machine 80.250 56.000 Year 3 31 Dec Prov for deprec’n – machine 31 Dec Bank £ 56.250 Disposal of machine Year 3 31 Dec Machine 31 Dec Profit & loss (profit on sale) £ 80.750 27.000 Balance b/d 80.200 3.450 Year 3 1 Jan Balance b/d 31 Dec Profit & loss* £ 37.450 The book-keeping entries.000 Provision for depreciation of machine Year 3 31 Dec Disposal of machine £ 56.450 4 Illustrate the calculation and account entries for an asset sold at a loss by displaying the example overleaf on the overhead projector.000 56.000 Year 1 31 Dec Balance c/d Year 2 31 Dec Balance c/d £ 80.200 83.450 83.250 27.750 56. are: Machine Year 1 1 Jan Year 2 1 Jan Year 3 1 Jan Bank £ 80.250 3.

100 1.250 56.000 Year 3 31 Dec Prov for deprec’n – machine 31 Dec Bank 31 Dec Profit & loss (loss on sale) £ 56.650 80.000 56.500 18.250 22.000 Profit & Loss Account for the year ended 31 December Year 3 £ Loss on sale of machine 1.100.250 23.000 80. ie Year 3.250 Disposal of Machine Year 3 31 Dec Machine £ 80.100 1.pages 105-157 15/3/03 11:16 am Page 118 Depreciation of fixed assets Example Using the same data and the same disposal date.750 22.250 80.750 56. 118 .000 Year 3 31 Dec Disposal of machine 80. 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 Machine Year 1 1 Jan Year 2 1 Jan Year 3 1 Jan Bank £ 80. a full year’s depreciation has been charged in the year of disposal.650 Balance b/d 80.000 £ 80.650 In the examples above.000 Provision for depreciation of machine Year 3 £ 31 Dec Disposal of machine 56.000 Balance b/d 80.000 Year 3 1 Jan Balance b/d 31 Dec Profit & loss* £ 37.000 Year 1 31 Dec Balance c/d Year 2 31 Dec Balance c/d £ 80. this time the machine is sold for £22.

such as: (a) recording depreciation to the credit of both the Provision Account and the Asset Account.500 27. which in the first instance of the disposal. 8 Copy and hand out or show exercise T/15. and then transferring it to the Asset Account (Dr provision.000 37.200 15.450 = £15. Cr asset).750 less £3. Ask the students to work through the exercise. (b) using the Provision Account as merely a calculating stage: ie entering the amount to the credit of the Provision Account. it is usual for profit or loss to be added to depreciation. would be: £18. 7 Common errors made by candidates regarding depreciation Draw the students’ attention to the errors they should avoid.pages 105-157 15/3/03 11:16 am Page 119 Depreciation of fixed assets 5 Point out that the so-called profit or loss on disposal is only a depreciation adjustment.500 42. then (again in the first instance) the calculation would be: Cost less Accumulated depreciation Net book value Sale of the machine Loss/depreciation £ 80. (e) failing to follow the instruction regarding the due proportion of annual depreciation where the asset is purchased during the year. In practice. 119 . (d) failing to accumulate the depreciation from year to year. breaking the rules of double entry.300 6 Explain that loss is really another word for depreciation.6 in the Appendix (page 256) on the overhead projector.300 for the year If the policy is to charge no depreciation in the year of disposal. (f) wording account entries poorly. (c) debiting depreciation to the Provision Account.

7 Making specific provision for certain bad debts as well as general provision for doubtful debts 15.3 The end-of-period transfer of total debts written off from the Bad Debts Account to the Profit & Loss Account 15. in whole or in part 15.1 if recovered within the same financial period in which the debt was written off.6 The entries in the Profit & Loss Account and balance sheet relating to the provision for doubtful debts 15.8 The accounting entries relating to the recovery of debts previously written off 15. and/or 15.8.2 if recovered after the year of writing off 120 .2 The accounting entries for writing off individual debtor balances. for subsequent accounting periods 15. as necessary. and subsequent adjusting of.4 The reasons for the creating of. in whole or in part.5 Given certain data.8.pages 105-157 15/3/03 11:16 am Page 120 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. the creating of a provision for doubtful debts and the adjusting of it. using a Bad Debts Account 15.1 The process of debts becoming irrecoverable and being written off. a provision for doubtful debts 15.

they may be written off: ● ● ● at intervals throughout the year yearly (e. as part of a year-end review) as the need arises. They can have more difficulty with creating and/or adjusting a provision for doubtful debts. so the addition to capital is lessened. 4 Outline the fact that the frequency with which debts are written off may vary. 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. in whole or in part. Careful explanation and illustration is therefore required. however. 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.The effect of charging this amount is to reduce the net profit for the year in question. it is a debt beyond any hope of recovery. For example. which is matched by the reduction in the total of the current assets. 3 Point out that writing debts off involves charging the amount written off in the Profit & Loss Account. for a number of reasons. 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.As the net profit is reduced.pages 105-157 15/3/03 11:16 am Page 121 Bad debts and provision for doubtful debts Writing off amounts due from debtors (‘bad debts’). which arises largely from the failure to grasp the concept of the provision. is not usually a great problem for LCCIEB book-keeping students. which are later transferred in total to the Profit & Loss Account.g. a debtor will pay part of the amount owing and the balance of the debt will be written off. ie that the figure for debtors is not overstated. 121 . Sometimes. to collect from a customer. The amount is written off in the firm’s accounts as being ‘irrecoverable’.

the following accounts are shown in the Sales Ledger: T Jackson Year 7 1 Jan Balance £ 530 Year 7 13 Apr J Grand Year 7 11 Mar Sales £ 415 Bank £ 90 T Jackson has managed to pay part of the amount due. T Jackson Year 7 1 Jan Balance £ 530 530 J Grand Year 7 11 Mar Sales £ 415 Year 7 31 Dec Bad debts Bad Debts Year 7 31 Dec T Jackson 31 Dec J Grand £ 440 415 855 Year 7 31 Dec Profit & loss £ 855 855 £ 415 Year 7 13 Apr Bank 31 Dec Bad debts £ 90 440 530 Profit & Loss Account for the year ended 31 December Year 7 Bad debts £ 855 122 .pages 105-157 15/3/03 11:16 am Page 122 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. In the annual review of debtors on 31 December Year 7. Example T Jackson and J Grand are debtors whose balances are outstanding. 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.

Solution J Hinge Year 4 1 Jan Balance £ 295 295 Bad debts Year 4 Jan–Dec Sundries 31 Dec J Hinge £ 1.306 222 1.528 Year 4 31 Dec Bank 31 Dec Bad debts £ 73 222 295 Profit & Loss Account (extract) for the year ended 31 December Year 4 Bad debts £ 1.306. 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.528 1. On 31 December Year 4. 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. he received a cheque for £73 from J Hinge in part payment of the amount of £295 that was due. Exercise During the year ended 31 December Year 4.pages 105-157 15/3/03 11:16 am Page 123 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.528 Year 4 31 Dec Profit & loss £ 1.W Glossop had written off debts due from customers that amounted to £1.528 123 .Ask the students to work through the exercise.

e. 3 Illustrate this procedure with the following on the overhead projector or board. (c) the provision for doubtful debts is calculated on the total of remaining debtor balances.122 124 . irrecoverable. eg 2% of total debtor balances. A provision for doubtful debts is then created and maintained. but experience makes it possible to calculate the total amount of debts that will need to be written off approximately.278 The account entries appear as follows: Profit & Loss Account for the year ended 31 December Year 5 Provision for doubtful debts £ 1.122 36.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. It is never certain which debtors will be unable to pay.122 Provision for Doubtful Debts Year 5 31 Dec Profit & loss £ 1.pages 105-157 15/3/03 11:16 am Page 124 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’. 2 Distinguish the provision for doubtful debts from writing off bad debts.360 960 37. i. Draw attention to the term ‘doubtful’.400 1.The calculation is really a broad estimate and is not the result of a close analysis of the position of individual debtors. Gross debtors (at 31 Dec Yr 5) less Bad debts written off less Provision for doubtful debts at 3% £ 38.

only £330 has to be deducted from debtors. like any provision. Solution Working: £25. 125 .130 .Ask the students to work through the exercise. the amount of the provision has to be adjusted as the total of debtors changes.The provision is likely.£330 = £24.pages 105-157 15/3/03 11:16 am Page 125 Bad debts and provision for doubtful debts 4 Explain that. Ellen Tamworth has debtors totalling £25. a provision for doubtful debts remains in the books until it is changed. She decides to write off a further £330 of debts. Exercise At 31 December Year 3.800 = £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 Profit & Loss Account for the year ended 31 December Year 3 Bad debts Provision for doubtful debts £ 870 992 £ 992 Note Point out that the £540 was written off ‘during Year 3’ and is therefore removed before 31 December Year 3. 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. she has written off £540 of debts. During Year 3. In addition. it may be considered desirable from time to time to change the percentage rate. to be reviewed annually because: ● ● if the provision is kept at a certain percentage of debtors. 5 Copy and hand out or display the following exercise on the overhead projector.800 4% of £24. she creates a provision for doubtful debts of 4% of the remaining debtors.Thus. in practice.130.

the amount of debtors after writing off bad debts is £26.176 Year 5 1 Jan Balance b/d 1.176 Stress that only the increase in the provision is debited to the Profit & Loss Account.176 1. 2 Increase in the provision Continuing with the last example. 3 Decrease in the provision It is supposed that.The 4% rate is unchanged.176 992 184 1. it is supposed that. carries on as it is in the book until it is either increased or reduced.176 992 184 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 Year 3 31 Dec Profit & loss Year 4 1 Jan Balance b/d 31 Dec Profit & loss £ 992 1. The 4% rate is unchanged.400. The calculation is: 4% of £29.pages 105-157 15/3/03 11:16 am Page 126 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.400 less Amount of existing provision Increase in provision £ 1. at 31 December Year 4. the amount of debtors after writing off bad debts is £29.800. 126 . once created. at 31 December Year 5.

176 Year 6 1 Jan Balance b/d 1. 127 . 2 Relate this deduction to the deduction of a provision for depreciation from the relevant fixed asset. is always deducted from debtors in the balance sheet.pages 105-157 15/3/03 11:16 am Page 127 Bad debts and provision for doubtful debts The calculation is: 4% of £26.176 1.176 104 The book-keeping entries are: Profit & Loss Account for the year ended 31 December Year 5 £ Reduction in provision for doubtful debts Provision for Doubtful Debts Year 3 31 Dec Balance c/d Year 4 31 Dec Balance c/d £ 992 Year 3 31 Dec Profit & loss Year 4 1 Jan Balance b/d 31 Dec Profit & loss £ 992 104 1.072 1.176 Year 5 31 Dec Profit & loss 31 Dec Balance c/d 104 1.176 1.The principle of obtaining a figure net of the provision is the same.072 1.800 less Amount of existing provision Decrease in the provision £ 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.176 992 184 1. although having a credit balance.176 Year 5 1 Jan Balance b/d 1.

176 £ 28. following the example on page 125. Ask the students to work through the exercise.800 1. eg: F Lucas Balance sheet (extract) at 30 September Year 6 Current Assets Debtors less Provision for doubtful debts £ 41.239 £ 40.960 4 Inform the students that if a balance sheet extract is required.300 1.pages 105-157 15/3/03 11:16 am Page 128 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 £ 36.072 £ 25.800 1.061 5 Copy and hand out or display the following exercise on the overhead projector or board. 128 . With reference to Step 4. then a suitable heading should be included. following the examples on pages 126 and 127.224 (b) Balance sheet (extract) at 31 December Year 5 Current Assets Debtors less Provision for doubtful debts £ 26. (b) The debtors at 31 December Year 5.840 £ 34. show each of the following as balance sheet extracts: (a) The debtors at 31 December Year 4.400 1.728 6 Copy and hand out or show exercises T/16. Solutions (a) Balance sheet (extract) at 31 December Year 4 Current Assets Debtors less Provision for doubtful debts £ 29.1 and T16.2 in the Appendix (pages 257–8). Ask the students to work through them.

pages 105-157

15/3/03

11:16 am

Page 129

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:

129

pages 105-157

15/3/03

11:16 am

Page 130

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;

130

pages 105-157

15/3/03

11:16 am

Page 131

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.

131

pages 105-157

15/3/03

11:16 am

Page 132

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 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

9.4

9.5

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.

132

pages 105-157

15/3/03

11:16 am

Page 133

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:

133

pages 105-157

15/3/03

11:16 am

Page 134

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 1,529 338 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

31 Aug Balance b/d

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 11 17 20 22 27 Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug 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 out £ 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

31 Aug

857 Cr 857 Cr

Note Show that the reconciliation of the 2 balances should be carried out by:

ticking ( ) the items that appear in both the Cash Book and bank statement and watching out for errors;

134

529 338 96 310 744 508 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. balancing the Cash Book finally to provide the updated balance. 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. 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 790 125 363 95 156 1. 135 .529 62 174 508 744 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 31 Aug Midshire Gas Co – direct debit (D/D) 31 Aug DVS Publications – standing order (S/O) 31 Aug Balance c/d 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. 2 Display the reconciliation for the data regarding Alec Simmons shown overleaf on the overhead projector or board.pages 105-157 15/3/03 11:16 am Page 135 Bank reconciliation statements ● ● ● entering the unticked items on the bank statement into the Cash Book and checking for errors. ie after the Cash Book has been updated. using the unticked items in the Cash Book to prepare the bank reconciliation statement.

3 in the Appendix (pages 262–5) on the overhead projector. not yet credited: L Nathan Balance as per bank statement £ 508 190 315 505 1. 6 Copy and hand out or show exercises T/17.013 190 315 505 508 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. which is sometimes done even though the students have updated the Cash Book. and T/17. Ask the students to work through them. 5 Common errors made by candidates concerning bank reconciliation statements Draw the students’ attention to the common errors. attempting the wrong ‘reconciliation’.pages 105-157 15/3/03 11:16 am Page 136 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) less Cheque paid in.013 156 857 3 An alternative way of showing the reconciliation would be to start with the bank statement balance. eg attempting to reconcile the closing bank statement balance with the opening Cash Book balance. which are: ● ● failing to update the Cash Book before preparing the bank reconciliation statement. the items appear in reverse order to those shown above. not yet credited: L Nathan less Unpresented cheques: B Tallon (318) P Gaul (319) Balance as per Cash Book £ 857 156 1.1. 136 .2. 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. T/17. If so.

000 J Fargo Year 8 1 Jul 14 Jul Balance b/f Bank – cheque dishonoured £ 3. Bank Year 8 9 Jul J Fargo £ 3. which may not have been noticed before. although practice varies.000 J Fargo is once again a debtor. 3 Illustrate the effects of a cheque being dishonoured by showing the example below on the overhead projector or board.000 J Fargo Year 8 1 Jul Balance b/f £ 3. (c) the drawer has insufficient funds in his or her bank account. 2 Tell the students that a cheque may be dishonoured because: (a) the cheque has been prepared incorrectly.000 3.000 Year 8 9 Jul Bank £ 3. The bank account needs to be adjusted and the debt reinstated on Fargo’s account.000 On 14 July Year 8.000 is received from J Fargo in settlement of a debt.pages 105-157 15/3/03 11:16 am Page 137 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. a cheque is usually considered stale 6 months after the date on the cheque. (b) the cheque may have become ‘stale’ (ie too old to be accepted by the paying bank).000 Year 8 9 Jul Bank £ 3. Bank Year 8 9 Jul J Fargo £ 3.000 Year 8 14 Jul £ J Fargo – cheque dishonoured 3. 137 . the bank returns the cheque marked ‘refer to drawer’. Example It is supposed that on 9 July Year 8 a cheque for £3.

013 68 796 864 1 May Balance b/d Bank statement Year 6 1 4 11 13 18 23 30 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 Balance £ 715 O/D 658 O/D 590 O/D 686 O/D 483 O/D 625 O/D 653 O/D 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) Balance b/d Uplands Services – direct debit (D/D) Bank interest 715 96 115 87 1. for instance.013 694 142 28 864 796 138 . The positive balance removes the difficulty of dealing with the overdraft. ie after the Cash Book has been updated.pages 105-157 15/3/03 11:16 am Page 138 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. If. 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 measure of the problem depends upon the stage at which the overdraft arises. the Cash Book opens with an overdraft.The following Cash Book has been updated from the bank statement at the bottom of the page. however. An overdraft is problematic. 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. when it exists at the stage of formal reconciliation. this overdraft might be turned into a positive balance once the Cash Book is updated.

Alternatively. not only is the opening Cash Book balance overdrawn but an overdraft also exists at the stage of formal reconciliation.pages 105-157 15/3/03 11:16 am Page 139 Bank reconciliation statements Note ‘O/D’ on the bank statement means that the account is overdrawn. 139 . 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 £ 796 59 855 202 653 115 87 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. not credited: A Simes Balance per bank statement – overdraft £ (796) 115 87 202 (594) 59 (653) Note The addition is serving to reduce the overdraft and any deduction serving to increase it. 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) less Cheque paid in. In this case.

00 156. it is now common for cheques drawn on the bank to be entered on the bank statement by cheque number only. it is desirable to include names and cheque numbers (if applicable) wherever possible.00 211.00 O/D 808.00 253.00 392. In examination questions. 75643 Date Year 4 1 3 5 8 12 14 17 20 22 May May May May May May May May May Particulars 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 Paid out £ 92. so that the ‘balance’ column is automatically updated as each transaction is entered.50 141.00 367.00 O/D 403.00 O/D 11.50 O/D 84. there will be sufficient information provided to link the items.00 125.00 179.00 32.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’.00 174. 140 .pages 105-157 15/3/03 11:16 am Page 140 Bank reconciliation statements Westshires Bank 12 High Street Crampton Shropshire CR3 5TU Mr Roger Dolby Account No. Ask the students to work through the exercise.00 Cr O/D Cr Cr 24 May 27 May 31 May 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.00 Cr 225. In bank reconciliation statements.00 O/D 136. 5 Copy and hand out or show exercise T/17. 3 Explain that bank statements have become more ‘user friendly’ in recent years.50 O/D 169.4* in the Appendix (page 265) on the overhead projector.50 33.00 Paid in £ Balance £ 716.00 405.00 207.00 Cr 51. in the ‘particulars’ column. 4 Make it clear that.

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.pages 105-157 15/3/03 11:16 am 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.The means of analysing expenditure that is used in a Petty Cash Book can be applied also to the main Cash Book. its relationship to the Cash Book itself. as well as in respect of any adjustment of the float 10. 141 . periodic reimbursement of the (controlled) float 10.7 The balancing of the Petty Cash Book and the book-keeping entries relating to the reimbursement of the float. and the posting of these totals as required to appropriate ledger accounts 10.5 The basis of the imprest system.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. and the practical way in which it is operated (including the imprest system).2 Petty cash as a system for effecting minor disbursements 10.4 The practice of setting a limit to the amount allowed in reimbursement per claim/voucher 10. its part in the double-entry system.3 The use of sequentially numbered vouchers and their authorization for payment 10.6 The recording of incidental receipts of money into petty cash. which is covered in Step 7. the totalling of the analysis columns.8 The analysis of petty cash outlay. other than the periodic reimbursement of the float 10.

3 Explain that. expenditure can be recorded under different headings. Emphasize that in numerous cases many of the disbursements will be to members of staff. the amount of money decreases. even if only as a user or beneficiary. 2 Point out that the Petty Cash Book is a means of lessening the load on the main Cash Book. by having analysis columns (where petty cash outlay is classified) beside the total payments column. may be placed on the amount of any individual payment from petty cash. 2 Illustrate the principle and working of the imprest system by showing the example below on the overhead projector or board. The role of analysis columns is explained in greater detail in Step 5 (page 146).The Petty Cash Book is concerned with minor payments. called the imprest amount or ‘float’. A limit. such as postage or ‘travelling’. while the Cash Book is for recording payments above a certain figure and for entering the receipt of money. such as travelling expenses. Draw upon their experience when discussing the purpose and uses of petty cash. Step 2 Aim: to understand the principle and working of the imprest system 1 Explain the basis of the imprest system. such as a maximum of £50. The petty cashier starts each week or month with a certain amount of money. At the end of the period (or the beginning of the next one). This analysis can provide useful information and can be used to save time and effort when making account entries. 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 £ 100 79 21 79 100 142 . As payments are made during the week or month. the fund of cash is made up by the main cashier to the imprest amount. ie reimbursing them for payments already made on behalf of their employer.pages 105-157 15/3/03 11:16 am Page 142 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.

Example Year 4 1 Nov The cashier gives £200 in cash to the petty cashier as the starting imprest of petty cash Voucher no £ Postage 1 3.30 R Ward – travel expenses 10 13. The vouchers should be numbered and filed in numerical order.70 Cleaning expenses 2 14.30 T Fallon – travel expenses 4 11. W Costain 9 40.50 Stationery 8 9.pages 105-157 15/3/03 11:16 am Page 143 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. Each voucher must be signed by someone in authority to formally authorize the payment.80 Cleaning expenses 5 16. either temporarily or permanently. 4 Acquaint the students with the use of vouchers to control payments from petty cash.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.60 Stationery 3 5.40 Refund of overpayment by debtor. An employee must present a voucher with a request for petty cash.10 Postage 7 4.20 Payment of the amount owing to J Wilds in the Purchases Ledger 6 31. the imprest amount may be increased.90 4 6 9 11 14 18 Nov Nov Nov Nov Nov Nov 21 Nov 24 Nov 27 Nov 29 Nov 143 .

20 31.30 Travel Postage Stationery Cleaning expenses Ledger £ £ £ £ £ 3.20 31.70 14. (d) each item is entered in the ‘total’ column and in the appropriate analysis column.60 5.90 16.60 5. The total of the ‘total’ column should agree with the total of all the analysis columns.30 13.40 40. (e) the column headed ‘ledger’ is used for other ledger postings not covered by the other analysis columns.pages 105-157 15/3/03 11:16 am Page 144 Petty Cash Book – imprest system The Petty Cash Book appears as follows: PETTY CASH BOOK Receipts Date Details £ Year 4 200.40 40.30 11. 4 Emphasize the following points about the Petty Cash Book: (a) the ‘date’ and ‘details’ columns are shared by both Dr and Cr sides. 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.10 4.90 13.50 9. (b) the ‘receipts’ column represents the debit side and the ‘total’ column the credit side.30 11.80 16.70 14. the voucher numbers will start with ‘11’. in this instance starting with ‘1’.80 3 Inform the students that columns headed from ‘postage’ to ‘ledger’ are the analysis columns.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 2 3 4 5 6 7 8 9 10 3.50 9. from the beginning of December Year 4. 144 .10 4. (c) the voucher numbers are entered in sequence.

80 8. This time.70 71.20 31.30 13.20 14.40 16.00 350.20 200.50 4.70 30. PETTY CASH BOOK Receipts Date Details £ Year 4 200.30 14.80 350.60 5.90 25.80 16.20 31.80 200.00 1 Dec Balance b/d 30 Nov Bank 30 Nov Balance c/d 200.70 3.60 5.30 11.40 40.50 9.10 9. reimbursement of money paid out takes place on the first day of the next period. the previous balancing would be laid out as follows: Receipts £ Date Total £ 150.80 13.80 1 Dec Balance b/d 1 Dec Bank 49.10 4.00 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 2 3 4 5 6 7 8 9 10 Travel Postage Stationery Cleaning expenses Ledger £ £ £ £ £ 3.40 40.00 49.30 11.70 14. 2 Display the Petty Cash Book as it would now look on the overhead projector or board.90 150.20 150.80 150.80 30 Nov Balance c/d 200.pages 105-157 15/3/03 11:16 am Page 145 Petty Cash Book – imprest system In line with common practice.00 3 Show the students that. the cashier hands a cheque to the petty cashier for the amount of the reimbursement. if reimbursements were made on the last day of the period.80 145 .

4 Display the Cash Book entries relating to the period-end reimbursements of petty cash shown above. the total of each analysis column is posted to an appropriate expense account in the General Ledger. to the discount columns in the Cash Book.00 150. remember. in principle. The credit entry in petty cash.pages 105-157 15/3/03 11:16 am Page 146 Petty Cash Book – imprest system Note The total of all the analysis columns should equal the total of the ‘total’ column. however.1 in the Appendix (page 267) on the overhead projector. Ask the students to work through the exercise. The existence of that total. 3 Demonstrate that the analysis columns are posted to the ledger accounts as follows: GENERAL LEDGER Postage Year 4 30 Nov Petty cash £ 8. At the end of each period.An exception to this procedure is the total of the ‘ledger’ column: it is not posted anywhere. is useful for crosschecking the column totals. If the classifications were not made. the individual entries are posted directly to the relevant personal accounts as soon as possible. Instead.80 5 Copy and hand out or show exercise T/18. CASH BOOK Year 4 1 Nov Petty cash 1 Dec Petty cash Cash Bank £ £ 200. then each item would have to be posted individually to an expense account to ensure double entry. which are similar.20 146 . 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. merely records a fall in the cash float. 2 Point out that the analysis columns serve as collection points.

2 in the Appendix (page 268) on the overhead projector. This money might be paid into petty cash. ie at the beginning or end of a period.10 SALES LEDGER W Costain Year 4 27 Nov Petty cash £ 40. Step 6 Aim: to be able to respond to questions involving (i) variations within the Petty Cash Book.80 Travel expenses Year 4 30 Nov Petty cash £ 25.10 Year 4 1 Nov Balance b/f £ 31.30 4 Copy and hand out or show exercise T/18.The appropriate expense account must be credited with the amount (see exercise T/18.70 Cleaning Year 4 30 Nov Petty cash £ 30.Work through the exercise with the students. Increase of the float also arises in exercise T/18. temporarily increasing the float.pages 105-157 15/3/03 11:16 am Page 147 Petty Cash Book – imprest system Stationery Year 4 30 Nov Petty cash £ 14. ie there is income from sources other than sales. employees of the firm or members of the public pay small sums of money to use the services of the firm. Ask the students to work through the exercise. Copy and hand out or show exercise T/18.30 Year 4 1 Nov Balance b/f £ 40.The amount received from cash or bank would then be the amount of the reimbursement. 2 An increase in the float would usually take place at the time of reimbursement. an allowance must be made for this amount.3* in the Appendix. plus the increase in the float.70 PURCHASES LEDGER J Wilds Year 4 18 Nov Petty cash £ 31. One way of recording this transaction is to enter it in the receipts column (debit) with suitable explanation in the details column.3* on the overhead projector. page 269). An example of this type of transaction might be paying for the private use of the telephone.3*. and (ii) the part played by the Petty Cash Book in the double-entry system 1 Sometimes.When totalling and balancing at the end of the period. 147 .

Some candidates balanced the account at the end of each week but then wrongly provided one total only for each analysis column. eg 2 separate weeks. 3 Illustrate the preparation of a Cash Book with analysis columns by showing the example below on the overhead projector. a question from a past paper. Preparation for 2 periods is required in exercise T/18. It provides scope for some discussion with the students.The same principle of analysing items can be applied also to income. 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. Example J Kilbride.4 on the overhead projector. Ask the students to work through the exercise. 148 . Part (b) of T/18. 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. The period covered in the situation given is 2 weeks. poor balancing when there is more than one period to record.The practice of having columns for analysing expenditure can be applied to the Cash Book just as it can to the Petty Cash Book. faulty posting of period totals to General Ledger accounts. which should take place before any ‘solution’ is handed to them. 4 Copy and hand out or show exercise T/18.4 in the Appendix (page 271). 5 regular classes of expenditure recorded in the analysis columns. Expenditure is analysed under the following headings: Wages. poor recording of separate (weekly) totals for the analysis columns. 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.pages 105-157 15/3/03 11:16 am Page 148 Petty Cash Book – imprest system 3 An examination question might require the preparation of the Petty Cash Book for 2 periods. eg. in the Cash Book itself. maintains a 2-column Cash Book with additional columns for the analysis of expenditure. especially. and. failing to keep to instructions regarding the headings of analysis columns. and totalling and balancing at the end of each period. trader.4 is a test of the students’ insight into a practical situation. 2 Explain that there might be. including minor ones.Anything apart from these regular expenses could be entered in a ‘ledger’ column. but the LCCIEB First Level syllabus is restricted to the analysis of expenditure. faulty recording of double entry in the Cash Book in respect of reimbursement.

Travelling. the Machinery Repairs Account would be debited at 30 March Year 6 with £230. (The answer is shown overleaf. 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 6.030 (Dr). Cleaning. Balance the Cash Book at 31 March Year 6 and bring down the balances. she had a balance of £65 in cash and a bank balance of £2. Ledger. and as soon as possible. On 1 March Year 6.) The transaction recorded in the ‘ledger’ column would be posted directly.pages 105-157 15/3/03 11:16 am Page 149 Petty Cash Book – imprest system Stationery. Note For checking purposes: The total of the analysis columns = total of cash and bank credit columns less the amounts of contra entries 149 . to the ledger accounts concerned.Thus. the account of T Smart would be debited at 18 March Year 6 with £315. Postage.The column totals would be posted to the 5 expense accounts in the General Ledger at the end of each month.

580 1 Apr Balance b/d 254 .201 2.580 60 95 58 195 17 31 95 27 230 300 43 67 Bank £ 2.315 1.pages 105-157 15/3/03 J Kilbride CASH BOOK Year 6 Wages Year 6 £ 43 £ £ £ £ Cash £ 65 130 250 350 230 95 27 315 52 195 17 31 230 180 605 1.201 1.030 Cash £ Stationery Cleaning Postage Travelling Ledger Bank £ 130 11:16 am £ 67 Page 150 350 440 300 1 3 8 11 14 15 28 Mar Mar Mar Mar Mar Mar Mar Balance b/f Bank C L Dunster Bank C Sales Cash C Sales 216 315 52 3 5 9 11 12 15 16 17 18 21 23 25 27 30 31 31 Mar Balance c/d 180 947 254 Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Cash C Stationery Travelling expenses Cash C Wages Bank C Cleaning Postage T Smart Travelling expenses Wages Stationery Postage Machinery repairs Wages 230 119 545 1.265 2.265 1.

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.4 The different ways in which capital expenditure and revenue expenditure items are dealt with in the accounts 12. shop. Capital expenditure usually involves the purchase of fixed assets or expenditure that adds to the value of existing fixed assets. extending a factory. For example. 151 . 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. they have much greater difficulty in applying their knowledge to a situation that requires correction. candidates are able to select between examples presented to them. of capital expenditure and revenue expenditure 12.2 The definition.pages 105-157 15/3/03 11:16 am 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 12.3 Classifying a list of items into capital expenditure and revenue expenditure respectively 12. or adding a fitment to a machine or adapting a machine so that its productivity improves requires capital expenditure. However. either capital or revenue.1 The distinctive nature of capital expenditure and revenue expenditure 12. or office premises. in brief.

buying raw materials and/or parts to use in the course of manufacturing. by contrast to capital expenditure. Effectively. eg repairing or servicing machines. insurance. 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. if a provision for depreciation were created on a newly purchased fixed asset.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. then there would be some charge for the year in the Profit & Loss Account.This capital expenditure is charged against profits in the year in which it is spent as though it were revenue expenditure. the prepayment is ‘capitalized’ at the end of Year 1. 3 Show that capital expenditure is sometimes treated as revenue expenditure. the prepayments will not be charged against the income of Year 1 but will be carried forward as a current asset into Year 2. the selling and distributing of goods. if prepayments are identified.This treatment might occur when expenditure on developing new products might take several years to result in increased sales. Of course.pages 105-157 15/3/03 11:16 am Page 152 Capital and revenue expenditure 2 Inform the students that. 152 . This type of expenditure may include: ● ● ● ● buying goods to sell. Thus at the end of Year 1. Expense items such as rent. maintaining fixed assets. ie ‘capitalizing’ it. which does not add to the original value of the fixed assets. the benefit provided by revenue expenditure is expected to be obtained within the accounting year. and salaries are likely to be reviewed at the end of each financial year. running the business. 2 Illustrate the classification of expenditure by showing the example opposite on the overhead projector.

This. be treated as revenue expenditure.000 30. regarding item (6) in the example.800. 4 Point out that in item (9) the expenditure is partly capital and partly revenue.750 Purchase of office equipment £27. 5 Copy and hand out or show the following exercise on the overhead projector or board. Exercise In the columns beside the items listed below.pages 105-157 15/3/03 11:16 am Page 153 Capital and revenue expenditure Example Capital expenditure £ 27.800 3 Advise the students that.100 Repairs to motor vehicle £215 Paid insurance £470 Fitting of new tyres to motor vehicle £190 Revenue expenditure £ 153 .760 Fitting of new refrigerator in delivery vehicle £2.200 980 1.520 3.750 Wages and salaries £63. the outlay is regarded as revenue expenditure and should be fully charged in the year that the cost was incurred.400 45.000 Cleaning of offices £1. renovation.000 1. would be incorrect.500 55. The cost of painting the warehouse at a later time would then. the legal services are necessary to make the purchase of land possible.000 Revenue expenditure £ 760 28. then the cost of painting the warehouse should be capitalized and spread over the next 4 years.000 was paid to employees engaged on building an addition on to the office premises (10) Purchase of land for building new premises £30.The cost has been ‘apportioned’ between the two categories of expenditure. Capital expenditure £ (1) (2) (3) (4) (5) (6) Paid heating and lighting bill £68 Purchased stationery £1.000 2. 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.520 Painting of office premises £3. Note also that item (11) is capitalized. etc merely restore an asset to its original condition.400 Construction of new warehouse £45.500 (1) (2) (3) (4) (5) (6) (7) (8) (9) 8. of course. Ask the students to work through the exercise.200 Purchase of goods for resale £980 Painting of newly constructed warehouse £1. painting. it might be argued that if the paintwork is expected to last 4 years for example. of which £8. If repairs. enter the amount of capital expenditure or revenue expenditure for each item.000 Repairs to existing office equipment £760 Salaries and wages £28.000 (11) Payment of fee for legal services in connection with purchase of the land mentioned in (10) £2. however.

Candidates should be ready to apply their knowledge by suggesting examples of capital and revenue expenditure for different types of business activity. such a purchase would generally be treated as revenue expenditure. Exercise Give one example of (a) capital expenditure. T/19.2. newspapers.3 in the Appendix (pages 272–3) on the overhead projector. advertising. etc Salespersons’ salaries and commission Purchase of newspapers. and T/19. Item (3) – improves the usefulness of the vehicle and might well increase the vehicle’s resale value. 154 . 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. 6 Copy and hand out or show exercises T/19.100 Note Item (2) – is treated as a consumable purchase.pages 105-157 15/3/03 11:16 am Page 154 Capital and revenue expenditure Solution Capital expenditure £ (1) (2) (3) (4) (5) (6) Revenue expenditure £ 68 1.Although the tyres may have a useful life of more than one accounting year. and magazines.760 215 470 190 2. Ask the students to work through them. 7 Copy and hand out or show on the overhead projector or board the exercise below.The answers should be related to the type of business organization. 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. books.1. 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. Ask the students to work through the exercise. etc Note These answers are only examples from a range of possible answers.

Ask the students to work through them.pages 105-157 15/3/03 11:16 am Page 155 Capital and revenue expenditure 8 Copy and hand out or show exercise T/19. 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. however.4 in the Appendix (page 274) on the overhead projector. 2 Illustrate the consequences of incorrect classification by displaying the following table on the overhead projector or board.5* and T/19. Therefore. is treated as a profit & loss expense that is used up within a financial period.6* in the Appendix (pages 275–6) on the overhead projector. Capital expenditure is treated as affecting the balance sheet. incorrect classification of capital and revenue expenditure will have consequences for both net profit and the balance sheet. an effect that is shown in the next 2 exercises. 155 . Ask the students to work through the exercise. and payment is expected to be used up over more than one financial period. Revenue expenditure. Incorrect classification Purchase of fixed asset treated as revenue expenditure Revenue expense treated as capital item Effect on accounts Expense overstated Fixed asset account understated Expenses understated Fixed asset account overstated Overstated Effect on net profit Understated Effect on balance sheet Capital understated Fixed asset understated Capital overstated Fixed asset overstated 3 Explain that incorrect classification can also distort the gross profit. 4 Copy and hand out or show exercise T/19.

‘Cash taken for own use’ in the profit statement really means ‘drawings’. 5 Common errors made by candidates in dealing with capital and revenue expenditure Draw the students’ attention to these comments.500 cost to be carried over 3 years.8* on the overhead projector.Therefore. 4 The explanation of the comments in T/19. ie £3.926. 3 The explanation of the comments in T/19.082 should be added to the existing figure to give a ‘true’ sales figure of £23.8* in the Appendix (pages 277 and 279). A common mistake made by candidates is to deduct the book value of the old delivery van.500 ÷ 3 = £500 depreciation per annum. ● Item (2) – the accrual of £286 increases the item ‘Wages’ to £2. Item (2) – £1. Exercises T/19.8* should be as follows: (a) John Bradford failed to make the distinction between capital and revenue.7* should be as follows: Item (1) – these are all items of capital expenditure and should be deducted from the figure for purchases. Item (4) – the £2.746.730 becomes the figure for closing stock. It would. ● Item (3) – £1. (b) ● Item (1) – the total of recorded sales is the total value of sales transactions in the period.600 should be deducted from the figure for sales.pages 105-157 15/3/03 11:16 am Page 156 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. 156 . £1. Ask the students to work through the exercises and to explain the comments given.100 is capital expenditure and should be deducted from the wages figure. ● Item (4) – the purchase price of the motor vehicle less expected trade in value of £700 = £1. the amount of £1. The item.7* and T/19. not the amount received in cash.7* and T/19. appear in a balance sheet as a deduction from capital. 2 Copy and hand out or show exercises T/19. taken from LCCIEB First Level Book-keeping past examination papers.This item is not an expense of the business and therefore should not be included in the Profit & Loss Account. Item (3) – the figures for closing stock should be reduced by £300. will give them some practice at applying what they have learnt.400. of course.That figure is completely internal to the business and would not enter into the transaction of selling the delivery van.

the need to provide for depreciation over the life of the motor vehicle would result in reduced net profit. (b) In considering the effect on net profit of certain capital expenditure.pages 105-157 15/3/03 11:16 am Page 157 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. as a capital item. has no direct effect on net profit. 157 . For example. the purchase of a motor vehicle. however. students sometimes disregard the effect of any provision for depreciation. (c) Students may provide an unnecessary explanation of the chosen classification when all that is required is a one-word answer.

3 The function of the ledger The main uses of the (General) Journal The advantages of having a journal.4 other non-regular transactions or adjustments 16. eg as a record of the purchase or sale on credit of fixed assets.3.2 16.3 opening entries 16.pages 158-200 15/3/03 11:17 am 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 4.2 the correction of errors 16. covering: 16. The questions may test the use of the journal in its own right.1 16.4 The books of original entry.1 the purchase and sale on credit of fixed assets 16. 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. Alternatively.The quality of the answers indicates that not enough attention is given to this topic. their function Questions requiring journal entries are quite common in the LCCIEB First Level Book-keeping examination and yet the answers are often disappointing.3.3. 158 . as a support to the double-entry system Journal entries.1 16. in standard format.3.

A general rule is that any transaction not included in any of the day books should be noted in the General Journal. 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. 4 Draw the students’ attention to the advantages of having and using a journal. ie the opening of a new set of accounts. opening entries. it helps to explain entries. Detail is recorded in the day books and more summarized postings are made to the ledger. etc can be shown there than is possible in the Cash Book. More details of the assets. there is less chance of omitting a transaction altogether. 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. eg various adjustments or the correction of errors. even though these are recorded anyway in the Cash Book – a book of prime entry. 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. 159 . Originally. The day books exist to assist the ledger. authority to purchase. the correction of errors. the journal is sometimes termed the Main Journal.1 5 Emphasize the role of the journal. or General Journal. that it is to support the ledger. 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. Journal Proper. The journal itself is not part of the double-entry system. that: ● ● ● it is an easily accessible record of the purchase and sale of fixed assets.The ledger and the various day books cover the great majority of transactions. Regarding the first point above. Today. some firms include the purchase and sale of fixed assets for cash or bank. other transfers. or of making an entry on one side only of the accounts.pages 158-200 15/3/03 11:17 am Page 159 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.

narratives. 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. should be relevant. Example T Morley JOURNAL Dr £ X Cr £ X Date Name of account to be debited Name of account to be credited Narrative 2 Highlight the following points: ● ● ● a date should always. followed by the account to be credited. which are confusing for the Examiner and which may lose them marks.600. some candidates show the credit entries first or. the account to be debited should always appear first. a narrative is an explanation of the journal entry. if possible. sometimes credit entries first. be entered for each journal entry.pages 158-200 15/3/03 11:17 am Page 160 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. and to the point. if required. (a) The purchase and sale on credit of fixed assets Example (i) On 9 June Year 3. mix the entries – sometimes debit entries first. 160 . even worse. meaningful. Concerning the second point above. a computer is bought on credit from Datarite Limited for £23. The students should avoid both these errors.

pages 158-200

15/3/03

11:17 am

Page 161

The journal

Year 3 9 Jun

Computer equipment Datarite Ltd Purchase, on credit from Datarite Ltd, computer . . . .

Dr £ 23,600

Cr £ 23,600

(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 Dr £ 2,300 Cr £ 2,300

Smithson Garages Motor-vehicle disposal 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 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)

Liabilities

Solution The total of the assets £66,930 less liabilities £1,370 = £65,560 capital

161

pages 158-200

15/3/03

11:17 am

Page 162

The journal

The opening journal entries appear as follows:
JOURNAL 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 Dr £ 42,000 5,200 4,800 7,500 4,360 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 £ 65,560

162

pages 158-200

15/3/03

11:17 am

Page 163

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 A Trott Year 8 1 Mar Balance CASH BOOK Year 8 1 Mar Balance Cash £ 130 Bank £ 1,100 £ 790 £ 580

* 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:

163

pages 158-200

15/3/03

11:17 am

Page 164

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 Transfer of expenditure for advertising for the year ended 31 Dec Yr 5 Dr £ 4,100 Cr £ 4,100

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 Dr £ 3,800 Cr £ 3,800

164

pages 158-200

15/3/03

11:17 am

Page 165

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 Total of bad debts written off for the year ended 31 Dec Year 5 Dr £ 715 Cr £ 715

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 Increase in provision for doubtful debts Dr £ 370 Cr £ 370

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.

165

pages 158-200

15/3/03

11:17 am

Page 166

The journal

Cash

Book Ledger General (Nominal) Ledger Purchases Ledger Sales Ledger (Private Ledger)

DOUBLEENTRY SYSTEM

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 Insurance Insurance Narration . . . . £ 90 £ 90

166

Petty Cash Book

BOOKS OF PRIME ENTRY

Discount columns

Purchases Day Book

Returns Outwards Day Book

Sales Day Book

Returns Inwards Day Book

General Journal

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. eg. the date given should be the one on which (in the firm concerned) the journal entry is made. .pages 158-200 15/3/03 11:17 am Page 167 The journal The correct entries appear as follows: Date Insurance (year to 30 Jun Yr 9) Insurance (year to 30 Jun Yr 8) Narration . . . the financial years must be stated for the entry to be valid. ● ● ● lay out journal entries poorly. £ 90 £ 90 ie. 167 .

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.3 11. and the terms used should be explained with care. 168 . Step 1 Aim: to be aware of the basic classification of errors and.4 11.2 Those errors which do not affect agreement of the trial balance.5 17.4 The drafting of appropriate adjusting journal entries Students often experience difficulty with this topic.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. those that usually affect the trial balance.3 From data provided. the selection of the relevant type of error 17. 2 Review the range of errors (below) that do not affect agreement of the trial balance.pages 158-200 15/3/03 11:17 am 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. in particular. types of such error 17.

JOURNAL Dr £ 73 Cr £ 73 Returns inwards A Doyle Correction of omission of entry of credit note no 387 (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.pages 158-200 15/3/03 11:17 am Page 169 Errors in the accounts 1 (a) Errors of omission This type of error occurs when a transaction is completely omitted from the books. has not been entered in the accounts. Use the example below to illustrate this type of error of commission. on the return of goods. 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 2 accounts would appear as: Eastern Supplies £ Purchases (entered wrongly in Eastern Sundries Account) 345 (continued) 169 . as follows. The adjusting entry would appear as: JOURNAL Dr £ 345 Cr £ 345 Eastern Sundries Eastern Supplies Purchase invoice no S/598 entered in wrong supplier account. before making the necessary correcting entries in the two ledger accounts concerned. now corrected In the Purchases Ledger. Use the example that follows to illustrate errors of omission. An adjusting journal entry should be made. this error means that a transaction is entered in the wrong person’s account (either debtor or creditor). A Doyle. Example Credit note number 387 for £73 is issued to a customer. Often.

ie they are both nominal accounts.pages 158-200 15/3/03 11:17 am Page 170 Errors in the accounts 1 Eastern Sundries £ Eastern Supplies (posting error corrected) Purchases 345 £ 345 The correction of an error involving impersonal accounts is as follows: JOURNAL Dr £ 19 Cr £ 19 Postage Telephone Payment in cash for postage was wrongly posted to Telephone Account. now corrected In this case. (c) Reversal of entries Debit and credit entries for the correct amount have been made. 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. wrongly posted to Fixtures and Fittings Account. 170 . now corrected Stress that both accounts are in the same class. both accounts are real accounts. A further example for impersonal accounts is as follows: JOURNAL Dr £ 463 Cr £ 463 Office furniture Fixtures and fittings Purchase by cheque of office furniture. Use the example that follows to illustrate the reversal of entries. but on the wrong side of the 2 accounts.

and to achieve what was first intended. the journal entry would be: JOURNAL Dr £ 840 Cr £ 840 Cash Sales Sales of goods for £420 cash and wrongly reversed in the accounts. an error of principle occurs. and to make a debit entry in the Office Equipment Account. it merely cancels the errors. As capital expenditure. 171 . wrongly. ie using a credit entry. it is necessary to double the amount. Example The purchase of office equipment for £1.To adjust fully. This purchase is an item of capital expenditure that. now corrected (d) Error of principle When a transaction is entered in the wrong class of account. it should have been recorded in a real account. It is therefore necessary to cancel the incorrect entry in the Purchases Account. Sales Cash £ 420 Cash Sales (correction of error) £ 840 Sales £ 420 Cash (correction of error) £ 840 Therefore.pages 158-200 15/3/03 11:17 am Page 171 Errors in the accounts 1 The correct entries should be: Sales Cash Cash Sales £ 420 £ 420 If the correct entries are adjusted by crediting the Sales Account and debiting the Cash Account with £420. Use the example given below to illustrate this type of error. has been treated as revenue expenditure and entered in a nominal account.264 has been wrongly debited to the Purchases Account.

this error is the result of the source document being incorrect. Example Sale of goods £350 on credit to T Hogan has been entered in the accounts as £380.264 Cr £ 1. Use the example that follows to illustrate this type of error.pages 158-200 15/3/03 11:17 am Page 172 Errors in the accounts 1 JOURNAL Dr £ 1. The trial balance is still in balance. Example Purchases account (debit) is understated by £10 and rent receivable (credit) also is understated by £10. now corrected (e) Error of original entry When an error of original entry occurs. JOURNAL Dr £ 10 Cr £ 10 Purchases Rent receivable Purchases Account and Rent Receivable Account each undercast by £10. now corrected (f) Compensating error A compensating error occurs when errors cancel each other out. Both entries are £30 too much. although not necessarily. the correct accounts have been used and the entries are on the correct sides.264 Office equipment Purchases Purchase of office equipment wrongly debited in Purchases Account. provided there are no other errors in the accounts. JOURNAL Dr £ 30 Cr £ 30 Sales T Hogan Sales overstated by £30. Use the following example to illustrate error of original entry. now corrected 172 . but the amount has been entered incorrectly in both accounts. Often.

a compensating error. They will then be corrected. is entered again. a transaction is entered correctly in the accounts and then. partly through checks in the system. eg the complete omission of a transaction. in error.2. a balance wrongly brought forward to the trial balance.The answer is that some will become known during the course of the year. 5 Fully discuss the limitations of the trial balance with the students.4 and T/21. 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.The trial balance is limited as a means of checking entries. 7 Review and discuss the answers to the questions. 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. 3 Discuss with the students how the various errors will affect the trial balance.5 in the Appendix (pages 290–1) on the overhead projector. Ask the students to work through them. a balance omitted from the trial balance. Either way. or an error of commission. the adjustments necessary to correct the errors should be ‘journalized’. T/21. 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. 6 Copy and hand out or show exercises T/21.3 in the Appendix (pages 288–9) on the overhead projector. an error in addition.pages 158-200 15/3/03 11:17 am Page 173 Errors in the accounts 1 (g) Error of duplication In this instance. These errors affect agreement within the trial balance only if they do not compensate one another. including: ● ● ● ● an incorrect posting on one side of the transaction. 173 . Ask the students to work through them.1. eg of entries within an account. 2 Ask the students when the errors are likely to become known. Others will become known at the end of the year when the trial balance is prepared. 3 Copy and hand out or show exercises T/21. and T/21.This error is not revealed by the trial balance.

attention should be paid to the points listed below.5.2 gross profit 17.4 The drafting of appropriate adjusting journal entries 17. Step 1 Aim: to understand the effect of errors or of correcting errors on gross and net profits.1 the trial balance 17. It is also evident that candidates experience some difficulty in answering questions on the effect of errors on profit and the balance sheet.5. In preparing for the examination as well as in the examination itself.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. 174 .The guidance in Step 2 and the supporting exercises should help to overcome this problem.5.3 net profit 17. Answers to questions requiring the correction of journal entries strongly indicate that insufficient attention is paid to this topic.5 The effect of errors and/or the effect of the correction of errors both in principle as well as by calculation on: 17.pages 158-200 15/3/03 11:17 am Page 174 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. as well as on the balance sheet 1 The problem for candidates in answering this type of question is often one of method.5.

pages 158-200 15/3/03 11:17 am Page 175 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. (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. 2 Copy and hand out or show exercises T/22. (b) In preparing an answer requiring journal entries. 3 Explain that. 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. 4 Copy and hand out or show exercise T/22. For example. Note that this question requires some one-sided journal entries. If necessary. Note The dash (–) in the credit column gives a positive indication to the Examiner that that candidate recognizes that no credit entry is required. Ask the students to work through them. now corrected. of course. It is. sometimes. an error could be the result of a posting failure. eg in recording the sale of a depreciated fixed asset. This exercise might help them to visualize debit and credit entries. Lack of understanding might be the result of unfamiliarity with the topic or with the particular form of question. an item in a question may require a one-sided journal entry only. there may be various ways of setting out the answer.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.1 and T/22. wrong to show accounts as part of an answer when only journal entries are required.3* in the Appendix (page 293) on the overhead projector.The T-type accounts should not be in detail – just miniature ‘accounts’ are enough.The trial balance would therefore be short on the debit side by £37.2 in the Appendix (page 292) on the overhead projector. Illustrate this point with the example below. candidates may find it helpful to draft T-type accounts. Ask the students to work through the exercise. the account can be written in the answer book and then boldly crossed through. but the same rule applies: debit comes before credit. 175 .

there is a sequence of consequences. 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 gross profit overstated the effect of correcting the error gross profit reduced The amount is the same for both effects.When errors are made. Exercise Trace the sequence of consequences of the following errors through to the balance sheet: (1) overstatement of sales (2) overstatement of returns outwards (3) understatement of carriage outwards 176 . For example. It will help the students considerably if they become used to working through the likely consequences of various types of error. 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.pages 158-200 15/3/03 11:17 am Page 176 Errors in the accounts 2 Step 2 Aim: to understand the effect of errors or of correcting errors on gross and net profits. by itself. Review the consequences of each one before moving on to the next. the understatement of purchases mentioned above will.The distinction is of fundamental importance: often questions relating to errors are answered from the wrong angle. The errors should be put to students one-by-one. 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.

5 Exercise T/22. Table 22.1 to illustrate the differences between the effects of errors on reported profits. 4 Use Table 22.This table also appears on page 217 of the student’s book. before making any correction. and work through it with the students. How to Pass Book-keeping. Copy and hand out. First Level. ie before correction Gross profit Purchases undercast Overstated Net profit Overstated Balance sheet Capital overstated Capital overstated Stock overstated Capital understated Effects (upon already reported profits) of correcting the error Gross profit Reduced Net profit Reduced Balance sheet Capital reduced Closing stock overvalued Overstated Overstated Reduced Reduced Capital reduced Stock reduced Expense item. eg rent overstated Income item.1 Effects of the error and effects of correcting the error Effects of the error. 177 .pages 158-200 15/3/03 11:17 am Page 177 Errors in the accounts 2 (4) overstatement of closing stock (5) overstatement of carriage inwards (6) understatement of returns inwards. and the effects resulting from correction. or show the exercise on the overhead projector.4* in the Appendix (page 294) shows the effects of errors and of their correction.4A. Pay special attention to the note at the end of T/22. etc. eg commission overstated No effect Understated No effect Increased Capital increased 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.

2 The meaning of the term drawings.3 The book-keeping entries for drawings 18. 178 . with related items being suitably brought together This lesson considers the further adjustments that might have to be made to the final accounts.11 Adjustments for end-of-period income accrual and income prepayment in the Profit & Loss Account and balance sheet 18. in the Trading Account (where goods are withdrawn for private benefit) 19. and if necessary to reinforce key study points.6 Adjustments in the Trading Account and balance sheet for end-of-period ‘outstanding’ purchases. ie goods received but invoices still awaited 13. Stock valuation could also be the main subject of a question or a part of a question. Final accounts brings together many facets of book-keeping. where necessary. The vertical layout of the Trading and Profit & Loss Account is also discussed. The adjustments include different forms of drawings and the valuation of stock. the students should have gained a fair knowledge of the various topics that have been discussed. the various forms of drawings 18. By this stage of their studies.The working and review of final accounts affords an opportunity to clarify points.4 The valuation of closing stock: the lower of cost or net realizable value 19.4 The possible effect of drawings upon the amount of capital 18.13 Showing income and expenses within the final accounts.5 How drawings are stated in the balance sheet and.pages 158-200 15/3/03 11:17 am 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. sort out difficulties.

using an already prepared trial balance that is not adjusted for the withdrawal. the candidates may be required to prepare final accounts that incorporate an adjustment for goods withdrawn by the proprietor. It will then be necessary to: ● ● show a deduction from purchases in the Trading Account. Sometimes. while the Drawings Account will show both cash and goods drawings. eg drawings of cash and drawings of goods are added together and entered as one figure. increase the amount deducted as drawings in the balance sheet. 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. 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). If the drawings take the form of goods being withdrawn from the business for private use. and making period-end adjustments for accruals and prepayments. the total of the drawings for the year is deducted from the owner’s capital balance at the start of the year. However. all contribute towards presenting a true picture of a business. examination candidates merge these figures. that they are: Dr Cr Drawings Account Cash/bank account In the balance sheet.pages 158-200 15/3/03 11:17 am Page 179 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. then the purchases balance will already be reduced by the amount of the drawings. 179 .Advise the students to show each adjustment to make sure they obtain the mark(s).

For example. Solution Amount paid during year ended 30 Jun Yr 7 less Prepayment at 30 Jun Yr 7 Annual charge To be apportioned: business use private use 4 £ 380 30 350 /5 1 /5 £ 280 70 350 The period-end adjustments in the ledger would be: Dr Cr Drawings Telephone £70 £70 In the final accounts: ● ● the figure for the telephone in the Profit & Loss Account would be shown as £280. Use of these facilities may mean that the cost of a facility is shared (or ‘apportioned’) between the business and the owner personally. of which £30 was prepaid at the year end. drawings in the balance sheet should be increased by £70. an adjustment would be made to allow for the owner’s private use. Example The business telephone is also used by the owner for private purposes. 4 Illustrate how to show shared cost by displaying the following example on the overhead projector or board. the owner may use a motor vehicle or the business telephone.The amount paid from the business bank account for the telephone during the year ended 30 June Year 7 was £380. (= capital reduced) (= capital increased) The increased figure for drawings is offset by the increased figure of net profit 180 .The yearly cost of the telephone is apportioned as follows: business owner’s private use 4 1 /5 /5 At the year end. or live in part of the business premises for which rent would otherwise be payable to the business.pages 158-200 15/3/03 11:17 am Page 180 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.

then a further adjustment for the difference in amount has to be made. 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. while the period-end stock check will include the goods in the value of the closing stock. 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 students should keep in mind that.The Purchases Account will therefore be understated. the candidates should make it clear that they are including the amount in their figures. Therefore. if any adjustment has to be made. in the balance sheet.The account entries should be supported by a journal entry. Ask the students to work through the exercise and give them guidance on method and the particular items. Step 3 Aim: to reinforce understanding and practice in making year-end adjustments in the preparation of final accounts 1 Explain that. resulting in an overstated gross profit and overstated net profit.pages 158-200 15/3/03 11:17 am Page 181 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. if Trading Account and balance sheet adjustments are required. The matching effect will be an increase of £100 in net profit and consequently in the amount of capital (credit effect). at the stage of preparing final accounts from a trial balance. ie it should not be lost in the total figure. while capital (through the addition of net profit) will be overstated. The effects will be that: ● ● the cost of goods sold will be understated. a position of balance exists at the start of drafting the final accounts. creditors will be understated in the Purchases Ledger. 2 Copy and hand out or show exercise T/23. 181 . If. creditors will be understated. the student should always look for 2 effects: a debit adjustment and a credit adjustment. For examination purposes. In addition. with the trial balance in agreement.1* in the Appendix (page 299) on the overhead projector. for some reason the amount in the invoice (when it is received) is different from the amount shown in the adjustment. purchased goods might already have been received but the invoice may still have to come from the seller.

so reducing the net profit. Note that in T/23.Ask the students to work through them. net profit is increased. 3 Copy and hand out or show exercises T/23. ie 2% of £35. item (6). as a result. (b) in the balance sheet. (b) therefore the gross profit is increased and. (5)(a) Rates and insurances in the Profit & Loss Account is reduced by £120. (4)(a) £520 is added to motor-vehicle running expenses and £420 is added to heating and lighting in the Profit & Loss Account.3 in the Appendix (pages 302–3) on the overhead projector. resulting in a net figure of £3. the Sales Ledger figure of £370 is set off against the Purchases Ledger figure of £4. (b) this reduction is matched in the balance sheet by 2 accrual items included under liabilities. Note The adjusted entries are highlighted in the solution given in T/23. review the adjustments one by one. (b) this decrease is matched by a reduction in the figure for fixed assets. as a deduction. Stress that the double entry is maintained. ‘rates and insurances prepaid’. 182 .726.1A. (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. (2)(a) Closing stock.pages 158-200 15/3/03 11:17 am Page 182 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. among the current assets. After the students have had time to scan the question. which reduces the net profit. the increased net profit addition to capital is matched by an item.3.000 = £700 less the existing provision of £600 = an increase of £100 which is charged to the Profit & Loss Account which reduces net profit by £100.2 and T/23. making the net profit £120 more. reduces the cost of goods sold. 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.096. only the presentation is different. pointing out the two-fold aspect of each adjustment: (1)(a) The increase in each depreciation provision is charged to the Profit & Loss Account. (3)(a) The revised provision for doubtful debts at 2% of debtors.

300 4. Show that: 183 .500 7.200 271.1*.200 £ 370.000 8.600 113.100 1. 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.500 112.070 46.400 15. 1 Jul Yr 5 Purchases less Purchases returns less Stock.300 650 100 12.3 in vertical format.300 12.630 3 Ask the students to rewrite the Trading and Profit & Loss Account for exercise T/23.350 67.700 Discount allowed Bad debts Provision for doubtful debts Rent Motor-vehicle running expenses Rates and insurances Salaries Lighting and heating Net profit 28. 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.000 3.700 263. 30 Jun Yr 6 Gross profit add Discount received Depreciation: Motor vehicles Fixtures and fittings 20.200 2.900 17. page 299).300 256.000 3.600 254.400 £ 366. shown below.870 3.pages 158-200 15/3/03 11:17 am Page 183 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.

(b) placing a value per item on the stock. that have physically deteriorated. to allow for items lost. Valuation involves: (a) a check on and count of the items in 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. 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. for example. or that are otherwise unsaleable. This means. Net realizable value is defined as the selling price less the costs of getting the goods into a saleable condition. that costs incurred for repairing damaged goods before they can be sold must first be deducted. ie it should not be included in the accounts until the goods concerned have actually been sold. A lower figure for closing stock means a higher ‘cost of goods sold’ and therefore a lower gross profit. 3 Tell the students that profit should not be anticipated. stolen.pages 158-200 15/3/03 11:17 am Page 184 Final accounts and adjustments further considered the value of closing stock affects cost of goods sold which in turn affects 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). 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. 184 .

340. (60) Revised stock valuation 5. 7 Show the significance of the stock valuation rule by displaying the example overleaf on the board or overhead projector. so that £270 becomes the stock valuation figure. Once repaired it is expected to sell for £570.£110) becomes the stock valuation figure.The likely selling price has fallen from £590 to £530. Included in this figure are items for which the stock value is under review. Its normal selling price was £250 but this had been reduced in November Year 3 to £190. Item 5 Valued at cost. Item 3 cost £330.340 Valued at cost. has been damaged and is to be repaired at a cost of £110. In examination answers. Its normal selling price is £280 but it is now expected to sell for only £220. Item 5 cost £170. The expected selling price has fallen below the cost price. ● ● ● ● ● ● Item 1 cost £410. which results in a much higher figure than they started with. Item 6 Valued at net realizable value. Item 6. so that £460 (ie £570 . The stock value is unchanged. This will be written off. The likely selling price is well above this figure. Item 4. Its normal selling price is £350 but it is now expected to sell for only £270. The stock value is unchanged. some candidates add the total net realizable value to the existing stock figure.930 Note A detailed explanation is given here for each item. The reduced selling price remains above cost. 6 Explain that the type of question similar to the example above requires adjustment for the difference in valuation. has been damaged and cannot be repaired. The stock value is unchanged.The item now has no sale or scrap value. (330) Item 4 Valued at cost. Item 2 cost £290. which cost £215. The stock value has fallen to zero.The normal selling price is £450. 185 .pages 158-200 15/3/03 11:17 am Page 185 Final accounts and adjustments further considered Example Andy Struddles has valued his stock at 31 December Year 3 at cost £6. Andy Struddles Revised stock valuation at 31 December Year 3 Pre-revised stock valuation Item 1 £ 6. (20) Item 3 Valued at net realizable value. Item 2 Valued at net realizable value. which cost £520. Although the selling price has fallen it is still above cost. The expected selling price has fallen below the cost price. Usually a question would not require such detail to be provided.

4 and T/23. If the machines are sold in Year 2 then no profit on their sale is recorded for that year even though plenty of effort.500) less Cost of goods sold: Purchases (8 × £1. The stock at the end of Year 1 becomes the opening stock for Year 2. Ask the students to work through them.1 (opposite) on the board or overhead projector to illustrate how mark-up is obtained. the profit for Year 1 would have been calculated as follows: Sales (6 × £1.000 3.000 The profit is therefore equal to £500 on each of the 8 machines when. ie at £1. By valuing the stock in Year 1 at selling price (ie the higher figure).000 each. The profit on the 2 unsold machines has been ‘anticipated’.The profit is calculated as follows: Sales (6 × £1.000 3. 6 machines are sold at £1.000 8.500 each. It is a term used in questions relating to stock valuation. For example. The recorded position between the 2 years is incorrect and misleading.000) less Stock (2 × £1. The cost of goods sold is also increased and gross profit is reduced.pages 158-200 15/3/03 11:17 am Page 186 Final accounts and adjustments further considered Example In Year 1 a trader purchases 8 machines at a cost of £1.000) Profit £ £ 9. in fact. only 6 have been sold. and it often causes students problems in the examination.1. and expense might have gone into selling them in that year. 8 Copy and hand out or show exercises T/23.000 4.000 6.000 5. If the unsold machines had been valued at the selling price. 9 Explain the term ‘mark-up’. if possible. During the course of the year. time. to make some net profit. if the cost price of a product is £300 and the mark-up to 186 . explain that goods may be ‘marked up’ from the cost price to ensure that an amount is received towards running costs and.000 2.500) less Purchases (8 × £1. the opening stock for Year 2 is increased.000 The profit in Year 1 consists of £500 on each of the 6 machines sold.000) less Stock (2 × £1. 11 With reference to Figure 23.000 each.500.500) Profit £ 8.000 £ 9.5 in the Appendix (pages 304–5) on the overhead projector. The remaining 2 machines are valued at the year end at cost price. ie at £1. ‘Mark-up’ can be defined as: cost of goods sold + some running cost + profit = mark-up = selling price 10 Display Figure 23.

187 .1 Mark-up 12 Point out that the cost portion may also be viewed as quarters. Selling Price Cost of goods sold Running cost + profit 1 2 3 4 Mark-up 331/3 % = 1/3 Figure 23.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. and so on. the denominator of the fraction in the selling price (the mark-up) can be obtained. Ask the students to work through the exercise. By adding the numerator to the denominator in the fraction of the cost price.The extra 1/3 at the end means that there are now 4 thirds (4/3 ) instead of 3 thirds ( 3/3 ). fifths.The original cost portion can be viewed as thirds.6 in the Appendix (page 306) on the overhead projector.The mark-up or 1/3 on the cost price = 1/4 (25%) of the selling price. the selling price will be £400.pages 158-200 15/3/03 11:17 am Page 187 Final accounts and adjustments further considered selling price is 331/3 %.

club accounts are often not prepared according to good accounting principles. 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. Questions on this topic can be set with various kinds of starting information.2 The preparation of an Income & Expenditure Account from a list of balances or from a Receipts & Payments Account (both with supporting data) 21.The questions usually start from either a trial balance or a Receipts & Payments Account. whether as club member recipients of the accounts or whether in helping to prepare the accounts.4 The preparation. This experience can be drawn upon when teaching this topic. if necessary. though. Unfortunately. Plenty of care is needed to answer the questions and some distinctive terms should be learned.1 The differences between a Receipts & Payments Account and an Income & Expenditure Account 21. are based on the same accounting principles as those for a business. Club accounts. if required. eg Refreshments Account.6 The calculation.pages 158-200 15/3/03 11:17 am 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 21.3 The suitable grouping of associated items of income and expenditure within an Income & Expenditure Account 21. of the amount of the Accumulated Fund Many candidates will have personal experience of club or society accounts. nevertheless. 188 . of an ancillary account for trading activities.

by itself the Receipts & Payments Account is incomplete: there is no mention of assets owned other than those mentioned in the account. Regarding the third and fourth points. unfortunately. the Receipts & Payments Account is sometimes the only account statement issued to members. there is no mention of liabilities and. ie in a balance sheet. eg subscriptions are included for Years 8 and 10. The weaknesses are that: ● ● ● ● there is no allowance for accruals and/or prepayments. ie that it represents a summary (in debit and credit form) of cash/bank transactions for a given period.The amounts. Example Linkwell Social Club Receipts & Payments Account for the year ended 31 December Year 9 Receipts £ Balance at bank.160 320 490 380 850 5. however. 189 . no account is taken of capital expenditure as distinct from revenue expenditure.860 570 1.100 31 Dec Yr 10 240 £ 870 Payments Hire of rooms Printing and stationery Purchase of video equipment Hire of films Annual social Visit to Bruges Balance at bank. 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.630 3 Point out that the 2 sides of the account relate to the debit and credit of a cash or bank account. eg the video equipment is fully charged to Year 9 even though it may well be in use for several years.pages 158-200 15/3/03 11:17 am Page 189 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. Ask the students to identify the weaknesses of a Receipts & Payments Account. 2 Display the example of a Receipts & Payments Account that follows on the board or overhead projector. 31 Dec Yr 9 £ 1.630 4. assets and liabilities should be dealt with separately.760 5. are item totals for the year and not individual transaction entries. 1 Jan Yr 9 Subscriptions received: Year ended 31 Dec Yr 8 420 31 Dec Yr 9 4.

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. in order to obtain a result that correctly reflects the activities of the club or society for the period. 190 . ie non-profit-making organizations. as a replacement for the Profit & Loss Account. 2 Tell the students that. ie items should be appropriately ‘grouped’. Many club members may have little if any knowledge of accounting. 4 Illustrate how to present an Income & Expenditure Account by showing the example opposite on the board or overhead projector. matters relating to a particular topic should be brought together. 3 Emphasize that the final accounts issued to members of clubs or societies should be: ● ● ● meaningful relevant easily understood. Thus. 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. but it is constructed on similar principles to the Profit & Loss Account.pages 158-200 15/3/03 11:17 am 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.Therefore. like the Profit & Loss Account. It incorporates adjustments for: ● ● ● accruals prepayments provision for depreciation of fixed assets. They should be supplied with statements that are informative and yet easily read. The account has certain distinctive features. the reason for using an Income & Expenditure Account is to include only ‘true’ income & expenditure for a period.

Note Remind the students that capital expenditure items and liabilities are not included in this account.400 530 410 260 180 4. which is dealt with on page 196.300 2.430 14.960 Additional information that applies at 31 December Year 4: (1) subscriptions: £280 has been received in advance of Year 5. Required An Income & Expenditure Account for Tattenham Sports Club for the year ended 31 December Year 4.150 3.200 Cr £ 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 2.400 800 1. £360 is accrued due for Year 4.860 7.960 14.They are shown in the balance sheet. 191 . (2) rent payable accrued due amounted to £400.pages 158-200 15/3/03 11:17 am Page 191 Club and society accounts Example Tattenham Sports Club Trial balance at 31 December Year 4 Dr £ 6. (3) prepaid insurance £80. (4) depreciation to be provided: sports equipment – 20% on cost video equipment – 121/2% on cost.

800 450 410 260 Income Subscriptions less received in advance add accrued due for Year 4 £ 7. if possible.410 5 Point out that a common mistake made by candidates is that they confuse this account with the Receipts & Payments Account.230 180 1. which can boost club funds. as they are in the Profit & Loss Account.260 275 Annual dance – surplus 1. a social. it is acceptable merely to state ‘7. of course. If only the adjusted figure is given with no indication of the adjustments made and that figure is incorrect.This practice can. Candidates often fail to position groups correctly and consequently lose marks. or a trip abroad. It is therefore essential that these items are brought together. If the outcome is a deficit. The members would be interested in the result of any particular event. then no marks for workings can be awarded. Examiners like to award marks for correct workings. a day out.535 955 7.870 360 7. An alternative to showing adjustments within the Income & Expenditure Account is to key the adjusted figures to workings shown clearly after the account. be applied to other workings and is discussed further in Lesson 25.The outcome may be a surplus. the group should be positioned on the debit side.150 280 6. or it may be a deficit where expenditure exceeds income.These events may be aimed at raising funds.410 7. 6 Subscriptions Highlight the fact that in the above account.230’ against subscriptions without any detail of adjustments.These events might involve 2 or even 3 items that are classified as partly income and partly expenditure. eg a dance. Stress that income is entered on the credit side of Income & Expenditure Account and expenditure on the debit side. However. 192 . 7 Events Clubs or societies may hold events or have special occasions. the group should be on the credit side.pages 158-200 15/3/03 11:17 am 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 £ £ 3. ie whether a surplus or a deficit. if a surplus. ie ‘grouped’. the students should be warned that this method is unwise.

2* in the Appendix (page 308) on the overhead projector. 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.The exercises in this lesson provide the opportunity for practice. Ask the students to work through the exercise. 8 With reference to the Income & Expenditure Account above. draw attention to use of the phrase ‘surplus of income over expenditure’. not ‘net loss’.This entry could have been shown as 2 or more items. the phrase to use is ‘deficit. 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. 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 X3 £ X2 £ 2 Copy and hand out or show exercise T/24. 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. 9 Copy and hand out or show exercise T/24. surplus on the annual dance is recorded as one entry only in the trial balance. 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.pages 158-200 15/3/03 11:17 am Page 193 Club and society accounts In the example on page 192. For Income & Expenditure Accounts. 193 . ie it is shown as the outcome. Stress that with T/24. this phrase replaces the term ‘net profit’ found in Profit & Loss Accounts.2 capital expenditure items are not included in the account. excess of expenditure over income’.Work through the exercise with the students. If expenditure exceeds income. The examination might require a separate Trading Account to carry the trading activities.1 in the Appendix (page 307) on the overhead projector.

A separate Trading Account should be provided in an examination answer only if it is specifically required. printing and stationery 53 Expenses for guest speakers 810 Hire of films 78 Cash in hand 82 Balance at bank 986 3. which also involves the preparation of a separate Trading Account.935 Additional information: 31 December Year 4 £ – 40 18 31 December Year 5 £ 60 50 15 Subscriptions in arrears Rent accrued due Stock of stationery 194 .680 Travelling expenses 64 Postage.935 3. Like a Capital Account.pages 158-200 15/3/03 11:17 am Page 194 Club and society accounts The item ‘subscriptions’ might involve making a number of adjustments. 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. Some candidates prepare one when it is not required – and forfeit marks by preparing it incorrectly.Therefore. the fund represents the difference between assets and liabilities.Ask the students to work through the exercise.020 48 2.3* in the Appendix (page 310).This situation occurs in exercise T/24. Step 4 Aim: to be able to calculate the accumulated fund of a club or society 1 Explain that instead of a Capital Account.760 32 75 Payments £ Refreshments 182 Rent of room 1. 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. a non-profit-making organization has an ‘accumulated fund’. Note Advise the students to follow the requirements of the question closely.

852 less Expenditure Refreshments 182 Rent of room (1. Carefully explain each item.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 5.40 + 50) 1. 195 .086 40 1.820 32 2.pages 158-200 15/3/03 11:17 am 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 less Rent accrued £ 1.15) 56 Expenses for guest speakers 810 Hire of films 78 Excess of expenditure over income (deficit) 2. 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. This Income & Expenditure Account is shown below.880 (28) Step 5 Aim: to be able to present a balance sheet of a club or society 1 As a straightforward example.690 Travelling expenses 64 Postage. work through the balance sheet for Bloxmore Travel Group (overleaf) with the students.020 48 18 1. printing and stationery (53 + 18 .680 .760 60 £ 2.

143 50 75 125 1.075 4.1 and ask them to prepare the balance sheet of the Southern Jazz Club.pages 158-200 15/3/03 11:17 am 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 £ 1.735 360 80 1. 196 . Tattenham Sports Club Balance sheet at 31 December Year 4 Cost £ 6.300 400 280 Net book value £ 2.125 3.385 Financed by: Accumulated fund add Surplus of income over expenditure 4.620 5. The items not yet marked off should be brought into the balance sheet for Tattenham Sports Club at 31 December Year 4.660 1.The balance sheet is presented below in vertical format.046 28 1.640 1.385 3 Refer the students back to exercise T/24.300 2.430 955 5.200 8.765 Fixed Assets Sports equipment Video equipment Current Assets Subscriptions accrued due Prepaid insurance Bank less Amounts due within 1 year Rent Subscriptions in advance 680 1.018 Accumulated fund Balance at 1 Jan Yr 5 less Deficit for Yr 5 1.860 2.018 2 Refer the students to the example in Step 2 (pages 191–2).500 Accumulated depreciation £ 3.

If the amount is small it is more likely.There are two ways in which a donation can be recorded in the books of account: (a) as income in the Income & Expenditure Account. Note In any examination question involving a donation.pages 158-200 15/3/03 11:17 am 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. 197 . the candidates will be told if it is to be capitalized. If there is no specific instruction. ie ‘capitalizing’ it. (b) by adding the amount to the accumulated fund in the balance sheet. the amount should be placed to the credit of Income & Expenditure Account. that method (a) will be used.

A number of matters are highlighted. in particular. Whenever possible. 3 The difference between an account and a statement This difference needs to be fully stressed. vertical presentation is purely optional and the students will not lose marks by using horizontal layout.pages 158-200 15/3/03 11:17 am Page 198 Lesson 25: The presentation of answers This lesson is devoted to bringing together points regarding the layout and presentation of examination answers. Running balance format is usually acceptable.When balancing an account. For an example of a statement. that could be introduced into the course at appropriate stages.This should be shown in the recognized sequence as follows: 198 . page 185. regarding presentation. If a statement is required. the date should be included as part of an entry. and the cumulative (updated) balance is clearly shown as well (either Dr or Cr).The date shown should be the first day of the next accounting period. 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.These points can be particularly related to the requirements of worked questions. ie where the double entry is completed. it must be in proper account format with debit and credit. 1 Ledger accounts The correct description must be shown for each debit and credit entry. However. 4 Presentation in columns (‘columnar presentation’) The 3-column Cash Book is probably the most familiar example. A suitable heading should always be provided for a statement. it must not be presented in account form. can often be presented more effectively in vertical format. 2 Layout of final accounts For the Trading and Profit & Loss Account and balance sheet. the double entry should be completed by bringing down the balance. Attention to the appearance of the answers could well make all the difference between an overall fail or pass.The rule is that this should be the name of the related account. see ‘Andy Struddles: revised stock valuation at 31 December Year 3’ in Lesson 23. but that is acceptable. the balance sheet. Where an account is specified as being required. Vertical presentation of a Trading and Profit & Loss Account effectively becomes a statement. 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.The balance sheet is a statement anyway. as long as the debit and credit columns are clearly marked with Dr and Cr respectively. However.

an answer should keep to the instructions and not show something totally different. They should not be unnecessarily complicated. as may sometimes be the case.130 X X X X Net profit X X W1 X X X X X Gross profit b/d X £ 199 .2. the adjustment of an item has to be more complicated.400) £ 13. eg: Profit & Loss Account £ W1 Rent & rates Various other entries 12. If. however.000 .pages 158-200 15/3/03 11:17 am Page 199 The presentation of answers Dr Discount allowed £ Cr Cash £ Bank £ Discount received £ Cash £ Bank £ Another example could be as follows: Year 1 A B C Year 2 Year 3 A question might specify this layout.600 The examiner can spot the working straightaway instead of having to search it out at a more distant point. 5 Workings Workings should be clearly shown. If so. workings (W1 W2 and so on) should be shown underneath the main account but ‘keyed’ to it. Thus. it is sufficient to show the adjustment as follows: Rent payable (16. if an adjustment is made to the figure of ‘rent payable’ in the Profit & Loss Account.

If part of the answer is shown later on in the answer book. 200 . Sensible spacing comes with practice and some guidance. Pencil should never be used to write answers to questions in this examination. Dark blue or black inks are strongly recommended. Sometimes work is crammed together within the first 3 or so pages of the answer book and becomes difficult to read.pages 158-200 15/3/03 11:17 am Page 200 The presentation of answers 6 Spacing The spacing of examination answers often leaves much to be desired. Work often lacks legibility because candidates use too light a shade of ink. the earlier stage of the answer should clearly signal the fact. Where work is cancelled. it should be struck through with a bold diagonal line.

in each case stating which assets and/or liabilities are affected.500. including any missing items: Creditors Goods Debtors Cash at bank Loan from J Tesco Motor vehicle Office equipment Fixtures and fittings £ 3. previously borrowed from T Walls.000 were paid by cheque on account and if the remainder were on credit. (4) Repayment by cheque of £1. and support material T/1.870 201 .250 2. (6) Purchase of postage stamps for £11 in cash. (3) Purchase of office furniture from D Jackson on credit £318.600: (i) if the purchaser paid by cheque. F Wiles.160 4. T/1.380 3. T/1.970 5.1 State the effect on a balance sheet of each of the following transactions. some worked solutions.600 3.400 2. (5) The receipt of a cheque for £965 from a debtor. (iii) if £2.pages 201-266 15/3/03 11:18 am Page 201 Appendix 1: Exercises.500 5. creditor. (7) Payment by cheque of £617. (1) Purchase of goods by cheque £350. (2) Sale of goods for cash £290. due to T Gates. (ii) if it were sold on credit.2 State the effect on a balance sheet of selling a computer for £3.3 Draw up A Grant’s complete balance sheet from the following incomplete data at 31 March Year 4.

200 of the cash into a newly opened business bank account Bought goods on credit from B Fury for £760 Bought office furniture.200 4. for £8. paid by cheque Sold for cash £125-worth of goods that had cost the same amount Purchased a lease on premises.740 4.4 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 During November Year 3.000.pages 201-266 15/3/03 11:18 am Page 202 Appendix 1: Exercises T/1.400 4.200 paid by cheque Bought stationery for £27 in cash Paid B Fury the amount owing Received from N Lawson a cheque for £2.100 2.450 for the same amount. Required Prepare the balance sheet of R Lines at: (i) 31 October Year 3 (ii) 30 November Year 3.5 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. amounting to £2.860 6. paid creditors £2. R Lines: ● ● ● ● banked cheques received from debtors. as a loan to the business T/1. 202 .300.900.000 in cash Transferred £14.850 2. for £390. bought goods on credit for £1.615 3. sold on credit goods that had cost £1.060 by cheque.

Year 9 2 Jan 5 Jan 9 Jan 13 Jan 16 Jan 22 Jan 25 Jan 27 Jan 30 Jan Commenced business with £15. (ii) the name of the account to be credited. is paid by cheque A Darby returns some of the goods previously sold to him Account credited T/2. (ii) the name of the account to be credited.1 Beside each of the details in the table. Account debited (1) (2) (3) (4) (5) (6) Sold goods on credit to A Darby A Brittle. Account debited (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 Account credited T/2.3 You are required to enter the transactions of B Lancaster in the appropriate accounts. state: (i) the name of the account to be debited. returns goods A Darby pays his account by cheque Goods are returned to T Zuck.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. creditor The account of F Lane. a creditor. to T Minott Sold goods for £90 in cash Purchased goods from T Marner on credit for £430 203 . debtor.pages 201-266 15/3/03 11:18 am Page 203 Appendix 1: Exercises T/2. state: (i) the name of the account to be debited.2 Beside each of the details in the table.

returned goods Account credited 204 . Account debited (1) (2) (3) (4) (5) (6) (7) 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.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. state which account is to be debited and which account is to be credited.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. paid her account by cheque Account credited T/3.1 In the column beside each of the details in the table.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.pages 201-266 15/3/03 11:18 am Page 204 Appendix 1: Exercises T/2. Account debited (1) (2) (3) (4) (5) (6) 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.

with the balance of £170 on credit Sent cheque to N Tucker to settle the account Paid wages in cash. Drew from bank £360 in cash for office Paid wages in cash.500 from Oftech Ltd. £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 £30.000 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 £370.000 of which was paid by cheque.000 in cash Paid £19.pages 201-266 15/3/03 11:18 am Page 205 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. £1. £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 10 12 13 14 16 18 20 21 22 24 26 28 30 31 Oct Oct Oct Oct Oct Oct Oct Oct Oct Oct Oct Oct Oct Oct 205 .500 from Comtec Ltd. £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. with the remainder on credit. £1. paid by cheque Bought a computer for use in the business for £3.4 Record the following in accounts: Year 3 1 Oct 2 Oct 4 Oct 7 Oct 9 Oct Choi Wing started in business with £21.000 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 £2.000 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.

2 Enter the following into debtor and creditor accounts only.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.pages 201-266 15/3/03 11:18 am Page 206 Appendix 1: Exercises T/4. 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 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 206 .

536 1.626 1.076 1. It is of an account drawn up and maintained by the customer.156 2.4 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 £12.3 This bank account is an example of running balance format.pages 201-266 15/3/03 11:18 am Page 207 Appendix 1: Exercises T/4.000 in cash Transferred £11.666 966 1.316 1.556 1.000 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 .756 1.106 806 1. 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 £ 1.016 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. T/4.

670 1. Debit Office equipment Creditors Insurance Cash Rent payable Debtors Sales Rent receivable Drawings Motor vehicle Loan from F Lang Capital Wages Premises Credit T/4.300 2.pages 201-266 15/3/03 11:18 am Page 208 Appendix 1: Exercises T/4.5 Against each of the listed items.900 2.980 7.530 3.400 5.6 On 30 June Year 4.650 5. 208 .800 19.740 420 6. tick ( ) either the debit column or the credit column according to which side of the trial balance you would expect the item to appear.630 Required Prepare the trial balance of D Lamb at 30 June Year 4.500 1.040 3. 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.

300 4. (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. T/5.500 £ 7.000 209 .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 £ 15.1* (a) The following details relate to K Fox for the year ended 30 September Year 3: Sales Cost of goods sold Running expenses £ 15.300 3.300 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.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.500 4.300 12.800 8.800 8.200 9.pages 201-266 15/3/03 11:18 am Page 209 Appendix 1: Exercises T/5.

900 9.600 1.pages 201-266 15/3/03 11:18 am 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 less Running expenses (Total) Net profit £ 26.2 T Avis Trial balance at 31 December Year 5 Dr £ 5.680 Cr £ 6.400 Note The above are statements – not accounts. T/5.200 18. Stock at 31 December Year 5 was valued at cost at £2.Therefore.160 750 910 700 360 420 450 800 1. 210 .320 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 Note It is assumed that T Avis started in business on 1 January Year 5 by placing £4.300 £ 17.100.800 12.000 in a business bank account.600 1.040 50 800 11.680 4.000 11. there is no opening stock.This figure is due to be brought into the accounts of TAvis after the agreement of the trial balance.400 6.

211 .460 31.pages 201-266 15/3/03 11:18 am Page 211 Appendix 1: Exercises T/5.800 3.650.400 390 5.000 65.100 3.300 65. Shui Ling drafted the following trial balance.360 Purchases Sales Cash at bank Wages Debtors Creditors Rent Motor vehicles Insurance Office equipment General expenses Fixtures and fittings Drawings Capital Shui Ling valued her stock at 31 December Year 4 at cost at £4. Shui Ling Trial balance at 31 December Year 4 Dr £ 19.460 Cr £ 32.700 12.400 520 3.510 3.680 2. Note A balance sheet is not required.3 At the end of her first year’s trading.960 7.You are required to draw up a Trading and Profit & Loss Account for the year ended 31 December Year 4.800 4.

300 570 390 117.600 1. including any item that you believe to be missing. T/6.100 59.600 9.620 38.The balance sheet should be in the correct format.980 Premises £42.080 2.120 Debtors £7.750 212 .130 Motor vehicle £7.000 Bank £3.500 53.000 Stock £3.100 Stock at 30 June Year 8 was valued at £4.200 3.000 117. Loan from T Gaul.440 15.100 36.1* From the following details you are required to draw up a complete balance sheet for Sai Yoon at 31 October Year 7.400 3. Note A balance sheet is not required.500 4. repayable 31 December Year 9.100 Cash £110 Creditors £7.pages 201-266 15/3/03 11:18 am Page 212 Appendix 1: Exercises T/5. Fred Trotter Trial balance at 30 June Year 8 Dr £ 2.4 The following is the trial balance of Fred Trotter after his first year’s trading.500 Cr £ 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 5.800 Fixtures and fittings £2. £4. You are required to draw up a Trading and Profit & Loss Account for the year ended 30 June Year 8.220.

100 51.130 110 15.290 33.650 3.2* With reference to the data in T/5. repayable 31 Dec Yr 9 Amount due within 1 year Creditors £ 55.850 Amount due in more than 1 year Loan: T Gaul.980 7.790 £ Current Assets Stock Debtors Bank 4.800 3.800 5.000 790 31.680 3.2/A Shui Ling Balance sheet at 31 December Year 4 £ Fixed Assets Fixtures and fittings Office equipment Motor vehicles 3.300 £ 31.890 213 .400 21.400 12. draw up a balance sheet for Shui Ling at 31 December Year 4.960 Amount due within 1 year Creditors 12.1/A Sai Yoon Balance sheet at 31 October Year 7 £ Fixed Assets Premises Fixtures and fittings Motor vehicle Capital 42.100 33.3 and the answer to it.090 less Drawings 4.020 66.890 2.pages 201-266 15/3/03 11:18 am Page 213 Appendix 1: Exercises T/6.870 66.750 4.000 7.870 T/6. T/6.120 Current Assets Stock Debtors Bank Cash £ 3.000 2.750 7.600 £ Capital Commencing balance add Net profit 5.

repayable 30 Jun Yr 7 Fixtures and fittings £ 3.4 and the answer to it. T/6. draw up a balance sheet for Fred Trotter at 30 June Year 8.pages 201-266 15/3/03 11:18 am Page 214 Appendix 1: Exercises T/6.3* By reference to the data of T/5. Alison Sharpe purchased another motor vehicle for business use for £2.100 60.300 Capital Balance at 1 Jul Yr 7 add Net profit less Drawings £ £ 53.600 9.600 Current Assets £ Stock Debtors Bank 4.500 3. which has not been shown above.940 2.300 2.220 3.900 4.000 6.080 Amount due within 1 year Creditors 9.640 2.000 980 Required Prepare a balance sheet for Alison Sharpe at 30 September Year 4.100 4. complete with the balance of capital.700 T/6.700 5.3/A Fred Trotter Balance sheet at 30 June Year 8 £ Fixed Assets Premises Fixtures and fittings Motor vehicles 38. (b) On 1 October Year 4.4* (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. 214 .970 60 2.080 1.600 55.200 51.400 60.100 2. She paid T Rolt £400 by cheque and the remainder of the amount was on credit.600.

640 Bank 1. T/6.4/A (a) Alison Sharpe Balance sheet at 30 September Year 4 £ Fixed Assets Fixtures and fittings Motor vehicle Capital 980 2.100 Amount due in more than 1 year Loan – T Wylie (repayable 30 Jun Yr 7) £ 7.200.100 2.940 12.890 2.pages 201-266 15/3/03 11:18 am Page 215 Appendix 1: Exercises Required (i) In ledger accounts.600 a decrease of current assets by £400 no effect on current assets an increase of current assets by £2.600 a decrease of current assets by £2.830 Motor Vehicle 2.000 3.200 (ii) Answer = (3) a decrease of current assets by £400 215 . record the entries for the transaction.080 £ Current Assets Stock 4.750 12.080 Debtors 3.830 (b) (i) Year 4 1 Oct 1 Oct Balance Bank and T Rolt £ 2.970 Cash 60 Amount due within 1 year Creditors 9.600 Bank Year 4 1 Oct Balance £ 1. (ii) State which one of the following effects this transaction will have: (1) (2) (3) (4) (5) an increase of current assets by £2.970 T Rolt Year 4 1 Oct £ Motor vehicle 400 Year 4 1 Oct Motor vehicle £ 2.

460 1.050 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 Stock at 31 December Year 6 was valued at £2.250 860 1.100 21. 216 .2 T Avis Trial balance at 31 December Year 6 Dr £ 9.1 Prepare a Trading and Profit & Loss Account for Lui Man for the year ended 31 December Year 6 from the following details: Purchases Sales Returns outwards Returns inwards Carriage inwards Carriage outwards Wages General expenses Stock at 31 Dec Yr 6 £ 15.270 2.020 5.430 21.790 Note Year 6 was Lui Man’s first year of trading.pages 201-266 15/3/03 11:18 am Page 216 Appendix 1: Exercises T/7.450.100 1.020 Cr £ 13. T/7.460 31.230 70 2.100 590 610 450 480 340 380 900 1.260 430 1.750 1.030 8.170 1.600 1.970 840 1.

860 25.800 760 49.300 T/7.4 From the following information.620 980 1.540 4.200 3.700 231.030 540 1. 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 £ 27.200 8.960 217 .380 143.640 2.600 980 1.950 53. 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 £ 68.010 390 7.pages 201-266 15/3/03 11:18 am Page 217 Appendix 1: Exercises T/7.890 570 7.3 Using the following information.

pages 201-266 15/3/03 11:18 am Page 218 Appendix 1: Exercises T/7. ie balances c/d on each account Balance sheet 218 .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 Capital Account Cash/bank account(s) Debtor/creditor accounts Asset accounts Balanced.

repayable 31 Jul Yr 13 Motor vehicles Drawings Capital Stock at 31 July Year 8 was valued at £14.000 11.pages 201-266 15/3/03 11:18 am Page 219 Appendix 1: Exercises T/7.000 16.6 From the following trial balance of T Brackwell.900 5.394 26.800 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.650 4. together with a balance sheet at that date. prepare a Trading and Profit & Loss Account for the year ended 31 July Year 8.340 194 110.500 1.000 23.750 4.500 13.344 Cr £ 256.200 3.344 157.200 462.500 53.960 29.100 24. 219 .400.300 5. T Brackwell Trial balance at 31 July Year 8 Dr £ 177.400 462.

fill in the column ‘Type of account’ and. T/8.1/A Account Fixtures and fittings Rent Motor vans Light and heat J Symes. 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.pages 201-266 15/3/03 11:18 am Page 220 Appendix 1: Exercises T/8. a sole trader.1* Philip Wilshaw. a debtor Bank Capital Drawings Type of account Real Nominal Real Nominal Personal Nominal Nominal Real Personal Real Personal Personal To be found in the following ledger 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 220 . in the last column. a creditor Purchases Sales Stock T P Stanley. uses the following accounts in his books: Fixtures and fittings Rent Motor vans Light and heat J Symes. state the ledger in which you would find the account. a creditor Purchases Sales Stock T P Stanley.

3* (a) Set out the following table. sales. creditor Trading Rent receivable Fixtures and fittings Wages Capital Name of ledger (b) Suggest 3 ways in which the Sales Ledger might be subdivided. enter the name of the ledger in which each of the accounts is recorded. state the type of accounts you would expect to find in each division of the ledger. name 3 accounts that might be included. etc Capital Drawings Trading and Profit & Loss T/8. Name of account (1) (2) (3) (4) (5) (6) (7) Drawings T Lucan. against the General Ledger and Private Ledger. 221 .2/A Division of the ledger Sales Ledger Purchases Ledger General Ledger Private Ledger (A) Type of account Personal/customers (or debtors) Personal/suppliers (or creditors) Impersonal: nominal or real Personal (private) (B) Name of account Wages. T/8.2* Division of the ledger Sales Ledger Purchases Ledger General Ledger Private Ledger (A) Type of account (B) Name of account Required (a) In column (A). In the right-hand column. (b) In column (B).pages 201-266 15/3/03 11:18 am Page 221 Appendix 1: Exercises T/8. rent receivable.

100 240 5.3/A (a) Name of account (1) (2) (3) (4) (5) (6) (7) Drawings T Lucan. by type of customer.450 1.500 2.600 2.670 222 . in which customers are numbered individually. 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 Financed by: Capital – balance at 1 Jan Yr 6 add Net profit less Drawings 5. then grouped.340 1.170 1.430 1.750 3. creditor Trading Rent receivable Fixtures and fittings Wages Capital Name of ledger 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. ie by sales areas. numerically. eg by customer names. geographically. on a product basis.230 70 4. ie according to product categories.920 1.670 £ 900 1.170 5.pages 201-266 15/3/03 11:18 am Page 222 Appendix 1: Exercises T/8.

400 915 6. 223 .000 39. J Penarth Trial balance at 30 April Year 8 Dr £ 154.290 18.080.510 16.pages 201-266 15/3/03 11:18 am Page 223 Appendix 1: Exercises T/8.200 615 20.190 Cr £ 212.300 48. prepare: (i) a Trading and Profit & Loss Account for the year ended 30 April Year 8. at 30 April Year 8. in vertical format.000 32. (ii) a balance sheet.000 339.430 475 6.190 87.160 22.500 339. 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 Stock at 30 April Year 8 was valued at £41.5* From the following trial balance of J Penarth.670 265 1.600 Purchases Sales Premises Stock at 1 May Yr 7 Rent Returns inwards Loan from R Jenks.650 7.400 3.

630 211.670 265 80.215 1.510 26.400 475 3.300 915 155.000 26.500 9.045 59.630 (ii) Balance sheet at 30 April Year 8 £ Fixed Assets Premises Fixtures and fittings Current Assets Stock Debtors Bank Cash less Amounts due within 1 year Creditors Net current assets less Amount due in more than 1 year Loan from R Jenks.545 20.545 224 .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 154.985 7.430 153.600 615 211.080 152.000 6.400 54.290 6.355 59.630 Gross profit b/d £ 39.pages 201-266 15/3/03 11:18 am Page 224 Appendix 1: Exercises T/8.160 62.545 96.985 less Returns outwards less Stock at 30 Apr Yr 8 Cost of goods sold Gross profit c/d 211.145 116.305 18.000 96.630 Rent Wages and salaries Insurance Carriage outwards Net profit 59.650 Sales less Returns inwards £ 212.400 41.045 16.545 £ 48.435 41.785 193.080 32. repayable Yr 12 Financed by: Capital – at 1 May Yr 7 add Net profit less Drawings 87.200 22.985 59.

Note The delay in clearance will increase if P Sempster (the payee) were to delay paying the cheque into his account. 225 . Chester branch). the cheque is made payable to P Sempster (an account holder at Derbyshire Bank.1: The journey of a ‘drawn’ cheque Year 4 7 May T Royle (drawer) cheque sent to P Sempster (payee) receives cheque T Royle credits bank account P Sempster debits bank account pays cheque into account with 8 May Derbyshire Bank Chester branch 9 May cheque sent to Derbyshire Bank clearance centre sent (with other cheques) to 10 May Albion Bank clearance centre Albion Bank York East branch charged against account of T Royle 10 May 11 May The journey of a ‘drawn’ cheque: ● ● the cheque is drawn by T Royle (an account holder at Albion Bank.York East branch).pages 201-266 15/3/03 11:18 am Page 225 Appendix 1: Exercises T/9.

Choose the answer from the following: (a) and (b) (a) and (c) (b) and (c) (b) and (d) 226 . Payments are always at pre-stated intervals.pages 201-266 15/3/03 11:18 am Page 226 Appendix 1: Exercises T/9. It is not intended for variable amounts. 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. They provide the facilities for regular banking. gives the payee freedom to draw upon the bank account of the debtor. requires the use of a cheque. can be cancelled by the payer. It is suited to the payment of gas bills. 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.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. It may be shown in the books of the account holder as having a credit balance. The transfer of funds requires the use of a cheque.

£87 Carriage outwards paid in cash.3* Chandran Yin had the following balances on 1 October Year 9: £ Cash 96 Bank 387 (Dr) During October Year 9. £32 Received cheque from T Lyle.pages 201-266 15/3/03 11:18 am Page 227 Appendix 1: Exercises T/9.3/A Chandran Yin CASH BOOK Year 9 1 Oct 5 Oct 13 Oct 27 Oct Cash £ 96 117 134 213 1 Nov Balances b/d 67 833 738 Bank £ 387 312 Year 9 3 Oct 8 Oct 20 Oct 27 Oct 31 Oct Cash £ 27 87 32 67 213 Bank £ 95 Balances b/d L Tarne Sales T Lyle Stationery T Womble Wages Carriage outwards Balances c/d 738 833 227 . 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. £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.

4/A W Towcester CASH BOOK Year 6 1 Apr 6 Apr 9 Apr 16 Apr 20 Apr 23 Apr 24 Apr Cash £ 162 470 80 235 360 340 Bank £ 930 400 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 58 400 190 80 340 45 39 1.072 283 1.072 1 May Balances b/d 39 1.905 1.302 1.pages 201-266 15/3/03 11:18 am Page 228 Appendix 1: Exercises T/9.905 Bank £ 240 Balances b/d Sales Cash C Bank C N Vine Sales Cash C 1.4* 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 4 6 8 9 13 16 20 23 24 26 28 Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Balances brought forward: Cash Bank (Dr) £ 162 930 240 470 58 400 190 80 235 360 340 45 283 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 T/9.302 228 .

040 Paid carriage in cash.040 43 130 290 150 460 87 7.545 12.375 7. 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. £290 Received cheque from T Dart for £315 Sales for £910 in cash.500 of cash in a newly opened business bank account Bought motor vehicle for £4. £270 Bought goods by cheque for £1. Balance the Cash Book at the end of the month. paid by cheque Sales for £860 in cash.000 in cash Placed £11.340 1 Dec Balances b/d 87 13.200 270 1.500 860 130 210 315 700 Year 5 3 Nov 5 Nov 10 Nov 13 Nov 15 Nov 17 Nov 18 Nov 28 Nov 29 Nov 30 Nov Cash Bank £ £ 11.375 Capital Cash C Sales Bank C T Dart Sales Bank C Motor vehicle Wages Purchases Carriage Cash C Wages Drawings F Glubb Balances c/d 12.5/A F Swaine CASH BOOK Year 5 1 Nov 3 Nov 8 Nov 17 Nov 20 Nov 23 Nov Cash £ 12. which was banked the same day Paid wages in cash. £43 Withdrew £130 from bank for office cash Paid wages in cash.pages 201-266 15/3/03 11:18 am Page 229 Appendix 1: Exercises T/9.000 Bank £ 11.200.5* Prepare a 2-column Cash Book from the following transactions.545 229 .500 4.340 13. 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.

after deducting a 3% cash discount Required Record these balances and transactions in the books of J Mander. Use a 3-column Cash Book.040 440 350 280 300 A Croft R Vine T Dole W Kone 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. ie which includes discount columns. 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. Balance the Cash Book at 31 May Year 5 and post the totals of the discount columns to the General Ledger.pages 201-266 15/3/03 11:18 am Page 230 Appendix 1: Exercises T/10. 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 136217.1 The following information relates to the business of J Mander: Year 5 1 May Balances brought forward: Cash Bank (Dr) Debtors – – Creditors – – £ 93 1. 230 .

bringing down the balances at 1 April Year 6.2 Thelma Cook keeps a 3-column Cash Book for her business.pages 201-266 15/3/03 11:18 am Page 231 Appendix 1: Exercises T/10. 231 . 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 £3.800 was banked Paid postage of £50 from cash Drew cheque number 10677 for £168. to pay a gas bill Drew cheque number 10681 for £855 payable to D Coyne.050. for purchases costing £1. of which £2.214 (Dr) respectively Drew cheque number 10674. for rent of £250 Sales totalled £1.000 was banked on the same day Drew cheque number 10680 for £106.200.210 Required Write up the 3-column Cash Book.108 was banked Paid office expenses of £70 from cash Drew cheque number 10679 for £2.200 Drew cheque number 10676 for £150. to pay a telephone bill Paid £128 for stationery from cash Drew cheque number 10678 for £150. to pay wages Income from sales totalled £2. in settlement of a debt of £520 Received cheque for £720 from S Britton. to replenish office cash Cash from sales totalling £2. in settlement of an amount of £750 Received cheque for £1. to replenish office cash Cash from sales totalling £1.160 from D F Pratt. in settlement of an amount of £1. of which £950 was banked on the same day Paid cleaning expenses of £35 from cash Sales banked £1.000.680 Drew cheque number 10675. in settlement of a debt of £900 Drew cheque number 10682 for £494 payable to F Cox.

a debtor of Jackson. 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 (2) Cheque-book counterfoils 8 14 18 22 26 Nov Nov Nov Nov Nov B Thwaites Electricity account T Smith Telephone account C Lord £ 423 46 327 68 197 (3) Record of movements of cash 11 23 29 30 Nov Nov Nov Nov Cash sales Cash sales Cash sales Taken for personal use £ 460 440 510 140 All these transactions were entered by 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 4.3 On 1 November Year 4. the Cash Book of T Jackson. showing the final balance at the end of November. showed a debit balance of cash in hand of £34 and a credit balance on bank account of £287.pages 201-266 15/3/03 11:18 am Page 232 Appendix 1: Exercises T/10. 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. 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. He then received the bank statement. For the month of November Year 4. (LCCIEB) 232 . a sole trader.Then record the additional items obtained from the bank statement. entering the information given in (1) to (3) above and balancing the cash and bank columns.

233 . which were paid directly into his bank account: 14 May 22 May From Westerns Ltd From Dugard & Wells £ 180 76 During the month.4 Ket Rampalla owns a small catering business. 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. there was a credit balance of £345 in the bank column of his Cash Book. (b) Open the ledger accounts and post the totals of the discount columns of the Cash Book. On 1 May Year 11. the following took place: (1) (2) (3) (4) 18 May 19 May 23 May 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.pages 201-266 15/3/03 11:18 am Page 233 Appendix 1: Exercises T/10. During May Year 11. and balance the Cash Book at 31 May. he paid the following cheques into his bank account: Amount of cheque £ 242 83 156 95 Cash discount allowed £ 18 – 7 – 3 12 19 26 May May May May Keston Services F Savage Quantell Ltd L Wright He also paid the following amounts from cash sales into his bank account: 6 13 20 27 May May May May £ 585 614 603 526 He received the following remittances. in date order. Include in your answer the name of the ledger in which the posting would be made.

840 5.839 5.518 3.842 5.521 £ 258 312 406 194 425 538 T/11.843 List price £ 320 460 240 580 360 Trade discount % 121/2 15 71/2 20 121/2 234 . (c) record the transfer to the Sales Account in the General Ledger at the end of the month. (b) post the items to the relevant accounts in the Sales Ledger.519 3.517 3. (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. you are to: (a) enter the transactions in the Sales Day Book.841 5. Year 6 4 9 15 22 26 Sep Sep Sep Sep Sep Credit sales to J Burton W Thorne A Glenn J Burton W Thorne Invoice no £ 5.516 3.2 From the following details. Year 6 2 5 12 18 23 29 Aug Aug Aug Aug Aug Aug Credit sales to F Dene T Marchant P Drummond T Marchant F Dene S Field Invoice no 3.pages 201-266 15/3/03 11:18 am Page 234 Appendix 1: Exercises T/11.1 From the following details.520 3. you are to: (a) enter the items in the Sales Day Book.

pages 201-266 15/3/03 11:18 am Page 235 Appendix 1: Exercises T/11. (b) post the items to the relevant accounts in the Purchases Ledger. Year 8 3 8 12 17 24 29 Oct Oct Oct Oct Oct Oct Credit purchases from T Slocombe J Barnaby K Linden R Tredgarth J Barnaby T Slocombe Invoice no* B361 1634 958 A179 2583 B398 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. you are required to: (a) enter the items in the Purchases Day Book.3 From the following details. (c) record the transfer to the Purchases Account in the General Ledger at the end of the month. 235 .

bringing down the balances at 1 August Year 2. (LCCIEB) 236 . £650 of which was paid into the bank Drew cheque number 555 for electricity.pages 201-266 15/3/03 11:18 am Page 236 Appendix 1: Exercises T/11. £12 Drew cheque number 558. 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. 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. £650 Received cheque from J Royle for £880. £145 Drew cheque number 556 for purchases. enter the balances at 1 July Year 2 and the transactions for the month of July. payable to N Henry for £480 to settle an account of £500 Cash sales totalled £440. in settlement of a debt of £900 Cash sales totalled £80 Drew cheque number 557. £400 of which was paid into the bank Paid travelling expenses in cash.4 The Cash Book balances of Rachel McLeod at 30 June Year 2 were: Cash £100 Bank £850 (Dr) In July Year 2.

1 From the following details.2 From the following details. (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 . 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. (b) post to the relevant accounts in the Purchases Ledger. (b) post to the relevant accounts in the Sales Ledger.pages 201-266 15/3/03 11:18 am Page 237 Appendix 1: Exercises T/12. you are required to: (a) enter the transactions in: (i) the Sales Day Book (ii) the Returns Inwards Day Book. (c) show the transfers to the General Ledger. you are required to: (a) enter the transactions in: (i) the Purchases Day Book (ii) the Returns Outwards Day book.

The entry concerning returns to R Varney on 30 October is related to the purchase on 24 October. goods bought on 24 October Year 6 at a list price of £40 27 Oct 30 Oct Note The entry about the returns to R Varney on 8 October refers back to the purchase of 3 October. subject to a trade discount of 15% Returned goods worth £37 to T Langton Returned to R Varney. Year 6 3 Oct 5 8 11 15 17 19 21 24 Oct Oct Oct Oct Oct Oct Oct Oct Credit purchase from R Varney. 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% Credit purchase from R Varney at a list price of £320. a trade discount of 15% must be applied to the returns.pages 201-266 15/3/03 11:18 am Page 238 Appendix 1: Exercises T/12. 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. 238 . Sales. subject to a trade discount of 121/2% Credit sale to K Petts at a list price of £420. (b) post the items to the personal accounts in the Purchases and Sales Ledgers. at a list price of £480. and (c) record the transfer to appropriate accounts in the General Ledger at the end of October Year 6.3 From the following details. you are required to: (a) enter the transactions in the Purchases. ie a discount rate of 12 1/2% must be applied to the returns. Returns Outwards and Returns Inwards Day Books. therefore.

subject to a trade discount of 20% and a cash discount of 5%. for goods bought on 7 January Required (a) Enter the above transactions in Lung Kwok’s Purchases Day Book. in full settlement. for goods bought on 12 January Received cheque from J New. (b) Why do traders allow cash discount? 239 . in full settlement. in full settlement.4 During the month of January Year 4. in full settlement. 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. if paid within 10 days Paid cheque to F Robins. for goods sold on 17 January Bought goods from P Harper with a list price of £840. if paid within 10 days Paid cheque to T Brown. if paid within 10 days Bought goods from F Robins with a list price of £420. subject to a trade discount of 25% and a cash discount of 3%.pages 201-266 15/3/03 11:18 am Page 239 Appendix 1: Exercises T/12. subject to a cash discount of 5%. for goods bought on 5 January Received cheque from B Stevens. subject to a trade discount of 25% Sold goods on credit to B Stevens for £340. if paid within 14 days Sold goods to K Burton for £660 less a trade discount of 15% and a cash discount of 5%. subject to a 331/3% trade discount and a cash discount of 2 1/2%. Sales Day Book and Purchases Returns Day Book and show the Cash Book entries. if paid within 14 days Sold goods to J New for £580.

000.700 1. Riggan had to return some of the goods to her suppliers.200 During May. She regularly purchases goods on credit. (LCCIEB) 240 . Required (a) Prepare the Purchases Day Book for May. Assume that there was a nil balance at the beginning of the month.200 3.000 1. showing the transfer to the Trading Account.800 4. Riggan pays this account monthly to take advantage of the cash discount.5 T Riggan is a sole trader and has a sports goods shop. Each of her suppliers grants a trade discount of 5% if the value of a transaction exceeds £2.800 1.pages 201-266 15/3/03 11:18 am Page 240 Appendix 1: Exercises T/12. (c) Prepare the personal account of M Boyce for the month of May. (b) Prepare the Purchases Account and the Purchases Returns Account for May.The returns were as follows: Date 14 May 22 May 27 May * Supplier 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. She made the following credit purchases in May Year 8: Date 8 12 15 22 23 26 May May May May May May Supplier M Boyce B Jones C Smith S Morris M Boyce C Smith Gross purchases value £ 3.

(LCCIEB) 241 . (3) The insurance premium paid on 31 August Year 4 covered the year ended 31 August Year 5. 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 4.1* On 1 January Year 4. in each account. Required Prepare accounts in the ledger of E Parker for the year ended 31 December Year 4. and show.pages 201-266 15/3/03 11:18 am Page 241 Appendix 1: Exercises T/13. (2) An advertising bill amounting to £85 had not been paid by 31 December Year 4. the following were 3 of the account balances in E Parker’s ledger: Rent Insurance Advertising £ 230 Dr 65 Dr 110 Cr During the year ended 31 December Year 4. the transfer to the Profit & Loss Account for the year ended 31 December Year 4. for: (i) rent (ii) insurance (iii) advertising. Give particular attention to dates.

820 Year 4 31 Dec Profit & loss £ 2.pages 201-266 15/3/03 11:18 am Page 242 Appendix 1: Exercises T/13.820 Year 5 1 Jan Insurance Balance b/d 500 Year 4 1 Jan Balance b/d 31 Aug Bank Year 5 1 Jan £ 65 180 245 120 Year 4 31 Dec Profit & loss 31 Dec Balance c/d £ 125 120 245 Balance b/d 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 £ 110 85 195 85 Balance b/d 242 .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 2.

Required Prepare for Melville & Co a Trading and Profit & Loss Account for the year ended 30 September Year 9.470 17.160 2.500 243 .300 84.970 In addition.470 118.2/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 £ 20.940 3.320 121.530 9.300 118.540 2.500 Sales £ 269.500 147. £250 rates prepaid amount to £180 heating and lighting accrued due.650 20.930 11.940 3.860 11.590 9.2* The following details are from the books of Melville & Co for the year ended 30 September Year 9: 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 £ 279.300 Gross profit b/d 147.320 83.500 269.300 269.650 139.120 17.590 35. T/13. at 30 September Year 9: ● ● ● ● ● wages and salaries owing amount to £620 rent payable accrued due. £60 office stationery is in stock amounting to £380.290 147.800 147.pages 201-266 15/3/03 11:18 am Page 243 Appendix 1: Exercises T/13.

being rent for the 4 months ended 31 March Year 6 Paid £360 by cheque. representing 2 months’ rent paid in advance Paid £450 by cheque.010 Bank Balance c/d 360 180 2.3* The following are details relating to N Tulloch’s Rent Payable Account: Year 5 30 Jun 8 Sep 27 Nov Year 6 9 Apr Balance on the account of £300. being rent for the 3 months ended 30 November Year 5 Paid £720 by cheque.010 244 .010 1 Jul Balance b/d 2.3/A N Tulloch Rent Payable Year 5 1 Jul Balance b/f 8 Sep Bank 27 Nov Bank Year 6 9 Apr 30 Jun £ 300 450 720 Year 6 30 Jun Profit & loss £ 2. T/13.pages 201-266 15/3/03 11:18 am Page 244 Appendix 1: Exercises T/13. 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 6.010 180 The transfer to the Profit & Loss Account is calculated as: 5 months at 7 months at £ £150 = 750 £180 = 1.260 2. Balance the account at the year end and show the transfer to the Profit & Loss Account.

£240 Rent for 4 months ended 30 November Year 5. 245 .040 Office expenses. 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. Balance the accounts and make the appropriate transfers to the Profit & Loss Account for the year ended 31 December Year 5.4* Tan Lian.pages 201-266 15/3/03 11:18 am Page 245 Appendix 1: Exercises T/13. £1. Required Open the 3 accounts listed above and enter the transactions that occurred in Year 5. a sole trader.There was no further increase in the monthly charge for rent in December Year 5.040 Insurance for 6 months ended 28 February Year 6. there was a stock of stationery valued at a cost of £90. £63 Rent for 4 months ended 31 March Year 5. had the following account balances on 1 January Year 5: Insurance Office expenses Rent payable £ 70 Dr 160 Dr 240 Cr During Year 5. £92 Rent for 4 months ended 31 July Year 5. £960 Insurance for 6 months ended 31 August Year 5. £210 Office expenses. £280 At 31 December Year 5. £1.

040 Dec (1.040 260 3.300 Year 5 1 Jan Balance b/d 31 Dec Profit & loss £ 240 3.300 Year 6 1 Jan Balance b/d 260 3.040 1.060 246    £ Check profit & loss transfer: Jan–Mar (960 × 3/4) 720 Apr–July 1.040 Aug–Nov 1.040 × 1/4) 260 £240 per month £260 per month .pages 201-266 15/3/03 11:18 am Page 246 Appendix 1: Exercises T/13.060 Year 5 31 Dec Profit & loss 31 Dec Balance c/d £ 505 90 595 Balance b/d 3.4/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 80 Year 5 31 Dec Profit & loss 31 Dec Balance c/d £ 440 80 520 Check profit & loss transfer: Jan–Feb 2 months 70 £35 per Mar–Aug 6 months 210 month Sep–Dec 4 months 160* 440    Balance b/d * £40 per month Office Expenses Year 5 1 Jan 26 Jan 12 Apr 11 Dec Year 6 1 Jan Balance b/d Bank Bank Bank £ 160 63 92 280 595 90 Rent Payable Year 5 9 Feb 8 Jun 6 Nov 31 Dec £ Bank Bank Bank Balance c/d 960 1.

pages 201-266 15/3/03 11:18 am Page 247 Appendix 1: Exercises T/14. (4) Rent receivable – the tenant owes £160 for rent outstanding at 31 December Year 5.630 (Dr) (Dr) (Dr) (Cr) (Dr) You ascertain the following information relating to the accounts above. is £47. (LCCIEB) 247 . (b) Show how any remaining balances on the above accounts would appear in the balance sheet of M Paine at 31 December Year 5. Required (a) Open these accounts. (2) Telephone – the amount accrued due. deal with the accrual or prepayment as necessary. and show the transfers to the Profit & Loss Account.840 45. M Paine’s financial year ends on 31 December Year 5.1 M Paine. a sole trader.960 215 760 3. certain accounts carry the following balances: £ Rates Telephone Insurance Rent receivable Wages 1. (5) Wages – the amount accrued due at 31 December Year 5 was £840. (1) Rates – included in the Rates Account is a payment of £900 for the half-year to 31 March Year 6. is about to prepare his final accounts. not yet paid to 31 December Year 5. At that date. enter the balances given. (3) Insurance – a premium of £720 paid for the year to 31 January Year 6 is included in the Insurance Account. As book-keeper. you need to adjust the figures shown in certain accounts.

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.pages 201-266 15/3/03 11:18 am Page 248 Appendix 1: Exercises T/14. showing how the 3 balances would appear.400. (3) On 1 January. He provides the following details for the year ended 31 December Year 10: (1) On 1 January. he paid 6 months rent in advance – £2.700. commission due and not yet received in respect of Year 10 amounted to £4. On 31 December. On 30 September. the estimated amount outstanding on the Telephone Account was £320. amounted to £3. he paid the telephone bill in respect of the previous 6 months.2 L Reinholdt is a theatrical agent whose accounting year ends on 31 December. At 31 December. 3 months rent had been paid in advance – £1. (b) Prepare a balance sheet extract for Reinholdt at 31 December Year 10. On 1 April.700. (2) On 1 January. January–December: commission received – £64. he paid the telephone bill in respect of the previous 6 months. he paid rent for the 6 months ending 31 March Year 11 – £2. and not yet received. commission due to Reinholdt. the estimated amount outstanding on the Telephone Account was £300. (LCCIEB) 248 . £510. £520. On 31 March.200.200. On 1 October.

260 rates £330 249 .pages 201-266 15/3/03 11:18 am Page 249 Appendix 1: Exercises T/14.590* 31 Dec Balance c/d (rates) Year 9 1 Jan 120 2. During Year 8. showing the transfer to the Profit & Loss Account and the account fully balanced. a trader.030 350 Balance b/d (rates) Balance b/d (rent) 120 * rent £1. she made the following payments by cheque: Rent 2 Apr 28 Sep Rates 7 Apr 5 Oct £ 600 630 160 180 At 31 December Year 8 there was accrued rent of £350 and rates were prepaid by £120.3* At 1 January Year 8. T/14. but her rates were prepaid by £110. L Johnston. Required Prepare L Johnston’s combined Rent & Rates Account for Year 8.3/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) 110 600 160 630 180 350 2. owed £320 for rent.030 Year 8 1 Jan Balance b/d (rent) 31 Dec Profit & loss £ 320 1.

In each account. 250 .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 Stationery Paid by cheque Stock Stock Owing to stationery suppliers Telephone Paid by cheque Paid by cheque Owing Owing Rent payable Paid by cheque Paid by cheque Owing Prepaid Rent receivable Received by cheque Received by cheque Owing Owing 23 Feb Yr 5 31 Dec Yr 4 31 Dec Yr 5 630 85 95 19 31 31 31 Mar Yr 5 Dec Yr 4 Dec Yr 5 Dec Yr 5 765 130 160 45 11 4 31 31 Jun Yr 5 Dec Yr 5 Dec Yr 4 Dec Yr 5 295 285 64 56 16 12 31 31 Feb Yr 5 Aug Yr 5 Dec Yr 4 Dec Yr 5 2. incorporating the information given above. for the year ended 31 December Year 5. (b) Show how the balances on the accounts would be displayed in Jan Goldsmith’s balance sheet at 31 December Year 5. show the transfer to the Profit & Loss Account and bring down the balance(s) at 1 January Year 6.510 360 740 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.pages 201-266 15/3/03 11:18 am Page 250 Appendix 1: Exercises T/14.160 2.

at the end of his financial year. 251 . 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. there was an outstanding advertising bill for £190 and 2 months’ payment outstanding on the office cleaning account. 30 June Year 5. Required (a) Open the following accounts: (i) (ii) (iii) (iv) Advertising Insurance Office Cleaning Rent Receivable. at £140 per month. the following amounts were paid by cheque: Year 4 25 Jul 1 Aug 5 Sep 24 Oct Year 5 26 Jan 1 Feb 8 Mar 21 Apr 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 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 Year 5 12 Jan 3 Mar 19 May £ 700 350 380 Rent (1 May – 31 Aug Yr 4) Rent (1 Sep – 31 Oct Yr 4) Rent (1 Nov – 31 Dec Yr 4) 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.pages 201-266 15/3/03 11:18 am Page 251 Appendix 1: Exercises T/14.5 In the books of Frank Napier. a sole trader.

680 1.100 780 1.250 2. (c) Show the transfer entries to the Profit & Loss Account for the year ended 30 June Year 5.260 1.480 252 . Note You are not required to show the Profit & Loss Account. (d) Balance the accounts at 30 June Year 5.pages 201-266 15/3/03 11:18 am Page 252 Appendix 1: Exercises (b) Post the various items to the accounts.680 630 1.6 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 6 months’ rent received by cheque at revised rate of £2. T/14.960 per annum Rates Year 8 1 Jul 1 Oct Year 9 1 Apr 3 months’ rates prepaid Paid 6 months’ rates by cheque Paid 6 months’ rates by cheque Advertising Year 8 1 Jul 28 Aug Year 9 15 May Accrued due Paid by cheque Paid by cheque Printing and Stationery Year 8 1 Jul 14 Sep Year 9 12 Feb Stock of stationery Purchased stationery by cheque Paid printing account by cheque 3.400 850 420 370 1.

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. including transfers to the Profit & Loss Account and year-end balances. how the balances on these accounts would appear at 30 June Year 9. 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 £ Method (a) (b) Net book value at 31 Dec Year 3 £ 253 . Required (a) Prepare the following accounts for the year ended 30 June Year 9. On 31 December Year 3.400.100. T/15.pages 201-266 15/3/03 11:18 am Page 253 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. in the form of a balance sheet extract. (i) (ii) (iii) (iv) Rent Receivable Rates Advertising Printing and Stationery (b) Show. (b) reducing balance method – using a rate of 40% on cost.100.1 Jack Millard commenced business on 1 January Year 3 and on that date purchased a motor vehicle for £10. There was also an unpaid invoice for £615 for printing. he wished to determine the depreciation expense for the year just completed. (2) The stock of stationery was valued at £3.

He decided to depreciate this asset. He kept the asset accounts at cost. Required Prepare for Charles Day the following accounts for each of Years 4. 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 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. and used a provision for depreciation account for each asset.pages 201-266 15/3/03 11:18 am Page 254 Appendix 1: Exercises T/15. on credit. prepare an extract to show how both assets would appear in Charles Day’s balance sheet at 31 December Year 7. on the same day. On that date. 6.600 from Greenaway Motors Ltd. (LCCIEB) 254 . 5.100.3 Required With reference to T/15.000 from P J Shop Fitters Ltd. He also purchased.2.2 Charles Day started a business on 1 January Year 4. using the rate of 40% per annum on the reducing balance method. he purchased by cheque a motor van costing £9. (LCCIEB) T/15. and would have a scrap value of £2. fixtures and fittings costing £15.

On 12 September Year 5. paying £8.600 by cheque. paying £10.pages 201-266 15/3/03 11:18 am Page 255 Appendix 1: Exercises T/15. using the reducing balance method.The financial year ends on 31 December. the residual (scrap) value would be £600. 6. Southern Stores bought a computer for use in the office. at the end of 5 years. It was estimated that. The business retained the asset accounts at cost and dealt with depreciation using a separate Provision for Depreciation Account for each asset. It was decided to provide for depreciation by use of the straight line method. while any asset purchased in the second half of the year has only half a year’s depreciation written off. and 7: (i) (ii) (iii) (iv) Computer Equipment Provision for Depreciation of Computer Equipment Motor Vehicle Provision for Depreciation of Motor Vehicle.4 On 8 February Year 5. Any asset purchased in the first 6 months of a year has a whole year’s depreciation provided.000 by cheque. Southern Stores purchased a motor vehicle for use in the business. (LCCIEB) 255 . (b) Show a balance sheet extract at 31 December Year 7 for both the Computer Equipment and Motor Vehicle Accounts. Required (a) Prepare the following accounts for the years ended 31 December Years 5. The vehicle was to be depreciated at the rate of 40% per annum.

000.000. he purchased by cheque a motor vehicle for £18. and Year 5. prepare the following accounts for the 3 financial years ended 31 December Year 3. 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. He estimated that they would have a working life of 8 years.5 D Amos purchased fixtures and fittings for £6. He decided to provide for depreciation on this asset at the rate of 40% per annum. On 1 July of the same year. On 31 December Year 6.200 and was paid by cheque. He set the rate at 40% on reducing balance each full year. (2) Motor vehicle – using the reducing balance method. 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.000 by cheque on 1 January Year 3.000. for use in the business. On 14 February Year 4. he sold the motor van for £3. he purchased a motor van by cheque for £8. using the reducing balance method. Required In the books of D Amos.pages 201-266 15/3/03 11:18 am Page 256 Appendix 1: Exercises T/15.400. Frank Saunders purchased furniture and equipment by cheque for £11. His financial year ends on 31 December. (LCCIEB) T/15. He decided to provide for depreciation on this asset using the straight line method over 8 years. He decided to depreciate his fixed assets as follows: (1) Fixtures and fittings – using the straight line method. He allowed a full year’s depreciation in the year of purchase and calculated the depreciation to the nearest £.6 On 1 January Year 4. 256 . with a residual (scrap) value of £1. 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. He estimated that the scrap value at the end of that time would be £600. Year 4.

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. open the following accounts and enter the transactions for the years ended 31 December Years 4.835 G Block 315 17.1 F Openshaw submitted the following information at 31 March for Years 4.694 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. the provision for doubtful debts was £380. Required (a) In the books of F Openshaw. 5. including the transfers to the Profit & Loss Account at the end of each financial year: (i) Bad Debts (ii) Provision for Doubtful Debts. (LCCIEB) T/16. prepare the following accounts for the years ended 31 March Years 4. (LCCIEB) 257 .640 Bad debts to be written off £ F Dale T Wylie 117 163 Date 31 Mar Yr 4 31 Mar Yr 5 31 Mar Yr 6 20. (b) Show extracts from the balance sheets of F Openshaw at 31 March Years 4. 5. placing debtors under current assets. and 6. At 31 March Year 3.pages 201-266 15/3/03 11:18 am Page 257 Appendix 1: Exercises Required In the books of Frank Saunders. 5. and 6. and 6: Total debtors before writing off bad debts £ 18. 5.

Coniston wrote off the balance as a bad debt. (ii) Show the balance sheet extract in respect of debtors at 31 December each year.500 3% 4% 2% Required (i) Prepare the following accounts for Years 1. and 3. Required Show the account of S Atkins in Coniston’s ledger. 2. Coniston & Son received a payment of £129 from S Atkins for an outstanding debt of £320. For the 3 years from the commencement of business to 31 December Year 3.2 (a) It is the practice of Coniston & Son to write off bad debts as they occur and to provide for doubtful debts.100 Year 3 £ 91. (b) On 7 June Year 4. 258 .300 1. showing the transfers to the Profit & Loss Account at the end of each year: ● ● Bad Debts Provision for Doubtful Debts. the following information is available: At year ended 31 December: Year 1 £ Balance of debtors before writing off bad debts Bad debts to be written off Provision for doubtful debts. as a percentage of debtors 47.800 800 Year 2 £ 76.pages 201-266 15/3/03 11:18 am Page 258 Appendix 1: Exercises T/16.400 1.

3/A (a) Calculation of debt provisions Gross debtors less Bad debts written off £ 42.496 38. AB & Co has debtors totalling £42.560 760 41. Required (a) Show in a statement: (i) how the 2 provisions are calculated (ii) the amount of net debtors.304 (b) AB & Co Balance sheet (extract) at 31 December Year 8 £ Current assets Debtors less Provision for bad and doubtful debts 41.3* At 31 December Year 8.pages 201-266 15/3/03 11:18 am Page 259 Appendix 1: Exercises T/16.900 1.800 D 620 E 570 F 710 less Specific provision: less General provision at 4% Net debtors 1. Debts amounting to £760 have yet to be written off as bad.304 £ 259 .560.900 39.800 3. No provision exists as yet. T/16. (b) Show as an extract how the item ‘debtors’ would appear in the balance sheet of AB & Co at 31 December Year 8.596 38. 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.

320 Debtor year-end balances £ 25. in a brief statement. and 10: (i) the Bad Debts Account.640 1. Note Bad debts written off should not be taken to the Provision for Doubtful Debts Account. At 1 January Year 8. 9.4 Donald Lisher. 260 .800 Provision for doubtful debts % 4 6 5 Year ended 31 Dec Yr 8 31 Dec Yr 9 31 Dec Yr 10 On 12 October Year 10. including the closing entries. 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 9.300 29. the balance on the account was £860. a sole trader.pages 201-266 15/3/03 11:18 am Page 260 Appendix 1: Exercises T/16. maintains a provision for doubtful debts that he adjusts at the end of each financial year. The following additional information is available: Bad debts written off during year £ 1. (b) Show. showing the balance carried forward each year. prepare for the years ended 31 December Years 8. 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. (ii) the Provision for Doubtful Debts Account.235 1.600 28.

K Sang. ends on 31 December. During Year 4. on 20 October. At 31 December Year 5.000 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. due from L Paul. debtors amounted to £41. In addition.000 and the provision for doubtful debts was adjusted to 2. 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 4. K Sang paid the balance of his debt.5% of this figure.pages 201-266 15/3/03 11:18 am Page 261 Appendix 1: Exercises T/16. Cleaver wrote off debts as follows: (1) The whole of the debt of £460. paid a contribution of 25%.At 31 December Year 3. (2) Another debtor. 261 . bad debts written off amounted to £560. was written off as irrecoverable on 15 August Year 4. In Year 5.500 and he had a provision for doubtful debts amounting to 2% of debtors. debtors amounted to £39. the balance was immediately written off as irrecoverable on 26 November Year 4. his trade debtors amounted to £37. a trader. who owed £220. which had been written off in Year 4.5 The accounting year of R Cleaver.

359 Cr 4.587 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 5.370 96 870 230 680 8 Paid in £ Balance £ 2.370 524 413 1. 262 .020 635 857 271 1. (b) Bring the Cash Book up to date by entering in it the items you consider appropriate from the bank statement.085 Cr 5.806 Cr 2.489 4.806 1.579 3.259 3. Balance the Cash Book and bring down the new balance at 1 October Year 5.455 Cr 5.592 Cr 2.020 857 1.pages 201-266 15/3/03 11:18 am Page 262 Appendix 1: Exercises T/17.814 Cr 4. (c) Prepare the bank reconciliation statement at 30 September Year 5.245 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 234 1.1 The following information is available in respect of A Wolfson.572 Cr 3.957 Cr 3. 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.

452 6.804 Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr 263 .250 650 2.660 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 13.701 60 Paid in £ Balance £ 3.240 1.200 3.660 1 May Balance b/d 3.368 400 1.180 Cr 1.pages 201-266 15/3/03 11:18 am Page 263 Appendix 1: Exercises T/17.925 1.240 Cr 2.730 3.360 2.534 3.130 3.484 5.925 245 360 72 1.164 5.610 1.060 260 1.610 1.368 1.820 7.409 5.250 2.2 The following is a copy of F Holme’s Cash Book for April Year 5: CASH BOOK Bank £ 3.864 7.576 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 23 25 27 29 30 30 Apr Apr Apr Apr Apr Apr Apr Apr Apr 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 £ 1.060 650 196 1.524 5.920 3.400 196 50 1.170 2.400 245 98 72 1.163 7.520 5.057 746 2.057 1.576 13.220 6.701 450 1.116 Cheque no 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 Bank £ 1.

213 Cr 5.389 Cr 4.446 5.758 5.296 5.121 150 462 517 324 138 74 Credits £ Balance £ 4.325 5. commencing with the bank statement balance of £7.705 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 .779 4.pages 201-266 15/3/03 11:18 am Page 264 Appendix 1: Exercises Required (a) Starting with the balance of £3.3 The following information relates to the business of M Rhodes: Bank statement at 30 June Year 5 Date 1 5 5 8 11 13 15 15 19 24 26 29 30 Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Details Balance 10659 10658 Counter credits Standing order – Ajax Insurance 10660 Counter credits 10661 Standing order – L White Direct debit – Town Council 10663 10665 Charges Debits £ 230 176 813 242 459 1.576.917 4. Balance the Cash Book and bring down the new balance on 1 May Year 5. (LCCIEB) T/17.619 Cr 4. bring F Holme’s Cash Book up to date by posting to it the items you consider appropriate from the bank statement.241 4.784 4.026 Cr 4. (b) Prepare a bank reconciliation statement at 30 April Year 5.804.

46 High Street. Ledbury.00 Drew cheque no 100567 payable to T Lucas for £95.3 (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 1.00 Drew cheque no 100569 payable to T Cavendish for £106.619 on 1 June Year 5. Thomas Snodden banks at Wilmster Bank.00 The bank made credit transfer payment to Spacewell Ltd for £105. he had a balance at the bank of £126. commencing with the bank statement balance of £4.00 Drew cheque no 100568 payable to N Swift for £73. On 1 September Year 2.705.00 Received cheque from L Morsewell for £235. 265 .50 This was debited to Snodden’s account on 21 September Received cheque from N Speedy for £165. Required (a) Write up the bank account in the books of M Rhodes starting with a debit balance of £4. In each instance above.00 (Dr).50 This was debited to Snodden’s account on 11 September The bank made a standing order payment to Moody Publishers for £162. Eastshire LE2 5SR – account number 96015. the bank credited Snodden’s account on the same day.4* You are required to prepare a bank statement from the details below.00 The bank made direct debit payment to Eastwise Electricity for £89. Entries should be in date order.00 Note Any cheques received by Thomas Snodden are paid into the bank on the day of receipt.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 The bank charged interest of £17.121 Note Cheques are paid into the bank on the day they are received.pages 201-266 15/3/03 11:18 am Page 265 Appendix 1: Exercises T/17. (LCCIEB) T/17. (b) Prepare a bank reconciliation statement at 30 June Year 5.00 This was debited to Snodden’s account on 16 September Received by credit transfer from K Hanson £214.

00 214.00 Cr 235.50 66.00 Cr 149.50 Credit transfer – K Hanson N Swift: 100568 73.00 Cr O/D Cr O/D Cr Cr 25 Sep 27 Sep 30 Sep Balance b/f R Grafton Standing order – Moody Publishers 162.00 N Speedy T Cavendish: 100569 106.50 231.50 139.50 Direct debit – Eastwise Electricity 89.00 266 .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 Particulars Paid out £ Paid in £ 57.00 74.00 O/D 166.pages 201-266 15/3/03 11:18 am Page 266 Appendix 1: Exercises T/17.00 Cr 69.00 125.00 165.00 L Morsewell Interest 17.00 Balance £ 126.00 Cr 21.00 Credit transfer – Spacewell Ltd 105.00 T Lucas: 100567 95.00 36.00 Cr 183.

The imprest is set at £100.34 21.30 and on that date the imprest was restored with cash drawn from the business bank account.82 7. You should use the following analysis columns: Travelling expenses Stationery Postage Purchases Cleaning expenses 267 .37 9.54 The imprest amount was restored on 1 July Year 7.38 4. She keeps a Petty Cash Book and uses the imprest system. On 1 June Year 7 the petty cash balance was £70.30 4.30 1.17 2. the following amounts were paid from petty cash: Details Year 7 2 Jun 4 Jun 5 Jun 6 Jun 10 Jun 14 Jun 18 Jun 22 Jun 25 Jun 29 Jun Travelling expenses Stationery Postage Cash purchases Postage Cleaning expenses Stationery Cash purchases Postage Travelling expenses Voucher no 76 77 78 79 80 81 82 82 83 84 Amount £ 12. During June Year 7.1 Lynn Parton owns a small business.23 1. Required Write up the Petty Cash Book from 1 June to 1 July Year 7.75 32.pages 267-326 15/3/03 11:18 am Page 267 Appendix 1: Exercises T/18.

pages 267-326 15/3/03 11:18 am Page 268 Appendix 1: Exercises T/18.The amount of the float is £300. Bring down the balance and show the entry to make up the float (from the bank) on 1 April Year 6. and show the balance at the end of the month. (ii) in which ledger is that account kept? 268 .40 27. the balance of petty cash in hand was £83.10 13.90 27. 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.70 22. A Lucan Postage Stationery Petrol F Coster – train fare Postage Paid to L Vine. 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.80 32.2 Peter Sharsby uses the petty cash imprest system. creditor Amount £ 15.20.50 51.40 19.60 4.80 83 84 85 86 87 88 89 90 91 92 93 Required (a) Enter the above transactions in the Petty Cash Book of Peter Sharsby for March Year 6. At 1 March Year 6.30 15.30 23.

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 3.00. On 1 July Year 3. 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 £ 17. 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 Drew cash from bank to restore the imprest Stationery Train fare reimbursed Postage Received by petty cashier from L Ward.40 11.pages 267-326 15/3/03 11:18 am Page 269 Appendix 1: Exercises T/18.20 28.30 1.60 on 6 July Year 3.60 7. and show the amount of cash drawn from the bank for the revised imprest on 1 August Year 3.00 69 70 71 72 73 74 75 76 77 78 27 Jul 30 Jul On 1 August Year 3 the float was increased to £300. 269 . (c) Show the Telephone Account in the General Ledger for July Year 3. the balance of petty cash brought forward was £83. bring down the balance of cash at that date.50 23. assuming that the Telephone Account had been paid by direct debit £97.00 31. The imprest amount was set at £250.70 12.3* Ellen Franks keeps her Petty Cash Book on the imprest system.00 14.90 35.30 7.

00 (c) Year 3 6 Jul GENERAL LEDGER Telephone Bank £ 97.00 167.30 17.00 26.00 31.90 72 73 74 75 76 77 78 35. 270 .30 1.90 35.60 31.70 23.00 31.00 Date Year 3 1 Jul 1 Jul 5 Jul 7 Jul 10 Jul 12 Jul 14 Jul 17 Jul 19 Jul 22 Jul 24 Jul 27 Jul 30 Jul 31 Jul 251.10 63.60 Year 3 12 Jul Petty cash £ 1.40 11.30 7.50 12.00 14.pages 267-326 15/3/03 11:18 am Page 270 Appendix 1: Exercises T/18.50 23.30 7.20 28.00 52. creditor Stationery Postage Balance c/d PETTY CASH BOOK Voucher no Total £ Travel expenses Postage £ £ Motor-v expenses Stationery Ledger £ £ £ 69 70 71 17.60 7.20 11.40 28.90 251.70 12.50 46.90 236.90 63.3/A (a) and (b) Receipts £ 83.80 31.90 Note The question does not require the Telephone Account to be balanced.10 1 Aug Balance b/d 1 Aug Bank Details Balance b/f Bank Stationery Train fare Postage Telephone – L Ward Motor-vehicle expenses Postage T Tarrant – travel Petrol K Tutt.60 7.00 14.00 188.

3 Aug Tuesday.pages 267-326 15/3/03 11:18 am Page 271 Appendix 1: Exercises T/18. (LCCIEB) 271 .22 1. The following transactions took place during the 2 weeks that followed: £ Monday.26 1. 13 Aug Friday. 31 July Year 6.15. 10 Aug Tuesday. 14 Aug 1.80 4. She restores the imprest amount to £85 on the first day of each week.41 12.70 9. The analysis columns in the Petty Cash Book are headed: Wages Postage Travelling Sundries Ledger At the close of business on Friday.94 3. 6 Aug Friday. 7 Aug Monday.88 2. 7 August might not have agreed with the Petty Cash Book balance.93 45.30 Required (a) Write up Carol Garner’s analysed Petty Cash Book for the 2-week period.00 1.94 48.21 2.00 3. Balance the Petty Cash Book and total the analysis columns at the end of each week. 11 Aug Thursday. 5 Aug Imprest restored Postage Window cleaning Creditor – R Jackson Postage Tea and coffee Travelling expenses Wages Postage Travelling expenses Imprest restored Travelling expenses Advertising Postage Travelling expenses Wages Postage Stationery Postage 3.22 Thursday. 4 Aug Wednesday.48 1. Carol balanced the Petty Cash Book and carried down the balance of £23. (b) Give 2 reasons why the cash in the petty cash box on Friday.4 Carol Garner maintains an analysed Petty Cash Book on the imprest system.75 4.The cash held in the petty cash box agreed with this balance.00 4.

pages 267-326 15/3/03 11:18 am Page 272 Appendix 1: Exercises T/19.100 was for an extension to the restaurant seating area. If an item is both capital and revenue expenditure. you should state the respective amounts. while the remainder was for painting and decorating the restaurant. or both. (4) Payment for carriage inwards in respect of foodstuffs for the kitchen.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. (3) Payment for advertising. of new ovens for the kitchen.400 for work done on the restaurant premises. £5. (2) Purchase of goods intended for resale in the normal course of business. Required State whether each of the 8 transactions is revenue expenditure. (5) Payment of £6. (6) Payment for heating and lighting. of a motor van for delivery of prepared foods to customers. (4) Purchase of materials to be used in building an extension to the firm’s business premises. 272 . capital expenditure. (1) Purchase of a motor van for use within the business. You only have to write one word. (7) Purchase.1 State whether each of the following is capital expenditure or revenue expenditure. (8) Payment for expenses of running the motor van. either ‘capital’ or ‘revenue’ in each case. in September Year 7. in July Year 7. (3) Purchase of petrol for the motor van. (2) Purchase. T/19. (5) Payment of insurance on the business premises.

pages 267-326

15/3/03

11:18 am

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

pages 267-326

15/3/03

11:18 am

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 From Mellow Brick Company: 40,000 high quality bricks Delivery charge 24,800 375 25,175

Invoice 2

From Premier Equipment Company: One earth moving machine 4 replacement tyres for existing machine

42,700 890 43,590

Invoice 3

From Excel Office Supplies: One photocopier for use within the firm 10 reams of copier paper

1,460 62 1,522

Invoice 4

From Arbor Construction Company: Building an extension to the cement storage area Repairs to fencing as instructed: Fencing panels and other materials Labour charges

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 £ Invoice 1 Invoice 2 Invoice 3 Invoice 4 Revenue expenditure £ Total expenditure £

(LCCIEB)

274

pages 267-326

15/3/03

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’.
Gross profit Effect on Net profit Balance sheet

Transaction (1) Purchase of motor vehicle for deliveries to customers – entered in Purchases Account (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 Balance sheet Fixed assets understated Capital understated No effect Fixed assets overstated Capital overstated Fixed assets overstated Capital overstated Fixed assets understated Capital understated Fixed assets understated Capital understated

(2) (3)

No effect No effect

No effect Overstated

(4)

No effect

Overstated

(5)

No effect

Understated

(6)

No effect

Understated

275

pages 267-326

15/3/03

11:18 am

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.
Items (1) (2) (3) (4) (5) (6) (7) (8) Trading Account Profit & Loss Account Balance sheet

T/19.6/A
Items (1) (2) (3) (4) (5) (6) (7) (8) £1,300 £5,100 Trading Account Profit & Loss Account Balance sheet

276

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 £ 73,200

3,860 49,750 53,610 4,200

49,410 23,790

4,400 18,900 860

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

pages 267-326

15/3/03

11:18 am

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 £ 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

278

Required (a) State what important distinction John Bradford has failed to make in his treatment of the motor-vehicle purchase.082 had not yet paid their accounts.173 2.092 2.373 838 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. Wages accrued due £286.pages 267-326 15/3/03 11:18 am Page 279 Appendix 1: Exercises T/19.664 14.200 16. 279 .076 588 Other information at 31 December Year 4: (1) (2) (3) (4) Customers invoiced for £1.8* John Bradford ended his first year of trading on 31 December Year 4. (b) Prepare a revised Trading and Profit & Loss Account for John Bradford for the year ended 31 December Year 4. Purchases that had cost £1.640 310 429 394 22. 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 £ 22.

664 1.092 2.pages 267-326 15/3/03 11:18 am Page 280 Appendix 1: Exercises T/19.746 22. 280 .700 Stock £8.095 5.000 Office equipment £11.800 Motor vehicle £9.443 11.1 After trading for some years.730 Debtors Liabilities Required (a) In the journal.303 838 1. records show her financial position to be as follows: Assets Premises £47.926 310 429 500 6. (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 £ 23.8/A (a) John Bradford has not made the distinction between capital and revenue expenditure.173 1.746** 14.650 D Crawle £570 F Munster £312 J Tester £423 Office cash £107 Creditors: A Farmer £318 T North £165 Bank overdraft £1. show the opening entries to record the assets and liabilities of Lorna Freele at 1 May Year 7. Name the division of the ledger in which each account appears.208 23.200 Fixtures and fittings £3. Lorna Freele decides to keep a double-entry set of books.082 T/20.730 12. At 1 May Year 7. (b) Post the figures for assets and liabilities as balances in appropriate ledger accounts.

120 140 29.pages 267-326 15/3/03 11:18 am Page 281 Appendix 1: Exercises T/20.600 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 30 Jun 15.300 3. rates. T/20.360 29.2* 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.2/A Walter Masson Journal Year 4 30 Jun Dr £ 4.300 1.360 (continued) 281 .120 30 Jun 410 410 30 Jun 29. showing transfers to the Trading Account.120 15.600 15.740 7. and insurance £ 4.200 Required Prepare closing entries for Walter Masson at 30 June Year 4. and Capital Account relating to the year ended 30 June Year 4.600 Cr £ 4. 30 Jun Yr 4 Office expenses Wages Rent.360 410 5. Profit & Loss Account.

670 14. and insurance Rent.200 3. and insurance for year ended 30 Jun Yr 4 Profit & loss Capital Net profit for year transferred 140 140 30 Jun 5.300 7.430 2. 282 .300 30 Jun 14.pages 267-326 15/3/03 11:18 am Page 282 Appendix 1: Exercises T/20.740 1. rates.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. rates.300 30 Jun 3.200 30 Jun 2.2/A (continued) 30 Jun Returns outwards Trading Returns outwards for year ended 30 Jun Yr 4 Stock Trading Value of stock at 30 Jun Yr 4 Trading Profit & loss Gross profit for the year Profit & loss Office expenses Office expenses for year ended 30 Jun Yr 4 Profit & loss Wages Wages for year ended 30 Jun Yr 4 Profit & loss Rent.670 30 Jun 1.740 30 Jun 7.300 5.

(b) Prepare the Trading Account for the year ended 31 August Year 5.pages 267-326 15/3/03 11:18 am Page 283 Appendix 1: Exercises T/20. B C Holt’s books included the following balances: £ Stock at 1 Sep Yr 4 Purchases Sales Purchases returns Sales returns Carriage inwards 9. to transfer the above balances to the Trading Account for the year ended 31 August Year 5. £10.380.760 B C Holt valued his stock at cost.960 90. The closing stock valuation should also be journalized.440 1. at 31 August Year 5. (LCCIEB) 283 . without narrations.580 58. Required In the books of B C Holt: (a) Prepare journal entries.3 At 31 August Year 5. the end of his financial year.030 2.105 1.

in the books of C Stanton. He was allowed £2. (LCCIEB) 284 .600 from the Smart Vehicle Company. (4) On 19 June. Required Prepare the journal entries to record the above transactions and adjustments.4* C Stanton’s financial year ends on 30 June. (2) On 1 June. (3) On 11 June.685 on credit from E Byte & Son.T Wilson paid £65 by cheque as the only payment on his debt of £260.200 for his old car and paid the balance by cheque. for £9. Stanton paid £360 by cheque for car insurance to 31 May Year 8. Note Narrations are not required. he purchased a new computer for £2. Stanton decided to make adjustments for the following matters. (5) During the month of June. On 30 June Year 7.pages 267-326 15/3/03 11:18 am Page 284 Appendix 1: Exercises T/20. including bank. Stanton decided to write off the balance as a bad debt. the following transactions took place during June Year 7: (1) On 1 June. Stanton had taken goods costing £419 for his own use. for use in the business. (b) Bank charges amounting to £71 had not been entered in the books. before preparing the final accounts: (a) Car insurance premium is prepaid. (c) Telephone charges of £124 for the month of June had not been paid. Stanton purchased a new car.

200 7.685 65 195 260 419 419 330 330 71 71 124 124 Motor car Motor-car disposal Bank Insurance Bank Office machinery E Byte & Son Bank Bad debts T Wilson Drawings Purchases Car insurance (Year 7/8) Car insurance (Year 6/7) Bank charges Bank Telephone (Year 6/7) Telephone (Year 7/8) 1 Jun 11 Jun 19 Jun 30 Jun 30 Jun 30 Jun 30 Jun 285 .pages 267-326 15/3/03 11:18 am Page 285 Appendix 1: Exercises T/20.600 Cr £ 2.685 2.4/A C Stanton Journal Year 7 1 Jun Dr £ 9.400 360 360 2.

paid £350 as a first and final instalment on a debt of £1. a debtor.pages 267-326 15/3/03 11:18 am Page 286 Appendix 1: Exercises T/20.200. (4) On 15 October. in respect of the financial year ended 31 December Year 5: (1) On 8 January. for £10. Required Prepare journal entries to record the above items.000 by cheque. Grant took from stock.400. T Hardwicke. the balance of the purchase being on credit. goods which had been purchased within the current trading year for £135. (2) On 12 March. a trader. according to invoice number K/6807. Grant purchased motor van number 5. Grant sold motor van number 3 for £4.000. for his own private use.600. Grant’s debtors totalled £18.5* The following information relates to James Grant. He paid a deposit of £2. (3) On 20 June. which was paid by cheque. It had been purchased in Year 2 for £8. He decided to adjust the provision for doubtful debts of £650 to 4% of total debtors. (LCCIEB) 286 .The balance of the debt was written off as irrecoverable.800. including narrations. The Provision for Depreciation on the motor van Number 3 Account showed a balance of £5.800 from Roundstar Garages. (5) On 31 December.

287 . Cheque received £4.050 1. balance of debt written off 350 1.pages 267-326 15/3/03 11:18 am Page 287 Appendix 1: Exercises T/20.200 4.800 Cr £ 2. Other forms of layout may be acceptable.800 5. previously purchased in Year 2 for £8.400 (3) 20 Jun Drawings Purchases Goods taken for private use 135 135 (4) 15 Oct Disposal **Motor van Provision for depreciation on motor van Disposal Bank Disposal Disposal Profit & loss Sale of motor van no 3.800 8. ref invoice no K/7807.200 5.000 8.5/A James Grant Journal Year 5 8 Jan Motor vehicles Bank Roundstar Garages Purchase of motor van no 5.800.000 with balance on credit Dr £ 10.600 94 94 **This journal entry has been set out in this way to show the different elements in the disposal.800 (1) (2) 12 Mar Bank Bad debts T Hardwicke Payment of 25% of amount due.000 400 400 (5) 31 Dec Pofit & loss Provision for doubtful debts Increase in provision to 4% of total debtors of £18. Payment by cheque £2.000 4.000 8.

(6) A bill for travelling expenses had been entered in the Telephone Account. the following errors occurred in the books of Ching Wong: (1) Both the Office Expenses Account and Sales Account were overcast by £100. for use in the business. was debited to the Purchases Account.1 In the year ended 31 December Year 9. (4) A purchase of goods from T Lister was posted to T Mister’s Account. Required Prepare a statement as follows and. against each item. (3) A sale of goods to B Winlock for £346 was entered in the Sales Day Book as £316. (5) A bill for cleaning had not been entered in the books. state the type of error. eg ‘error of omission’: Type of error (1) (2) (3) (4) (5) (6) 288 . (2) The purchase of equipment.pages 267-326 15/3/03 11:18 am Page 288 Appendix 1: Exercises T/21.

289 . by how much? T/21.pages 267-326 15/3/03 11:18 am Page 289 Appendix 1: Exercises T/21. if so.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.360 18.360 18.500 20.500 Year 5 31 Dec Balance c/d £ 20.500 Year 5 31 Dec Balance c/d £ 18. (2) The proprietor of a business had taken for his own use goods purchased for resale.050 20.2 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 £ 16.500 Balance b/d 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.This had not been recorded in the books. (4) A payment for electricity had been posted from the Cash Book to the debit of the Rent Payable Account.220 2.140 18.450 1.360 Fixed Assets (at cost) Year 5 31 Dec Balance b/d 31 Dec Bank (goods for resale) Year 6 1 Jan £ 19. (3) An invoice for £271 for goods sold on credit to N Pinter had been entered in the books as £217.360 Balance b/d 20.

4 The following trial balance was prepared incorrectly for K Masters at 31 December Year 8.566 130.pages 267-326 15/3/03 11:18 am Page 290 Appendix 1: Exercises T/21.054 176. with some balances entered in the wrong column: Dr £ 28.600 560 687 6.500 19.600 137.000 369.918 183. (LCCIEB) 290 .800 18.084 22.886 754 1.391 395.150 Cr £ 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 317 Required Prepare a correct trial balance for K Masters at 31 December Year 8.315 4.217 11.584 14.150 765 930 580 4.

(LCCIEB) 291 .The following errors were later discovered: (1) The Purchases Day Book total of £5. (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. you should state ‘no effect’.5 Laurence Grant failed to agree his trial balance at 30 June Year 5.You should set out your answer as follows: Cause debit total to exceed credit total by £ (1) (2) (3) (4) (5) Cause credit total to exceed debit total by £ Note If there is no effect on the trial balance.pages 267-326 15/3/03 11:18 am Page 291 Appendix 1: Exercises T/21.960 had been posted to the Purchases Account in the General Ledger as £5.690. (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. (4) Discount allowed of £157 had been credited to the Discount Received Account.

had been entered in the Cash Book and posted to the Wages Account.pages 267-326 15/3/03 11:18 am Page 292 Appendix 1: Exercises T/22. (5) The total of the stationery analysis column of the Petty Cash Book for February Year 8. was posted to the credit side of the Discount Allowed Account.2 The following errors occurred in the books of Eric Sawyer. £60. for her personal use. Required Show the correction of each of the above errors by means of a journal entry. 292 .50. (4) The total of one month’s discount-received column in the Cash Book. T/22. but no entry had yet been made in the books. Required Prepare journal entries. was posted to the Postages Account.1 Lynn Webster is a sole trader whose financial year ends on 30 September. 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. necessary to deal with the errors in (1). Your entries should include narrations. a sole trader. (2) A payment of £390 for advertising had been posted to the Travelling Expenses Account. (2). bought during the year ended 30 September Year 5 for £186. (3) The payment of a subscription to a trade association. £1. (3) Lynn Webster had taken goods. in one accounting period: (1) The cost for petrol of £26 was wrongly debited to the Motor Vehicles Account. At 30 September Year 5. (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. (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. was wrongly debited to the Purchases Account. (4).560 in cash. including narrations.500 had been debited to Fixtures and Fittings. (5) The payment of wages. (6) A purchase of a new motor van for £10. which was £54. to Webster’s employees for building an extension to the firm’s offices. (5) and the omission in (3). £13.

(6) A cash sale of £300 had been completely omitted from the books. been wrongly posted as a cash purchase.000 Cr £ 380 C Yates C Bates Sales No entry Cash/bank Purchases Rent No entry Telephone Electricity Cash/bank Sales Motor van Purchases 293 . (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. had been posted to another debtor’s account in the name of C Yates.3* Henry James. a sole trader. Required Prepare the necessary journal entries on 30 September Year 6 to correct the above errors and omission.000 had been posted in error to the Purchases Account. It did not agree. T/22. (5) A telephone bill paid by cheque. he discovered the following: (1) A payment of £380 from a debtor. it had also. On checking the entries in his books. extracted a trial balance at 30 September Year 6.000 7. amounting to £230. (7) The purchase of a motor van costing £7. had been posted in error to the Electricity Account.000 – 100 100 500 – 230 230 300 300 7. (3) A credit purchase of £100 had been correctly entered in the Purchases Day Book for the month of September.680 but this had been posted in the Sales Account as £6.3/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 Dr £ 380 1. C Bates.680.pages 267-326 15/3/03 11:18 am Page 293 Appendix 1: Exercises T/22. (2) The total of credit sales for March appeared in the Sales Day Book as £5. Narrations are not required. however.

580 62.200 24.730 less Stock at 31 Dec Yr 5 Gross profit c/d Discount allowed Motor-vehicle expenses Wages Insurance Office expenses Provision for depreciation: Office equipment 1.150 77.400 670 137.370 Gross profit b/d Discount received £ 12.500 Net profit 137.pages 267-326 15/3/03 11:18 am Page 294 Appendix 1: Exercises T/22.860 137.450 980 76.870 61.200 75.470 89.860 720 9.070 13.620 15.850 2.300 1.120 Motor vehicles 8.600 62.730 640 8.4* 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 76.300 1.580 294 .600 Sales less Returns inwards £ 138.730 61.

not yet paid. £350.200 3. show for each of the 5 errors/omissions the effect upon gross profit. had wrongly been charged to Year 5.000 5.050 20.200 6. (5) The provision for depreciation of motor vehicles had been wrongly calculated. net profit and the balance sheet of: (i) the error/omission (ii) correcting the error/omission.400 Accumulated depreciation £ – 1.800 85. (2) A bill. (4) £300 paid in wages had been posted wrongly to the Office Expenses Account.950 70.700.850 14. at 31 December Year 5. It should have been valued at £12.600 34.920 21. for W Lennon.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. 295 .920 15.000 3. £100.550 4.400 87.870 Fixed Assets Premises Office equipment Motor vehicles Current Assets Stock Debtors Cash and bank less Amounts due within 1 year Creditors Financed by: Capital – balance at 1 Jan Yr 5 add Net profit less Drawings 83.pages 267-326 15/3/03 11:18 am Page 295 Appendix 1: Exercises Balance sheet at 31 December Year 5 Cost £ 45.900. (3) No adjustment had been made for prepayment of insurance.300 1.680 12. for carriage inwards.530 13.100 16. It should have been £8.600 12.320 Net book value £ 45.450 87. the revised Trading and Profit & Loss Account and balance sheet after the necessary adjustments have been made. (b) Show. for Year 6. Required (a) In a statement.

4/A: part (a) only Effect of error/omission Gross profit overstated by £300 Net profit overstated by £300 Balance sheet: Stock overstated by Capital overstated £300 Gross profit and net profit understated by £100 Balance sheet: Sundry creditors by overstated £100 Capital understated Net profit understated by £350 Balance sheet: Current assets by understated £350 Capital understated    Effect of correcting for the error/omission Gross profit reduced by £300 Net profit reduced by £300 Balance sheet: Stock reduced by Capital reduced £300 Gross profit and net profit both increased by £100 Balance sheet: Sundry creditors by reduced £100 Capital increased Net profit increased by £350 Balance sheet: Current assets by increased £350 Capital increased       (1) (2) (3) (5) 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. 296       Net profit overstated by £200 Balance sheet: Fixed assets overstated Capital overstated    (4) Office expenses overstated Wages understated No further effects by £350 Reduced office expenses Increased wages No further effects Net profit reduced by £200 Balance sheet: Fixed assets reduced Capital reduced             by £300 by £200 . They are both included in this instance to emphasize the difference in the wording of the two parts of the answer to (a).pages 267-326 15/3/03 11:18 am Page 296 Appendix 1: Exercises T/22. Incorrect or unsuitable wording of answers in this topic can result in a significant loss of marks.

320 from a debtor.5 Helen Sagan. This incorrect amount had also been entered into the expense account. J Wilson. (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. Required (a) Prepare journal entries to correct the errors. a sole trader. and enter the effect on profit of each of the errors. (2) A receipt of £2. (b) Prepare a statement. (3) A purchase. If there is no effect enter a tick ( ) in the right hand column. (5) A cheque payment of £2. had been posted to the account of S Williamson. on credit.300 had been debited to the Machine Repair Account. which did not agree. as shown below. including the amount.pages 267-326 15/3/03 11:18 am Page 297 Appendix 1: Exercises T/22. prepared a trial balance at 30 September Year 5. (6) An invoice from P Rees for purchases of £240 had been omitted from the ledger.The correct entry had been made in the Purchases Account. Depreciation is not charged on assets in the year they are purchased.000 for rent had been entered in the Cash Book as £200. of a new machine for £5.You have found the following errors: (1) A cash payment for material purchases for £726 had been entered in the Cash Book as £762. Narrations are not required. Effect on profit Error number (1) (2) (3) (4) (5) (6) Overstated £ Understated £ No effect 297 .

670. you should enter a tick ( ) in the column headed ‘no effect’. Required Prepare a statement as shown below and against each of the items (1) – (5) enter the effect. after the necessary adjustments have been made.6 This exercise refers to the errors set out in T/22.2. with the amounts. If there is no effect on the net profit. You should set out your answer as follows: Increase of net profit £ (1) (2) (3) (4) (5) (6) Reduction of net profit £ Note Enter each amount in the appropriate column. Effect of corrections on net profit Increase £ (1) (2) (3) (4) (5) Reduce £ No effect Underneath your statement. you should state the amount of the revised net profit. Required State the effect of the correction of each of these errors on the draft net profit of Sawyer. you should state ‘no effect’.pages 267-326 15/3/03 11:18 am Page 298 Appendix 1: Exercises T/22. If there is no effect. Lynn Webster calculated a provisional profit of £5.7 This exercise refers to T/22. on the provisional profit of correcting for the error/omission. Despite having failed to agree her trial balance. (LCCIEB) T/22.1. 298 .

300 370.930 556.900 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 £17.360 3.000 1.000 556.000 12.000 28.200 23.600 600 27.000 19.400.300 10.pages 267-326 15/3/03 11:18 am Page 299 Appendix 1: Exercises T/23.000 263. (5) The rates and insurances were prepaid by £120.420 12. (4) Motor-vehicle running expenses at £510 and lighting and heating at £420 were accrued.400 108.700 2. 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 6.000 82. prepared the following trial balance from her books at 30 June Year 6: Dr £ 80.900 Cr £ 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 7. (LCCIEB) 299 .500 3.300 650 35. a sole trader.400 15.000 3.720 420 3. (3) The provision for doubtful debts is to be set at 2% of the debtors.1* J Salmon.

100 366.900 17.400 366.600 112.700 300 .630 113.600 Gross profit b/d 28.100 1.500 7.200 Discounts allowed Bad debts Provision for doubtful debts Rent Motor-vehicle running expenses (3.400 254.930 + 420) Net profit 263.350 46.300 650 100 12.600 366.600 113.000 Fixtures and fittings 8.300 256.300 4.000 3.420 .pages 267-326 15/3/03 11:18 am Page 300 Appendix 1: Exercises T/23.300 12.700 Discounts received £ 15.360 + 510) Rates and insurances (3.700 Sales less Sales returns £ 370.200 271.500 112.1/A J Salmon Trading and Profit & Loss Account for the year ended 30 June Year 6 £ Stock at 1 Jul Yr 6 Purchases less Purchases returns less Stock at 30 June Yr 6 Cost of goods sold Gross profit c/d Depreciation: Motor vehicles 20.200 2.870 3.120) Salaries Lighting and heating (3.000 3.

430 108.330 34.630 126.000 27.000 54.630 28.pages 267-326 15/3/03 11:18 am Page 301 Appendix 1: Exercises Balance sheet at 30 June Year 6 Accumulated depreciation £ 43.720 420 62.300 120 10.800 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 Financed by: Capital add Net profit less Drawings Cost £ 80.000 162.800 91.430 301 .400 35.000 46.960 Net book value £ 37.000 82.000 27.200 18.400 930 28.200 17.000 700 34.200 70.430 126.

000 75.080 2.140 13.580 Cr £ 210 850 34.820 14.360 1.860 43.460 240 Depreciation is provided as follows: Fixtures and fittings – 10% per annum on cost Motor vehicles – 20% per annum on cost Provision for doubtful debts is to be adjusted to 4% of debtors (5) Required For Hilda Braquette.800 3.300 24.180 10.260 6.920 7.400 650 1.200 161. (LCCIEB) 302 . prepare: (a) the Trading and Profit & Loss Account for the year ended 31 October Year 5 (b) a balance sheet at 31 October Year 5.972 390 1.340 215.820 2.200 5.260 Additional information at 31 October Year 5: £ (1) (2) (3) Stock at cost Insurance prepaid Accrued due: Light and heat Office expenses (4) 80 140 220 £ 8.200 148 10.000 2.2 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 6.pages 267-326 15/3/03 11:18 am Page 302 Appendix 1: Exercises T/23.100 215.

A creditor had not yet presented a cheque drawn by Lippis for £79. a sole trader. 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 12.240 167. (5) Depreciation was to be provided on fixtures and fittings at 10% per annum on cost.650 93.140. Unusually. Prepayment at 31 March Year 12. Accruals at 31 March Year 12: wages £230.800 8. and it was agreed that the debtor balance should be a contra against the creditor balance.093 8.935. 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.pages 267-326 15/3/03 11:18 am Page 303 Appendix 1: Exercises T/23. Insurances £46. (LCCIEB) 303 (1) (2) (3) (4) . and the bank applied bank charges amounting to £32. amounting to £1. (6) Archway Supplies was Lippis’ main supplier.201 Cr £ 64.096 47 1. £7. Archway purchased goods from Lippis.310 285 12.3 The following trial balance was extracted from the ledger of P Lippis. Lippis received a bank statement.092 368 459 7.210 4. showing that there was a balance in his favour on 31 March Year 12.010 180 370 2.942 110 1. heat and light £98.201 The following additional information is to be taken into account: Stock valued at cost on 31 March Year 12.540 480 1.700 2.000 39.420 167.

4 At 31 December Year 3.00 4. 304 .00 4.00 7.00 Selling price £ 3.00 1. Hilda Braquette produced the following list of stock items and asked for your help: Item (i) (ii) (iii) (iv) (v) (vi) (vii) Quantity 200 500 1.00 2.50 1.pages 267-326 15/3/03 11:18 am Page 304 Appendix 1: Exercises T/23.50 6.00 5.50 3.00 3.200 50 75 350 450 Original cost £ 2. the end of her first year of trading.50 2.00 20 damaged – saleable at half price Comments Stock value £ 20 broken – to be thrown away 40 damaged – saleable at half price old stock Required Calculate the stock valuation of each item and total to show the value of Hilda Braquette’s closing stock at 31 December Year 3.00 3.

5 The following balances were included in the trial balance of James Hanson at 31 March Year 4: Debit £ 18.382. showing any necessary adjustments in respect of the 3 items of stock above. James Hanson counted and valued his stock in hand at cost. 305 .382. starting with the stock value of £1. This included the following 3 items of stock: Cost price £ 120 72 80 Net realizable value £ 140 60 45 Item 1 Item 2 Item 3 Required (a) Prepare a statement.146 Credit £ 29.410 194 Purchases and sales Returns Stock at 1 Apr Yr 3 At 31 March Year 4.pages 267-326 15/3/03 11:18 am Page 305 Appendix 1: Exercises T/23. £1.620 238 1. (b) Prepare a Trading Account for James Hanson for the year ended 31 March Year 4. to show a new stock valuation at 31 March Year 4.

(4) Lang took goods that had cost £195 for his own private use. (2) He returned goods to suppliers that had been invoiced to him at £273.300.320.220. a trader. (b) Calculate the effect of the adjustment of the value of stock on the amount of the gross profit £94. On 31 March Year 4. (c) Prepare the Stock Account for the years ended 31 March Years 5 and 6 respectively. the following took place: (1) Lang bought goods to a purchase invoice value of £740. Required (a) Prepare a statement adjusting the value of stock at 31 March Year 5 for entry into the Stock Account at cost price.6 The financial year of F Lang.360. he provisionally valued his stock at £14. Between 18 March Year 5 and the end of that financial year. (LCCIEB) 306 .800 for the year ended 31 March Year 5. the value of his stock at cost was £12. On 17 March Year 5.pages 267-326 15/3/03 11:18 am Page 306 Appendix 1: Exercises T/23. F Lang sells goods at a mark-up of 33 1/3 % on cost price. (3) He sold goods to a selling value of £1. assuming that the value of stock at 31 March Year 6 was £15. ends on 31 March.

Note A balance sheet is not required. Required Prepare the Income & Expenditure Account in respect of the Southern Jazz Club for the year ended 31 December Year 19. 307 . (2) On 1 January Year 19.860 3.pages 267-326 15/3/03 11:18 am Page 307 Appendix 1: Exercises T/24.480 3.100 150 1. It was decided that the equipment owned at 31 December Year 19 should be depreciated by £700.730 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 £ 2.182 11.970 868 1.200 2.600. 1 Jan Yr 19 Members’ subscriptions Sale of Festival tickets Sale of food and drink 3.950 11.840 2.520 1.1 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. the Club owned equipment worth £2.950 The following additional information was available: (1) Members’ subscriptions in arrears at 31 December Year 19 amounted to £50.

272 500 3.900 17.120 5.389 17.2* 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. for the Walton Cricket Club.pages 267-326 15/3/03 11:18 am Page 308 Appendix 1: Exercises T/24. (LCCIEB) 308 .600 215 468 366 450 1.460 4. for the year ended 31 December Year 8: (a) the Refreshments Account (b) the Income & Expenditure Account.200 650 1.920 8.000 5.000 2.180 1.600 50 At 31 December Year 8 £ 560 630 180 50 7.254 80 Stock of refreshments Creditors for refreshments Subscriptions in arrears Subscriptions in advance Pavilion Sports equipment Insurance prepaid Required Prepare.000 7.900 The following information was also available: At 31 December Year 7 £ 340 590 – – 8.010 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 £ 3.

380 560 2.600 780 5.pages 267-326 15/3/03 11:18 am Page 309 Appendix 1: Exercises T/24.200 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 .200 5. excess of income over expenditure £ 4.180 215 468 366 1.190 510 650 10.010 500 1.000 Equipment 806 Surplus.300 less In advance 50 8.2/A Walton Cricket Club Refreshments Account for the year ended 31 December Year 8 £ Stock at 1 Jan Yr 8 Purchases (3.806 1.200 Sales £ 5.120 add Arrears 180 8.190 309 .590 + 630) less Stock at 31 Dec Yr 8 Cost of sales Wages Profit on trading 340 3.272 420 Income £ £ Profit from refreshments 780 Subscriptions 8.000 .820 1.80) Depreciation: Pavilion 1.250 Profit on raffles: Sale of tickets less Cost of prizes Hire of ground 1.040 3.463 10.

020 35 30 6.020 4. for the Belvedere Sports Club.810 12.160 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 £ 2.400 1. for the year ended 30 September Year 11: (a) a Refreshments Trading Account (b) an Income & Expenditure Account.150 12.500 30 September Year 11 £ 60 170 1.460 250 165 235 430 390 1.710 2. Note A balance sheet is not required.160 810 4.pages 267-326 15/3/03 11:18 am Page 310 Appendix 1: Exercises T/24.000 Subscriptions in advance Subscriptions in arrears Stock of refreshments Insurance paid in advance Light and heat accrued due Equipment Required Prepare.310 50 54 8. 310 .220 80 2.150 Additional information: 30 September Year 10 £ 90 100 1.3* 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.

220 80 900 1.50) Printing and stationery Light and heat (235 .020 Income & Expenditure Account for the year ended 30 September Year 11 Expenditure Insurance (250 + 35 .260 311 .020 4.260** 810 390 420 4.170 1.820 160 4.3/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 Sales £ 4.020 2.420 less In arrears 30 Sep Yr 10 In advance 30 Sep Yr 11 100 60 Income Profit on refreshments Subscriptions Profit from raffle: Sale of tickets less Cost of prizes £ £ 140 4.pages 267-326 15/3/03 11:18 am Page 311 Appendix 1: Exercises T/24.710 140 4.460 3.310 2.820 £ ** Subscriptions: add In advance 30 Sep Yr 10 In arrears 30 Sep Yr 11 90 170 £ 4.531 4.480 1.30 + 54) Repairs to equipment Wages – ground staff Postage Depreciation of equipment Surplus of income over expenditure £ 235 165 259 430 1.160 260 4.

600 Bank +3.1 (1) (2) (3) (4) (5) (6) 2.145 Capital £16.100 Debited Purchases Cash Equipment T Ball D Trill Office furniture Debited A Darby Returns inwards Bank T Zuck Creditor.T Walls -1.2 (i) Computer -3.600 Assets £23.500 Bank +965 F Wiles -965 Postage +11 Cash -11 Bank -617 T Gates -617 1.500 Bank -1.045 Other liabilities £6.2 (1) (2) (3) (4) (5) (6) 3.3 1.pages 267-326 15/3/03 11:18 am Page 312 Appendix 2: Summarized answers to selected exercises 1.1 (1) (2) (3) (4) (5) (6) (7) Goods +350 Bank -350 Cash +290 Goods -290 Office furniture +318 D Jackson.600 Debtor +3.1 (1) (2) (3) (4) (5) (6) 312 .045 Other liabilities £6.T Doyle Credited Sales A Brittle A Darby Returns outwards Bank A Darby Credited Cash Bank Office Services Ltd Cash Sales F Tracey 1.600 (iii) Computer -3.5 2. Creditor +318 Loan.470 (i) 31 Oct Yr 3: Assets £22.600 Bank +2.660 Capital £16.600 (ii) Computer -3.000 Debtor +1.860 (ii) 30 Nov Yr 3: Assets £22. F Lane Returns inwards Debited Purchases Creditor Office equipment Rent Cash Bank Credited T Ball Sales Bank Returns outwards Sales Creditor.190 Other liabilities £7.905 Capital £16.

215 4.1 (a) Cr balance £1.270 Net profit £23.1 7.4 7.170 Gross profit £82.259 Discount totals: Discount allowed Discount received Dr £80 Cr £71 313 .1 Balances at 31 Mar Yr 5: Cash £117 Bank £978 (Dr) Discount Allowed Account Discount Received Account Dr £18 Cr £16 10.3 5.210 Gross profit £27.780 Gross profit £17.6 Trial balance totals £31.350 Balance sheet: Net profit £5.900 Net profit £7.2 Multiple choice: (1) (b) and (d) (2) (a) and (c) (3) (b) and (d) 10.000 Creditors 16.500 Current assets 40.090 Net profit £6.1 (b) Debit balance – on debtor’s account. 894 Amounts due in more than 1 year 26.pages 267-326 15/3/03 11:18 am Page 313 Appendix 2: Summarized answers 3.000 9.250 Net profit £6. representing an asset 4.2 (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 4.800 £ Fixed assets 162.3 7.850 Net profit £14.180 Gross profit £18.260 Gross profit £18.6 5.2 Balances at 31 May Yr 6: Cash £423 Bank £8.4 7.030 Gross profit £85.394 Capital 161.

436 £64 £1.3 Balances of Cash Book before adjustment: Cash £99 Bank £383 (Dr) Balances after adjustment: Cash £99 Bank £200 (Dr) 10. 12.510 Cr 262 Cr 700 Cr 4.133 11.336 314 .4 Balances at 31 Jul Yr 2: Cash £263 Bank £2.155 14.930 11.pages 267-326 15/3/03 11:18 am Page 314 Appendix 2: Summarized answers 10.5 (a) Purchases Day Book total £15.3 (a) Purchases Day Book total Sales Day Book total Returns Outwards Day Book total Returns Inwards Day Book total 12.1 (a) Rates Telephone Insurance Rent receivable Wages To P/L 31 Dec Yr 5 1.2 (a) Sales Day Book total for September Year 6 £1.1 (a) (i) Sales Day Book total (ii) Returns inwards Day Book total 12.4 (a) Purchases Day Book total Purchases Returns Day Book total Sales Day Book total (b) To encourage prompt payment.3 (a) Purchases Day Book total for October Year 8 £1.672 11.470 Cr Balance b/d 1 Jan Yr 6 450 Dr 47 Cr 60 Dr 160 Dr 840 Cr £988 £1.2 (a) (i) Purchases Day Book total £1.000 Dr 46.305 £152 12.349 £127 £174 £1.1 (a) Sales Day Book total for August Year 6 £2.141 (ii) Returns Outwards Day Book total £109 12.4 (a) Bank balance at 31 May Yr 11: £1.129 Discount totals: Dr Cr Discount allowed Discount received £60 £30 £1.198 (Dr) (b) Discount Allowed Account Dr £25 Discount Received Account Cr £47 Both recorded in the General (Nominal) Ledger 11.

4 (a) Insurance Stationery Telephone Rent payable Rent receivable 14.700 6.1 Advertising Insurance Office cleaning Rent receivable To P/L 31 Dec Yr 5 620 Cr 780 Cr 572 Cr 3.100 Dr 615 Cr { Depreciation charge Net book value (a) £2.400 Cr 2.950 Cr 65.800 Dr 1.300 £6.640 Cr 2.2 (a) (i) Rent (ii) Commission receivable (iii) Telephone 14.050 300 14.240 315 .700 Dr 300 Cr L Reinholdt Balance sheet (extract) at 31 December Year 10 £ £ Amounts due within 1 year (current liabilities) Telephone – accrual Current Assets Rent in advance Commission due 1.5 (a) (i) (ii) (iii) (iv) 14.pages 267-326 15/3/03 11:18 am Page 315 Appendix 2: Summarized answers 14.220 Dr To P/L 30 Jun Yr 9 2.6 (a) Rent receivable Rates Advertising Printing/stationery 15.350 Dr 4.350 4.010 Cr Balance b/d 1 Jan Yr 11 1.100 (b) £4.300 Cr 2.1 (b) M Paine Balance sheet (extract) at 31 December Year 5 £ £ Amounts due within 1 year (current liabilities) Accruals: Telephone Wages Current Assets Prepayments: Rates Insurance Rent receivable 450 60 160 670 47 840 887 14.630 Dr 3.2 (b) To P/L 31 Dec Yr 10 4.185 Cr { Balance b/d 1 Jan Yr 6 95 Dr 160 Dr 45 Cr 56 Cr 740 Dr 150 Dr Balance b/d 1 Jul Yr 5 190 Cr 50 Dr 280 Cr 190 Cr Balance b/d 1 Jul Yr 9 740 Cr 840 Dr 580 Dr 3.570 Cr 900 Dr To P/L 30 Jun Yr 5 360 Cr 560 Cr 1.160 £8.

pages 267-326 15/3/03 11:18 am Page 316 Appendix 2: Summarized answers 15.598 Cr 31 Dec Yr 3 1.1.800 Cr (iv) Provision for depreciation of motor vehicle £7.120 Cr 15.875 Cr (2) Provision for depreciation of motor vehicle £12.798 Cr 16.816 Cr 15.5 Balances at 1 Jan Yr 6: (1) Provision for depreciation of fixtures and fittings £1.4 (a) Provision for doubtful debts: To P/L Account 31 Dec Yr 8 £152 Cr 31 Dec Yr 9 764 Cr 31 Dec Yr 10 336 Dr £ 240 240 240 To P/L Account 31 Dec Yr 4 £275 Cr 31 Dec Yr 5 245 Dr Balance 1 Jan Yr 6 £780 Cr (b) Journal Debtor Bad debts recovered Cash/bank Debtor £ 240 16.2 Balances at 1 Jan Yr 8: (ii) Provision for depreciation of motor van (iv) Provision for depreciation of fixtures and fittings £8.2 (a) (i) (2) Provision for doubtful debts: To P/L Account 31 Dec Yr 1 £1.356 Cr £3.440 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 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 £3.1 (a) (ii) Provision for doubtful debts: 16.410 Cr 31 Dec Yr 2 1.210 Dr Balance 1.5 (iv) Provision for doubtful debts: 316 .4 Balances at 1 Jan Yr 8: (ii) Provision for depreciation of computer equipment £4.386 16.900 Cr £1.4 £1.

966 Dr 17. incorrect amount paid out.73 Travel £3.793 Dr 18. 19.00 Travelling expenses £46.47 Cleaning expenses £7.15 Sundries £6.20 18.00 Travel £6.40 Balance b/d 1 Apr Yr 6 £46.48 Week 2: Total outlay £74. ie without a voucher.2 (1) Revenue (2) Capital (3) Revenue (4) Revenue (5) £5.1 (1) Capital (2) Revenue (3) Revenue (4) Capital (5) Revenue 19.48 (b) Any 2 from: ● ● ● ● theft from box.57 Postage £5.60 Postage £18.20 Stationery £31.1 Total outlay £97.84 Stationery £13.00 Postage £8.80 Motor-vehicle expenses £97.3 (1) (2) (3) (4) (5) JK Distributors Revenue Capital Capital Revenue Capital Jameson Partners Capital Capital Revenue Revenue Revenue 317 .48 Wages £45.56 Wages £48.1 Cash Book (bank) balance: before adjustment £4.4 (a) Week 1: Total outlay £77.3 Cash Book (bank) balance after adjustment £3.300 Revenue (6) Revenue (7) Capital (8) Revenue 19.20 Travelling expenses £16.80 Reimbursement £97.20 Reimbursement £253.75 Reimbursement £77.60 Ledger £60.pages 267-326 15/3/03 11:18 am Page 317 Appendix 2: Summarized answers 17.95 Purchases £53.37 Balance b/d 1 Jul Yr 7 £2. cash in box incorrectly counted.2 (a) Cash Book (bank) balance after adjustment £3.00 Postage £10. amount paid out without being recorded.2 (a) Total outlay £253.80 (b) (i) To debit of Motor Vehicle Expenses Account (ii) General (Nominal) Ledger 18.549 Dr after adjustment £3.100 Capital £1.58 Ledger £9.632 Dr 17.35 Sundries £14.

590 1.460 12.522 14.4 Capital expenditure £ Invoice Invoice Invoice Invoice 1 2 3 4 42.300 £1.700 1.4 Totals £382.5 (b) Profit overstated (1) (2) (3) (4) (5) (6) 22.1 (1) Compensating error (2) Error of principle (3) Error of original entry (4) Error of commission (5) Error of omission (6) Error of commission 21.090 21.3 (1) Principle (2) Omission (3) Original entry (4) Commission 21.935 20.175 43.535 Total expenditure £ 25.400 Revenue expenditure £ 25.2 (a) Errors of principle (b) Increase the gross profit by £1.pages 267-326 15/3/03 11:18 am Page 318 Appendix 2: Summarized answers 19.175 890 62 2.445 21.5 (1) (2) (3) (4) (5) 22.800 £240 Reduction of net profit £26 £18 effect effect effect effect Increase of net profit No No No No 318 .102 21.6 (1) (2) (3) (4) (5) (6) Profit understated No effect Cause debit total to exceed credit total No effect No effect £314 £430 Cause credit total to exceed debit total £270 £5.3 (b) Gross profit £29.

320 less 25%) less Drawings 319 .596 Closing capital £36.361 Provisional net profit add Net adjustment Adjusted net profit 23.5 (a) Pre-adjusted stock value Item 1 – no change Item 2 (12) Item 3 (35) Revised stock value (b) Gross profit £10.190 (iv) £125 (v) £300 (vi) £1.596 23.335 less Sales (£1.691 8.6 (a) Provisional value add Purchases less Returns 740 273 £ 14.935 £ 23.400 (iii) £1.456 (b) Balance sheet: Net assets £36.502 £ 1.355 23.3 (a) Gross profit £24.pages 267-326 15/3/03 11:18 am Page 319 Appendix 2: Summarized answers 22.697 195 13.850 Net profit £15.560 3.2 (a) Gross profit £86.220 467 14.385 23.460 1.687 990 13.206 515 £ 5.670 2.050 (vii) £890 Total £6.7 Increased net profit (1) (2) (3) (4) (5) Reduced net profit £ 515 No effect 186 1.205 (b) Balance sheet: Net assets £98.760 Net profit £12.385 Closing capital £98.4 (i) £400 (ii) £2.382 (47) 1.

502) Revised gross profit £ 94.pages 267-326 15/3/03 11:18 am Page 320 Appendix 2: Summarized answers (b) Pre-adjusted gross profit deduct reduction in value of closing stock (14.1 Deficit (on income/expenditure) £128 Closing accumulated fund £6.082 24.800 718 94.332 320 .220 -13.

Bank current account This account is used for the regular banking and withdrawal of money. Bank statement A statement issued by a bank showing the customer’s account as recorded by the bank. It is generally incurred on the purchase. Carriage inwards A payment made for having purchases delivered. Carriage outwards A payment to a carrier for delivering goods to customers. or improvement of fixed assets. Cheque A written instruction to a bank to make payment. Assets Resources or items owned by the business. Carriage An expense incurred in. Allowance An amount set against a previous purchase or sale. the delivery of goods. It should be added to purchases in the Trading Account. Capital expenditure Expenditure that is expected to be of benefit to the firm over the long term. It should be shown in the Profit & Loss Account. Cheque clearance the passing of a cheque through the bank system. Bad debt A debt which is expected never to be paid.pages 267-326 15/3/03 11:18 am Page 321 Appendix 3: Glossary Account A record of transactions by category (such as purchases) or by person or organization. alteration. Cash discount An allowance for the early settlement of an account. Bank reconciliation statement A statement that accounts for the difference between the bank statement balance and the adjusted Cash Book balance. or charge made for. Cash sales Goods sold with immediate payment (in cash or by cheque).The book-keeper finds and enters the difference and brings it down. Bank deposit account A relatively stable account. an irrecoverable debt. Accumulated fund The capital account of a club or society. withdrawals are usually infrequent. that is. Capital The amount of the owner’s financial stake in the business. Balance The amount on one side of an account that exceeds the amount on the other side ‘to balance’. Cash purchases Goods bought and paid for immediately (in cash or by cheque). 321 . Balance sheet A form of financial statement. with payment completed.

initiated by the payee. Discount allowed A discount granted to a debtor for early payment. Drawer The party who first signs a cheque. that is. Counter credits Payments into a bank account (a number of cheques. Donation A gift of money. Credit sales Goods sold. with payment to be received by an agreed future date. which are acknowledged by the bank as a credit into the account. Current assets Short-term assets. Credit note Issued by the seller. initiated by the paying party. on whose bank account the cheque is drawn. Cost of goods sold Opening stock plus purchases less closing stock for a given period. Direct debit Credit transfer in reverse: it is the direct transfer of money through the banking system. Commission is commonly calculated as a percentage. 322 . Creditor A person (or business) to whom money is owed by a business. Depreciation The estimate of the fall in value of fixed assets over a period of time. with payment to be made at a later date. Deficit An excess of expenditure over income (for a given period). Discount received A discount granted by a creditor for early received payment. Debtor A person (or business) who owes money for goods or services supplied by a business.pages 267-326 15/3/03 11:18 am Page 322 Appendix 3: Glossary Commission Payment or money received (paid) for carrying out (benefiting from) a service. Credit transfer A direct means of transferring money through the bank system. Credit purchases Goods bought. Dishonoured cheque A cheque that the drawer has failed to honour. Doubtful debts As in ‘provision for doubtful debts’: debts that may never be recovered and for which an allowance is made. granting credit for the return of goods or for deficiency in supply. Compensating error When errors cancel each other out. or providing (receiving) advice. for example) amounting to a stated sum. Contra Used for entries in the Cash Book where a debit bank entry is matched by a credit cash entry and vice versa. Current liabilities Amounts payable within one year. which are directly involved in the trading activities of the firm. for example on sales.

Invoice A document issued on a credit sale. Income accrual Income other than sales revenue. Net profit Gross profit less other expenses. It gives details of the goods supplied. 323 . these would be kept in a book or series of books. or services withdrawn from the business for the owner’s personal benefit. goods. Final accounts Used as a broad term to include the Trading and Profit & Loss Account and the balance sheet. Imprest system A system in which a fixed float is reimbursed periodically. outstanding at the end of the period for which it was due.pages 267-326 15/3/03 11:18 am Page 323 Appendix 3: Glossary Drawings Money. Fixed assets Longer-term assets bought for use within the business. prepared by the seller and sent to the buyer. Expense Outlay or cost. List price The price of goods before the deduction of a trade discount. 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. Expense accrual An amount due in respect of an accounting period that remains unpaid at the end of that period. Error of principle When a transaction is entered in the wrong class of account. Error of commission When a transaction is entered in a wrong account of the same class. In a traditional manual system. Ledger The set of accounts belonging to a business. Liabilities Amounts owing to persons outside the business. Net realizable value Selling price less any costs of getting the goods into a saleable condition. such as assets or expenses. Longer-term liabilities Amounts payable in more than one year. Income prepayment Income received in advance of the due period. Effective purchase price (or selling price) The list price less trade discount. Gross profit An excess of sales income over cost of goods sold. Nil balance No balance remaining on a given account. the amount to be paid and the terms of sale.

On account Payment towards an amount owing. Returns outwards The return of previously bought goods. 324 . Returns inwards The return of previously sold goods by the customer. Purchases Goods bought on credit or for cash. Purchases Ledger Comprised of suppliers’ accounts. Opening entries Journal entries recording the opening balances of a new set of accounts. Private Ledger Normally used for keeping accounts of a highly confidential nature. Real accounts Comprised of assets. Revenue Income. who makes an allowance. that is.pages 267-326 15/3/03 11:18 am Page 324 Appendix 3: Glossary Nominal accounts Income and expense accounts. Posting Entering transactions or period totals in accounts from day books (including the Cash Book). which are intended to be sold later. Profit The surplus of income over costs. a part payment. Personal accounts Accounts of people or organizations with whom the business deals. that is. for which an allowance is given. Receipts & Payments Account A summarized version of the Cash Book of a club or society. ledger creditors. Prime entry As in ‘books of prime entry’: the point at which a transaction is recorded for the first time. Provision An accounting allowance for an estimated known or possible fall in the value of an asset. a deficit. such as the Capital Account. Overdrawn account Occurs when more funds have been withdrawn than put into the account. usually calculated for a given time period. prior to entry in the ledger. Payee The party to whom a payment is due to be made. Reducing balance depreciation A fixed percentage is written off the reduced balance of the asset each year. Revenue expenditure Expenses incurred in running the business and in maintaining fixed assets. to the supplier. Reimbursement Makes good the total of outlays in a given period. Prepayment A payment made in advance of an accounting period or due date.

Standing order A direct transfer between bank accounts. Sales Ledger Comprised of customers’ accounts. Vertical balance sheet A balance sheet presented to read downwards. Set off One amount set against another. Source document The basis of an entry in the accounting system.pages 267-326 15/3/03 11:18 am Page 325 Appendix 3: Glossary Running balance The balance on the account is shown. like a story. Trade discount The amount allowed as a reduction of the list price when goods are sold by one business to another business. Straight line depreciation A fixed proportion is written off the original cost of the asset each year. such as a period of credit allowed or the rate of any cash discount. 325 . Terms of sale The conditions for settlement of an account. Unpresented cheque A cheque not yet presented to the bank for payment. A running balance is presented in columnar format. to reduce the amount owed or receivable. involving fixed amounts at regular intervals. that is. such as a sales invoice. Trial balance A periodic check that the total of the debit balances equals the total of the credit balances. after each transaction entry. Transaction on credit Taking ownership of an asset now but paying for it at a later date. updated. debtors.

A retailer is unlikely to enter directly each small sale transaction by debiting the Cash Book and crediting the Sales Account. payment would then be made on the gross figure. Lesson 12 1 If the account were to be settled before a return is made. All purchases can be dealt with through the Sales Journal (or Sales Day Book). it is better to have all sales evidenced by an invoice. eg a till roll acting as a day book. entering purchases of fixed assets into a journal may not be necessary. 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. 326 . an invoice may be raised for all sales. with coding to ensure that revenue and capital purchases are properly separated. Lesson 20 1 In a computerized system. both cash and credit. From the audit viewpoint.pages 267-326 15/3/03 11:18 am Page 326 Notes Lesson 11 1 In practice. A summarizing method is likely to be used.

Sign up to vote on this title
UsefulNot useful