Cambridge IGCSE and O Level Accouting Workbook Answers

Cambridge IGCSE and O Level Accounting
Workbook answers
Section 1 (Chapters 1–5 of the Coursebook)
Multiple choice questions
1 D 9 D
2 B 10 C
3 C 11 C
4 D 12 D
5 C 13 B
6 A 14 D
7 B 15 C
8 C
Structured questions
1 Book-keeping is the detailed recording of all the financial transactions of a business. Accounting
uses the book-keeping records to prepare financial statements at regular intervals.
2 a Assets = Capital + Liabilities.
b i 35 000 ii 192 000 iii 23 000 iv 72 000
3 b asset c asset d liability
e asset f asset g asset
4 b assets − machinery increase liabilities − trade payables increase
1
c assets − bank decrease liabilities − trade payables decrease
d assets − other receivables increase assets − cash decrease
e assets − bank increase liabilities − loans increase
5
Mary
Statement of financial position at 2 January 20–9
Assets $ Liabilities $
Premises 100 000 Capital (158 000 + 10 000) 168 000
Fixtures (30 000 + 1 000) 31 000 Trade payables (12 000 + 1 500 + 1 000) 14 500
Inventory (18 000 + 1 500) 19 500
Trade receivables (13 000 – 500) 12 500
Bank (9 000 + 500 + 10 000) 19 500
182 500 182 500
© Cambridge University Press 2018

6
Kumar
Statement of financial position at 2 August 20–8
Assets $ Liabilities $
Machinery 55 000 Capital 80 000
Equipment 18 000 Loan (20 000 + 10 000) 30 000
Motor vehicles (15 000 + 10 000) 25 000 Trade payables (9 200 – 2 100) 7 100
Inventory (9 500 + 1 500) 11 000
Bank (5 200 – 2 100 – 1 500) 1 600
Cash 100
117 100 117 100
7 a Provide information about the assets and liabilities of the business

Provide details about the amounts owed by trade receivables and owed to trade payables
Provide details of the payments and receipts
Provide information to enable financial statements to be prepared
Ensures that no transaction is overlooked
b Enable profit or loss for the period to be calculated
Provide information for comparison with previous periods and other businesses
Assist with decision-making
Assist with monitoring the progress of a business 2
8 a debit rent credit bank
b debit inventory credit cash
c debit carriage inwards credit cash
d debit equipment credit WR Stores
e debit Jones credit sales
f debit sales returns credit Jones
g debit drawings credit purchases
9
Raminder
Cash account
Date Details Fo. $ Date Details Fo. $
20–9 20–9
Mar 1 Balance b/d 100 Mar 9 Office expenses 22
31 Sales 840 14 Drawings 200
995 Balance c/d 718
940 940
20–9
Apl 1 Balance b/d 718

Bank account
20–9 20–9
Mar 1 Balance b/d 2 750 Mar 18 Equipment 4 500
4 Wahid 280 28 Sabena 330
13 AB Loans 5 000 31 Balance c/d 3 350
24 Commission receivable 150
8 180 8 180
20–9
Apl 1 Balance b/d 3 350
10
Mona
Bank account
20–4 20–4
Jan 1 Capital
20 000 Jan 1 Rent 500
12 Aswan Traders 1 000 10 Mohamed 3 000
14 Balance c/d 17 500
21 000 21 000
20–4
3
Jan 15 Balance b/d 17 500
Capital account
20–4
Jan 1 Bank 20 000
Rent account
20–2
Jan 1 Bank 500
Purchases account
20–2
Jan 2 Mohamed 3 300

Mohamed account
20–4 20–4
Jan 4 Purchases returns 100 Jan 2 Purchases 3 300
10 Bank 3 000
14 Balance c/d 200
3 300 3 300
20–4
Jan 15 Balance b/d 200
Purchases returns account

20–4
Jan 4 Mohamed 100
Sales account
20–4
Jan 7 Aswan Traders 1 700
4
14 Cash 1 500
Aswan Traders account

20–4 20–4
Jan 7 Sales 1 700 Jan 12 Bank 1 000
14 Balance c/d 700
1 700 1 700
20–4
Commission receivable account

20–4
Jan 9 Cash 120

Cash account
20–4 20–4
Jan 9 Commission receivable 120 Jan 13 Office expenses 20
14 Sales 1 500 14 Drawings 500
Balance c/d 1 100
1 620 1 620
20–4
Office expenses account

20–2
Jan 13 Cash 20
Drawings account
20–2
Jan 14 Cash 500 5
11 a
Thomas
Sanele account
Date Details Fo. Debit Credit Balance
$ $ $
20–1
June 1 Balance 450 450 dr
June 6 Sales 1 200 1 650 dr
June 10 Sales returns 50 1 600 dr
June 14 Cash 250 1 350 dr
June 20 Sales 590 1 940 dr
June 26 Bank 1 000 940 dr
b The balance of the account is shown after every transaction.

12
Jason
Bank account
20–5 20–5
Apl 1 Capital 39 000 Apl 2 Premises 25 000
27 Paul 1 340 24 Lynne 8 000
28 ABC Finance Loan 10 000 30 Balance c/d 17 340
50 340 50 340
20–5
May 1 Balance b/d 17 340
Cash account
20–5 20–5
Apl 1 Capital 1 000 Apl 6 Operating expenses 250
Apl 9 Sales 320 12 Carriage outwards 10
30 Wages 200
Balance c/d 860
1 320 1 320
20–5 6
May 1 Balance b/d 860
Capital account
20–5
Apl 1 Bank 39 000
1 Cash 1 000
Premises account
20–5
Apl 1 Bank 25 000
Purchases account
20–5 20–5
Apl 4 Lynne 9 500 Apl 20 Drawings 100

Lynne account
20–5 20–5
Apl 24 Bank 8 000 Apl 4 Purchases 9 500
9 500 9 500
20–5
Operating expenses account

20–5
Apl 6 Cash 250
Sales account
20–5
Apl 9 Cash 320
12 Paul 1 460
7
Paul account
20–5 20–5
Apl 12 Sales 1 460 Apl 15 Sales returns 120
27 Bank 1 340
1 460 1 460
Carriage outwards account

20–5
Apl 12 Cash 10
Sales returns account

20–5
Apl 15 Paul 120

Drawings account
20–5
Apl 20 Purchases 100
ABC Finance Loan account

20–5
Apl 28 Bank 10 000
Wages account
20–5
Apl 30 Cash 200
13 a Mar 1 Amount owed by Anwar to Akinola

Double entry: credit Anwar account for February
Mar 9 Akinola sold goods on credit to Anwar
Double entry: credit sales account
Mar 12 Anwar returned goods to Akinola 8
Double entry: debit sales returns account

Mar 18 Anwar paid Akinola by cheque
Double entry: debit bank account
Mar 31 Amount owed by Anwar to Akinola
Double entry: debit Anwar account for April
b Mar 10 Akinola withdrew from business bank for personal use
Double entry: credit bank account
Mar 28 Akinola withdrew goods from business for personal use
Double entry: credit purchases account
Mar 31 Total drawings for the month transferred to capital account
Double entry: debit capital account
14 a To check the arithmetical accuracy of the double entry book-keeping.
To assist in the preparation of financial statements.
b Two from:
Error of commission A transaction is entered using the correct amount and on the
correct side abut in the wrong account of the same class
Error of complete reversal he correct amount is entered in the correct accounts but the
T
entry has been made on the wrong side of each account
Error of omission A transaction is completely omitted from the accounting
records
Error of original entry An incorrect figures is used when the transaction is first
entered in the accounting records so the double entry used the
incorrect figure
Error of principle A transaction is entered using the correct amount and on the
correct side but in the wrong class of account
Compensating errors These occur when two or more errors cancel each other out
c Error 1 is an error of original entry so will not affect the balancing of the trial balance.
Error 2 will affect the balancing of the trial balance as only one entry (to sales) has been
made rather than a double entry.
Error 3 is an error of omission when a transaction was completely omitted so will not affect
the balancing of the trial balance.
15
Peter
Trial balance at 31 October 20–2
Debit Credit
$ $
Cash 600
Bank overdraft 10 500
Equipment 18 200
Fixtures and fittings 6 100
Trade receivables 12 400
Trade payables 13 600
Purchases 48 600
Sales 66 200
Sales returns 3 300
9
Wages 21 400
Office expenses 4 700
Carriage inwards 900
Operating expenses 4 000
Drawings 12 500
Capital 9 50 95 42 400
132 700 132 700
16
Maria
Amended trial balance at 31 December 20–4
Debit Credit
$ $
Premises 60 000
Inventory 1 January 20–4 9 500
Cash at bank 2 300
Loan from XY Finance 5 000
Purchases 36 100
Sales 45 900
Sales returns 1 400

Rent and rates 4 700

Wages 12 300
Carriage outwards 2 600
Capital 98 400
159 100 159 100
17 a
Error 1 will cause the debit side of the trial balance to be $4 100 less than the credit side as
the drawings ledger balance has been omitted completely.
Error 2 will not affect the trial balance as it is an error of commission. The total debits will
still equal the total credits.
Error 3 will cause the debit side of the trial balance to be $2 000 less than the credit side. In
each case the debit side of an account has been under-cast.
Error 4 will not affect the trial balance as it is an error of omission. The total debits will still
equal the total credits.
b
John
Amended trial balance at 30 November 20–8
Debit Credit
$ $
Purchases (174 900 + 1 000) 175 900
Sales 246 500
Carriage inwards 5 650 10
Bank overdraft (14 500 + 2 150) 16 650
Operating expenses (3 600 + 2 150) 5 750
Equipment 5 700
Motor vehicles 10 400
Salaries (62 590 + 1 000) 63 590
Insurance 3 200
Inventory 1 December 20–7 14 850
Loan to employee 1 000
Drawings 4 100
Capital 44 360
323 950 323 950
18 a One from:
• makes it more convenient to use as the same types of account are kept together
• the task of maintaining the ledger can be divided between several people
• checking procedures can be introduced
• may reduce the possibility of fraud.
b ii nominal ledger iii nominal ledger iv sales ledger
v purchases ledger vi nominal ledger

19 a
Anjori
Cash Book
Date Details Fo. Cash Bank Date Details Fo. Cash Bank
$ $ $ $
20–9 20–9
May 1 Balance b/d 200 4 960 May 4 Western Stores 2 120
9 C Wright 1 310 15 Carriage outwards 40
12 Sales 950 19 Bank c 900
19 Cash c 900 11 Drawings 500
31 Balance c/d 2 370 26 Insurance 1 420
30 Motor vehicle 5 500
31 Balance c/d 210
1 150 9540 1 150 9540
20–9 20–9
Jun 1 Balance b/d 210 Jun 1 Balance b/d 2 370
b A contra entry is an item appearing on both sides of the cash book. They occur when cash is paid
into the business bank account and when cash is withdrawn from the bank for business use.
c It is not possible to take out more cash than is available so the cash balance can never be
brought down as a credit balance. It can only be either a debit balance or a nil balance.
d The cash balance is an asset and the bank balance is a liability.
11
20 a
Vikram
Cash Book
Date Details Fo Discount Cash Bank Date Details Fo Discount Cash Bank
allowed received
$ $ $ $ $ $
20–3 20–3
Nov 1 Balance b/d 135 Nov 1 Balance b/d 3 150
7 High Street High Street 50
50
Stores Stores
17 Sales 1 670 (dis. chq)
26 Valley 8 192 20 Marine 24 936
Stores Traders
29 Bank c 1 000 23 Seafresh 15 735
Foods
30 Balance c/d 3 959 29 Cash 1 000
30 Wages 860
Balance c/d 275
8 1 135 5 871 39 1 135 5 871
20–3 20–3
Dec 1 Balance b/d 275 Dec 1 Balance b/d 3 959

b To encourage customers to pay their accounts promptly.

c 24/(936 + 24) × 100 = 21/2%
d Valley Stores account credit side ‘Discount allowed 8’
e The total of the discount allowed column is transferred to the debit side of the discount
allowed account and the total of the discount received column is transferred to the credit
side of the discount received account.
21 a–c
Sara
Cash Book
allowed received
$ $ $ $ $ $
20–7 20–7
Jul 1 Capital 20 000 Jul 3 Cash c
3 Bank 200 5 Rent 200
10 HiFinance 6 000 13 Motor 350
Loan vehicle
31 Honey 50 1 950 17 Motor 150 5 900
Farm expenses
22 Beeline & Co 45 1 455
29 Carriage 20
inwards
31 Balance c/d 30 20 045
12
20–7 50 200 27 950 45 200 27 950
Aug 1 Balance b/d 30 20 045
Sara
Sales Ledger
Honey Farm account
20–7 20–7
Jul 20 Sales 2 100 Jul 25 Sales returns 100
31 Bank 1 950
Discount 50
2100 2100

Purchases Ledger
BeeLine & Co account
Date Details Fo. $ Date Details Fo $
20–7 20–7
Jul 22 Bank 1 455 Jul 7 Purchases 1500
Discount 45 28 Purchases 930
31 Balance c/d 930
2 430 2 430
20–7
Aug 1 Balance b/d 930
Nominal Ledger
Capital account
20–7
Jul 1 Bank 20 000
Rent account
13
20–7
Jul 5 Bank 350
Purchases account
20–7
Jul 7 BeeLine & Co 1 500
28 BeeLine & Co 930
HiFinance Loan account

20–7
Jul 10 Bank 6 000
Motor vehicles account

20–7
Jul 13 Bank 5 900

Motor expenses account

20–7
Jul 17 Cash 150
Sales account
20–7
Jul 20 Honey Farm 2 100

20–7
Jul 25 Honey Farm 100
Carriage inwards account

20–7
Jul 28 Cash 20
14
Discount allowed account

20–7
Jul 31 Total for month 50
Discount received account

20–7
Jul 31 Total for month 45

d
Sara
Trial balance at 31 July 20–7
Debit Credit
$ $
Cash 30
Bank 20 045
BeeLine & Co 930
Capital 20 000
Rent 350
Purchases 2 430
HiFinance Loan 6 000
Motor expenses 150
Sales 2 100
Sales returns 100
Carriage inwards 20
Discount allowed 50
Discount received 45
29 075 29 075
e Advantages:
15
• payments made automatically so there is no need for Sara to take action
• reduced administration costs (no need to write and forward monthly cheque)
• Sara will not get behind with the payment.
Disadvantages:
• Sara would lose control of payments schedule
• payments automatically on set dates so cannot adjust day according to cash position.
Plus any other suitable comments.
Recommendation – on balance should agree to pay by direct debit.

22 a–b
Mirza
Cash Book
allowed received
$ $ $ $ $ $
20–2 20–2
Nov 1 Balance b/d 400 5 900 Nov 17 Machine 570
repairs
10 Commission 2 10 20 Square 46 2 254
receivable Tiles Co
28 Redfern 500
18 Redfern 500 Traders
Traders (dis.chq.)
22 Southern 10 340 30 Bank c 1 730
Traders
25 Sales 1 620 Balance c/d 500 5 146
30 Cash c 1730
10 2 230 8 470 46 2 230 8 470
20–2
Dec 1 Balance b/d 500 5146
16
Mirza
Sales Ledger
Redfern Traders account
20–2 20–2
Nov 1 Balance b/d 500 Nov 18 Bank 500
28 Bank (dis. chq) 500 30 Balance c/d 500
1000 1000
20–2
Dec 1 Balance b/d 500
Southern Traders account

20–2 20–2
Nov 3 Sales 350 Nov 22 Bank 340
Discount 10
350 350

Purchases Ledger
Square Tiles Co account
20–2 20–2
Nov 15 Purchases returns 230 Nov 1 Balance b/d 2 300
20 Bank 2 254 7 Purchases 1 600
Discount 46
3 900 3 900
20–2
Nominal Ledger
Capital account
20–2
Nov 1 Balance b/d 44 000
Machinery account
Date Details Fo. $ Date Details Fo. $ 17
20–2
Inventory account
20–2
Fixtures and fittings account

20–2
Sales account
20–2
Nov 3 Southern Traders 350
25 Cash 1 620

Purchases account
20–2
Nov 7 Square Tiles Co 1 600

20–2
Nov 10 Cash 210

20–2
Nov 15 Square Tiles Co 230
Machine repairs account

20–2 18
Nov 17 Bank 570
Discount allowed account

20–2
Nov 30 Total for month 10
Discount received account

20–2
Nov 30 Total for month 46

c
Mirza
Trial balance at 30 November 20–2
Debit Credit
$ $
Cash 500
Bank 5 146
Redfern Traders 500
Square Tiles Co 1370
Capital 44 000
Machinery 30 000
Inventory 3 500
Sales 1 970
Purchases 1 600
Commission receivable 210
Purchases returns 230
Machine repairs 570
Discount allowed 10
47 826 47 826
23 a
The imprest system of petty cash is when the petty cashier starts each period with a fixed 19
amount of money (the imprest). At the end of the period the chief cashier provides the petty
cashier with enough cash to restore the balance to the imprest amount.
b One from:
• the chief cashier is aware of exactly how much petty cash has been spent each period
• the petty cash expenditure can be controlled
• the amount of the imprest can be adjusted as necessary if it is too much or not enough
• the imprest system can also help to reduce fraud.

c
Eniola
Petty Cash Book
Date Details Fo Total Date Details Vo Total Office Postages Refreshments Ledger
Received paid expenses accounts
$ $ $ $ $ $
20–9 20–9
Feb 1 Bank 200 Feb 3 Office expenses 15 15

21 Postage refund 2 4 Postage stamps 10 10
9 Refreshments 21 21
12 Central Stores 30 30
14 Parcel postage 5 5
16 Office expenses 11 11
26 High Street Trading Co 19 19

111 26 15 21 49
28 Balance c/d 91
202 202
20–9
Mar 1 Balance b/d 91
Bank 109
20
24 a
Rashid
Petty Cash Book
Date Details Fo Total Date Details Vo Total paid Travel Postages Cleaning Ledger
Received & accounts
stationery
$ $ $ $ $
20–1 20–1

Oct 1 Balance 21 Oct 2 Bus fares 4 4 3
Cash 79 3 Envelopes 3
4 Postages stamps 20 20
5 Ali 12 12
Taxi fare 8 8
6 Cleaner's wages 30 30

7 Zafar 10 10
87 12 23 30 22
Balance c/d 13
100 100
20–1
Oct 8 Balance b/d 13
Cash 87
21
b
Rashid
Nominal ledger
Travel account
20–1
Oct 7 Petty cash 12
Postages & stationery account

20–1
Oct 7 Petty cash 23
Cleaning account
20–1
Oct 7 Petty cash 30
Purchases ledger
Ali account
22
20–1
Oct 7 Petty cash 12
Zafar account
20–1
Oct Petty cash 10
c Credit cash column in cash book

d Current asset 13

25 a
Kate
Petty Cash Book
Date Details Fo Total Date Details Vo Total paid General Travel Postages & Ledger
Received expenses expenses stationery accounts
$ $ $ $ $ $
20–6 20–6
Jul 25 Balance 60 Jul 27 General expenses 10 10

30 General expenses 8 8
Train fare 9 9
Copy paper 12 12
Southlands & Co 13 13
52 18 9 12 13
Balance c/d 8
60 60
20–6
Jul 31 Balance b/d 8
Bank 52
23
b
Kate
Cash Book
Date Details Fo. Discount Bank Date Details Fo. Discount Bank
allowed received
$ $ $ $
20–6 20–6
Jul 26 North Star Co 30 1 170 Jul 25 Balance b/d 750
Western Traders 25 28 Motor expenses 59
31 Balance c/d 1 602 29 Orientals 39 1 911
Fashions
30 Western Traders 25
(dis. chq)
31 Petty cash 52
30 2 797 39 2 797
20–6
Aug 1 Balance b/d 1 602
26 Advantages:
• allows chief cashier to concentrate on more important issues
• can allow petty cash spending to be controlled
• provides training for junior members of staff
• reduces the number of entries in the ledger and the cash book. 24
Disadvantage:
• chief cashier will have to supervise the junior.
Recommendation – when there are large numbers of petty cash transactions, the advantages
outweigh the disadvantages so recommend starting to maintain a petty cash book.

Workbook answers
1 D 4 C
2 D 5 B
3 A 6 C
1 A statement of account is a summary of the transactions for the period and acts as a reminder
to the customer of the amount due. It can be checked against the customer’s own records to
ensure that no errors have been made by either the supplier or the customer.
2 A debit note is issued by a customer. It is a means of notifying the supplier of any shortages,
overcharges and faults, and requesting a reduction in the total of the invoice. It is only when/if
the supplier agrees and a credit note is issued that entries are made in the accounting records.
3 a invoice: Lydia b debit note: Tracey
c credit note: Lydia d statement of account: Lydia
e cheque: Tracey f receipt: Lydia
4 a Documents used – cheque, credit note, invoice
b A debit note is not used as it is a request for the original invoice total to be reduced.
No entries can be made until this request is accepted.
A statement of account is not used as it is a summary of the transactions for the period and 1
a reminder to the customer of the amount outstanding.
5 a Building Supplies
b i 110 ii 50 iii 450 iv 90 v 360
c discount
d Trade discount maybe allowed because the customer is in the same trade and because the
customer is buying in bulk.
e 360 − 21/2% = 351
f i debit P Onamusi account, credit sales account
ii debit purchases account, credit Building Supplies account
6 a Credit
b ii 80 iii 20 iv 60
c Debit note
d It is necessary to reduce the price of the goods to that which the customer was actually
charged on the original invoice (list price less trade discount).

e
Building Supplies
Joyo account
20–6 20–6
Nov 1 Balance b/d 330 Nov 17 Sales returns 60
10 Sales 280 30 Bank 539
Discount 11
610 610
f i Purchases ledger ii Sales ledger

7 Any five from: cash book, petty cash book, sales journal, purchases journal, sales returns
journal, purchases returns journal, general journal.
8 Two from:
• removes detail from the sales account
• allows book-keeping to be divided between several people
• groups all credit sales together which assists when posting to the ledger
• useful when preparing sales ledger control accounts.
9 The total of the purchases journal will be debited to the purchases account in the nominal
(general) ledger. The individual items will be credited to the accounts of the suppliers in the
purchases ledger.
10 a
Ben
2
Purchases journal
Date Name Folio Amount
$
20–2
May 4 Pet Products Ltd 560
12 Cosy Canines 634
21 Pampered Pets & Co 422
31 Transfer to purchases account 1616
Purchases returns journal

Date Name Folio Amount
$
20–2
May 16 Cosy Canines 28
27 Pampered Pets & Co 12
31 Transfer to purchases returns account 40

b
Ben
Purchases account
20–2
May 31 Credit purchases 1 616
for month

20–2 20–2
May 31 Returns for month 40
Pet Products Ltd account

20–2
Aug 4 Purchases 560
Cosy Canines account

20–2 20–2 3
Aug 16 Purchases returns 28 Aug 12 Purchases 634
Pampered Pets Co account

20–2 20–2
Aug 27 Purchases returns 12 Aug 21 Purchases 422
c Purchases account and purchases returns account – nominal ledger

Pet Products Ltd account, Cosy Canines account, Pampered Pets Co – purchases ledger
11 a
Nahida
Sales Ledger
London Road Stores account
20–9 20–9
Jun 1 Balance b/d 240 Jun 14 Bank 234
10 Sales 310 Discount 6
30 Balance c/d 310
550 550
20–9

West End Fashions account

20–9 20–9
Jun 21 Sales 280 Jun 27 Sales returns 80
28 Bank 195
Discount 5
280 280
b
Nahida
Nominal ledger
Sales account
20–9
Jun 30 Cash 2 120
Credit sales for 590
month

20–9
4
Jun 30 Returns for month 80
c If a sales invoice has not been recorded, the total of the trade receivables in the statement of
financial position will be understated as one of the credit customers owes the business more
than is shown in their account. There would be no effect on the inventory as this is the value
of the goods owned on that date and these goods have already been sent to a customer.
d Transaction Document used Nahida’s book Document Coco’s book of
by Nahida of prime entry used by Coco prime entry
Goods sold on credit Invoice received Purchases Sales invoice Sales journal
by Coco to Nahida journal
Goods returned by Credit note Purchases Credit note Sales returns
Nahida to Coco received returns journal issued journal

Workbook answers
1 A 10 D
2 D 11 B
3 A 12 D
4 C 13 B
5 D 14 C
6 D 15 C
7 C 16 A
8 D 17 B
9 D 18 C
1 a
Jane
Sales account
20–7 20–7
Dec 31 Income statement 89 000 Dec 31 Total for year 89 000
1
89 000 89 000
Wages and salaries account

20–7 20–7
Dec 31 Total paid 20 500 Dec 31 Income statement 20 500
20 500 20 500
Rent receivable account

20–7 20–7
Dec 31 Income statement 5 200 Dec 31 Total received 5 200
5 200 5 200

20–7 20–7
Dec 31 Income statement 490 Dec 31 Total for year 490
490 490

Inventory account
20–7 20–7
Jan 1 Balance b/d 4 400 Dec 31 Income statement 4 400
4 400 4 400
20–8
Dec 31 Income statement 5 300 Dec 31 Balance c/d 5 300
5 300 5 300
20–8
Drawings account
20–7 20–7
Dec 31 Total for year 8 000 Dec 31 Capital 8 000
8 000 8 000
Capital account
20–7 20–7
2
Dec 31 Drawings 8 000 Jan 1 Balance b/d 40 000
Balance c/d 38 000 Dec 31 Profit 6 000
46 000 46 000
20–8
b The balance decreased because the drawings during the year were greater than the profit
earned in the year. This could have been avoided by taking less drawings or earning a greater
profit (for example the expenses could have possibly been reduced).
2 a
Mustafa
Income statement for the year ended 30 June 20–4
$ $ $
Commission receivable 84 000
Interest receivable 2 300
86 300
Less Rent and rates 12 000
Salary of assistant 25 000
Postages and telephone expenses 4 950 50 000
Profit for the year 36 300

b Gross profit is the profit earned on goods sold without taking account of the expenses of
running the business. It is calculated by deducting the cost of sales from the sales.
Profit for the year is the final profit after taking account of running expenses and other
income. It is found by adding other income to the gross profit and deducting the expenses.
c It was not possible to calculate a gross profit for Mustafa as he is not operating a trading
business, i.e. he is not buying and selling goods. He is providing a service instead.
3 a
Haleema
Income statement for the year ended 31 August 20–3
$ $ $
Revenue 80 000
Less sales returns 2 000 78 000
Less Cost of sales
Opening inventory 10 000
Purchases 35 000
Carriage inwards 7 500 42 500
52 500
Less Closing inventory 16 000 36 500
Gross profit 41 500
Add Discount received 230
41 730
Less Carriage outwards 5 000
Discount allowed 450 3
Wages 24 000 47 450
Loss for the year 5 720
b Purchases: debit income statement, credit purchases account

Sales returns: debit income statement, credit sales returns account
Operating expenses: debit income statement, credit operating expenses account
Discount received: debit discount received account, credit income statement
Opening inventory: debit income statement, credit inventory account

4 a
Kelly
Income statement for the year ended 31 March 20–7
$ $ $
Gross profit 39 100
Add Rent receivable 3 000
42 100
Less Wages 18 650
Motor expenses 1 570
Discount allowed 950
Insurance 2 400
Advertising costs 3 110 41 910
Profit from operations 190
Less Loan interest 250
Loss for the year 60
b
Kelly
Capital account
20–7 20–6
Ma 31 Drawings 2 340 Apl 1 Balance b/d 50 000
Loss 60
Balance c/d 47 600
50 000 50 000
20–7
Apl 1 Balance b/d 47 600
5 a Machinery – non-current assets Inventory – current asset

Trade payables – current liability Trade receivables – current asset
Drawings – capital Petty cash – current assets
Bank overdraft – current liability Five–year bank loan – non-current liability
Loss for the year – capital
b Non-current assets are usually arranged in increasing order of liquidity with the most
permanent assets coming first, e.g. premises, machinery, fixtures and motor vehicles.
c Current assets are usually arranged in increasing order of liquidity with the furthest away
from cash coming first, e.g. inventory, trade receivables, bank and cash.
d Non-current liabilities are amounts owed which are not due for repayment in less than
one year.

6
Samira
Statement of financial positon at 31 March 20–1
$ $ $
Assets
Non-current assets
Premises 80 000
Fixtures and equipment 30 000
125 000
Current assets
Inventory
Cash 9 000
200
21 200
Total assets 146 200
Capital and liabilities
Capital
Opening balance 140 000
Less Loss for the year 11 500
128 500
5
Less Drawings 9 000
119 500
Non-current liabilities
Loan – AB Loans 10 000
Current liabilities
16 700
Total capital and liabilities 146 200
7
Vijay
Income statement for the year ended 31 May 20–6
$ $ $
Fees from clients 136 000
Add Rent receivable 10 000
146 000
Less Salaries 72 500
Motor vehicle expenses 1 480
Rates and insurance 6 750 96 400

Vijay
Statement of financial positon at 31 May 20–6
$ $ $
Assets
Non-current assets
Premises 50 000
Office equipment 10 400
69 700
Current assets
Bank 13 900
Petty cash 100
26 500
Total assets 96 200
Capital
Plus Profit for the year 49 600
129 600
Less Drawings 35 000
94 600 6
Current liabilities

8 a
Bethany
Income statement for the year ended 31 July 20–9
$ $ $
Revenue 62 000
Less sales returns 2 000 60 000
Less Cost of sales
Purchases 36 000
Less purchases returns 3 000
33 000
47 500
Gross profit 18 600
Add Commission receivable 4 000
22 600
Less Bank charges 300
Lighting and heating 2 500
Rates and insurance 5 100
Repairs and maintenance 3 080
Carriage outwards 2 950 16 000
7
Bethany
Statement of financial positon at 31 July 20–9
$ $ $
Assets
Non-current assets
Premises 50 000
Office equipment 4 900
65 500
Current assets
Inventory 6 100
Bank 1 330
9 660
Total assets 75 160
Capital
76 600
Less Drawings 4 100
72 500
Current liabilities

b Advantage
• better working conditions.
Disadvantages
• no increase in operating profit
• cost is $30 000
• is Bethany able increase her capital?
• can a loan be obtained (will have to pay annual interest and may need security and will
decrease the profit for the year)?
Recommendation – disadvantages outweigh the advantages so recommend do not
proceed.
9 a i The business is treated separately from the owner of the business. Only those
transactions affecting the business are recorded in the accounting records of that
business. For example, the purchase of motor vehicle by the business for business use
would be recorded, but the purchase of a motor vehicle by the owner for personal use
would not be recorded.
ii The accounting records of a business are maintained on the basis of assumed continuity.
It is assumed that the business will continue to operate for an indefinite period of time
and that there is no intention to close down the business or reduce the size of the
business significantly. For example, the non-current assets of a business will appear in
the statement of financial position at their book value: if it was intended to close the
business these should be included at their expected sale values.
iii Every transaction has two aspects – a giving and a receiving. Both these aspects must
be recorded in the books of a business. The term double entry is used to describe how 8
these two aspects of a transaction are recorded in the accounting records. For example,
the purchase of machinery by bank transfer will be debited to the machinery account to
show the ‘receiving’ and credited to the bank account to show the ‘giving’.
iv All the assets and expenses of a business are recorded at their actual cost. This is a
fact and can be easily verified. Inflation can make comparisons difficult when assets
are purchased at different times. This principle is linked to the money measurement
principle. For example, if premises are valued at $80 000 but the business managed to
purchase them for $75 000, it is the latter figure which will be recorded in the accounting
records.
b Understandability
c Information in accounting records can be useful if it can be compared with similar
information about the same business for another accounting period or at another point in
time. It is also useful to be able to make comparisons with similar information about another
business. In order to make meaningful comparisons it is essential that each set of financial
statements are prepared on a comparable basis. Alternatively, it is necessary to be aware
of any different policies which may have been used and the effects of those policies on the
accounting statements being reviewed.
d Two from:
• free from significant errors
• free from bias
• prepared with suitable caution being applied to judgements and estimates
• capable of being depended upon by users as being a true representation of the
underlying transactions and events being represented.

10 a i Capital expenditure is money spent on purchasing non-current assets, or improving

and expanding existing non-current assets. These costs will appear in the statement of
financial position under non-current assets.
ii Revenue expenditure is money spent on running a business on a day-to-day basis. These
costs will appear in the income statement where they are matched against the revenue
for the period.
iii Capital receipts occur when money is received other than from normal trading activities.
This includes the receipt of capital from the owner, the receipt of loans and the proceeds
of sale of a non-current asset. A capital receipt is not entered in the income statement
(apart from a profit or loss on sale of a non-current asset).
iv Revenue receipts occur when money is received from normal trading activities. These
include revenue from the sale of goods, fees from clients and other income such as rent
received, commission received, discount received and so on. These are entered in the
income statement.
b i capital expenditure ii capital expenditure iii revenue expenditure
iv revenue expenditure v capital expenditure
c Profit for the year will be overstated by $100, non-current assets will be overstated by $100.
11 a
Ali
Income statement for the year ended 31 January 20–7
$ $ $
Revenue 36 000
Less Cost of sales
Purchases 18 000 9
Gross profit 19 500
Less General expenses 5 220
Insurance 450 13 770
b Two from:
• proceeds of sale of equipment as this is a capital receipt and should not be included in
the income statement
• purchase of equipment as this is capital expenditure and should not be included in the
income statement
• drawings as these do not affect the calculation of the profit as they represent money
taken by the owner and are not a business expense.
c The purchase of new equipment was included as an expense so the value of the non-current
assets would be understated. The proceeds of sale of one quarter of the equipment was
included as income so the value of the non-current assets would be overstated by the book
value of the equipment at the date of sale..
12 a
The cost of inventory is the actual purchase price of the goods plus any additional costs
incurred in bringing the goods to their present position and condition.
b The net realisable value of inventory is the estimated receipts from selling the goods less any
costs of completing the goods or costs of selling.

c Applying the principle of prudence to the valuation of inventory ensures that the profit is not
overstated and the value of the inventory is not overstated.
d DZ22 410 units × $18 7 380
LS15 290 units × ($15 + $2) 4 930
SH49 300 units × $25 7 500
e Inventory DZ22 was valued at selling price as this was lower than the cost price.
Inventory LS15 was valued at the total cost price (the cost of the product plus the cost of
bringing the goods to the premises) as this was lower than the selling price.
Inventory SH49 was valued at the cost price as this was lower than the selling price.
f Profit for the year ended 30 June 20–7 overstated
Current assets at 30 June 20–7 overstated
Martha’s Capital at 1 July 20–7 overstated
Gross profit for the year ending 30 June 20–8 understated
Current assets at 30 June 20–8 no effect
13
Yee
Wages account
20–8
Dec 31 Bank/cash 68 000 20–8
Balance c/d 1 550 Jan 1 Balance b/d 1 300
69 550 Dec 31 Income statement 68 250
10
69 550
20–9
Insurance account
20–8 20–8
Jan 1 Balance b/d 1 140 Dec 31 Income statement 2 340
Dec 31 Bank/cash 2 400 Balance c/d 1 200
3 540 3 540
20–9

14 a
Zeema
20–3 20–4
Oct 1 Balance b/d 550 Sep 30 Bank/cash 8 250
20–4
Sep 30 Income statement 6 600
Balance c/d 1 100
8 250 8 250
20–4
Oct 1 Balance b/d 1 100
b
Zeema
Extract from Income statement for the year ended 30 September 20–4
Income $
Rent receivable 6 600
15 a
Mandeep
11
20–4 20–4
Jun 30 Income statement 1 300 Jan 1 Bank 650
Balance c/d 650 Apl 1 Bank 650
Jun 30 Bank 650
1 950 1 950
20–4
b
Mandeep
20–3 20–3
Jul 1 Balance b/d 520 Jul 2 Bank 520
Jun 30 Income statement 1 860 Oct 3 Bank 410
20–4
Jan 3 Bank 630
Mar 2 Bank 340
Jun 30 Balance c/d 480
2 380 2 380
20–4

c Only revenue related to the particular time period covered by the income statement should
be included, irrespective of the actual amount received. The items have been adjusted for
the amounts prepaid or accrued so that they represent the revenue for the year.
16 a
Jenny
Income statement for the year ended 31 December 20–6
$ $ $
Revenue 350 000
Less Cost of sales
Purchases 280 000
Less purchases returns 10 000
270 000
295 000
Gross profit 79 000
Add Rent receivable (5 500 + 500) 6 000
Discount received 4 100
89 100
Less Operating expenses 12 200
Rates and insurance (5 490 − 400) 5 090
Repairs and maintenance 3 870 12
Salaries (41 000 + 3 500) 44 500
Bank charges 790 69 390
Jenny
Statement of financial positon at 31 December 20–6
$ $ $
Assets
Non-current assets
Premises 80 000
103 500
Current assets
Inventory 24 000
Other receivables (400 + 500) 900
54 000


Capital
129 710
112 710
Current liabilities
Other payables 3 500
Bank overdraft (17 200 + 790) 17 990
44 790
b Advantages
• not due for repayment for three years
• lower percentage rate of interest
• definite date set for repayment (unlike overdraft when can be called in at short notice)
Disadvantages
• will need to provide security
• will need to enough funds are available to repay the loan when due
• total interest may be higher as is charged on full amount of loan (overdraft interest 13
• charged only on actual amount outstanding)
Plus any other suitable comments
Recommendation–may depend on whether the overdraft is regarded as temporary finance
or whether it is thought that long-term finance is required. If it is only required in the short
term the business should continue with the overdraft. If long-term finance is required, the
loan may be the better option.
17 a
Leo
Income statement for the year ended 31 October 20–7
$ $ $
Gross profit 34 500
Less Stationery (380 − 95) 285
Wages (19 800 + 790) 20 590
Rent and rates (2 600 − 220) 2 380
Heating and lighting 2 200
Bank charges 200 28 755
Profit from operations 5 745

b
Leo
Statement of financial positon at 31 October 20–7
$ $ $
Assets
Non-current assets
Equipment 32 000
45 600
Current assets
Inventory 6 500
Inventory of stationery 95
Other receivables 220
10 555
Total assets 56 155
Capital
49 495
Less Drawings 5 000
14
44 495
Loan – FS Limited 5 000
Current liabilities
Other payables (790 + 250) 1 040
6 660
18 a
Depreciation is an estimate of the loss in value of a non-current asset over its expected
working life.
b Two from: physical deterioration, economic reasons, passage of time and depletion.
c Depreciation is charged to avoid overstating the value of non-current assets as most lose
value over a period of time. It also ensures that the cost of the non-current assets is spread
over the years which benefit from the use of those assets. This also means that the profit is
not overstated.
d Principles of prudence and matching.
e i Straight line method of depreciation = $3 600 per annum
ii Reducing balance method of depreciation
Year ended 31 July 20–2 − 40% × $20 000 $8 000
Year ended 31 July 20–3 − 40% × ($20 000 − $8 000) $4 800
Year ended 31 July 20–4 − 40% × ($20 000 − $12 800) $2 880

19 a
Gugu
Equipment account
20–1 20–2
May 1 Superquip b/d 30 000 Apl 30 Balance c/d 30 000
30 000 30 000
20–2 20–3
May 1 Balance b/d 30 000 Apl 30 Balance c/d 40 000
Nov 2 Bank 10 000
40 000 40 000
20–3
Provision for depreciation of equipment account

20–2 20–2
Apl 30 Balance c/d 6 000 Apl 30 Income statement 6 000
6 000 6 000
20–2
20–3 May 1 Balance b/d 6 000
15
Apl 30 Balance c/d 13 000 20–3
Apl 30 Income statement
(6 000 + 1 000) 7 000
13 000 13 000
20–3
b
Gugu
Extract from income statement for the year ended 30 April 20–3
Expenses $
Depreciation – equipment 7 000
c
Gugu
Extract from statement of financial position at 30 April 20–3
$ $ $
Cost Accumulated Net book
deprecation value
Non-current assets
Equipment 40 000 13 000 27 000

d Depreciation actually charged 20% × (40 000 − 13 000) = 5 400

Depreciation which should have been charged 20% × 40 000 = 8 000
Both the profit for the year and the value of the equipment will be overstated by 2 600.
20 a–b
Dinesh
Machinery account
20–6 20–6
Jan 1 Balance b/d 18 000 Jun 30 Disposal 9 000
Jul 1 Western Ltd 12 000 Dec 31 Balance c/d 21 000
30 000 30 000
20–7
Provision for depreciation of machinery account

20–6 20–6
Jun 30 Disposal 5 400 Jan 1 Balance b/d 10 800
Dec 31 Balance c/d 9 600 Dec 31 Income statement
(1 800 + 2 400) 4 200
16
15 000 15 000
20–7
Disposal of machinery account

20–6 20–6
Jun 30 Machinery 9 000 Jun 30 Provision for 5 400
depreciation
Cash 2 800
Dec 31 Income statement 800
9 000 9 000
21 a
Depreciation is an application of the principle of matching because it spreads the cost of
the non-current asset over the years which benefit from the use of that asset. Depreciation
is an application of the principle of prudence as it ensures that the non-current assets are
recorded as more realistic values and are not overstated.
b The same method of depreciation should be used each year for the same type of asset in
order to apply the principle of consistency.

c
Melody
Equipment account
20–4 20–5
Oct 1 Superquip 10 000 Sep 30 Balance c/d 10 000
10 000 10 000
20–5 20–6
Oct 1 Balance b/d 10 000 Sep 30 Balance c/d 14 000
Bank 4 000
14 000 14 000
20–6 20–7
Oct 1 Balance b/d 14 000 Mar 31 Disposal 5 000
Sep 30 Balance c/d 9 000
14 000 14 000
20–7
Provision for depreciation of equipment account

20–5 20–5
Sep 30 Balance c/d 2 000 Sep 30 Income statement 2 000 17
2 000 2 000
20–6 20–5
Sep 30 Balance c/d 4 800 Oct 1 Balance b/d 2 000
20–6
Sep 30 Income statement
(2 000 + 800) 2 800
4 800 4 800
20–7 20–6
Mar 31 Disposal 2 000 Oct 1 Balance b/d 4 800
(1 000 + 1 000)
Sep 30 Balance c/d 4 600 20–7
Sep 30 Income statement
(1 000 + 800) 1 800
6 600 6 600
20–7

Disposal of equipment account

20–7 20–7
May 31 Equipment 5 000 May 31 Provision for depreciation 2 000
Cash 1 800
Sep 30 Income statement 1 200
5 000 5 000
d
Melody
Extract from income statement for the year ended 30 September 20–7
Expenses $
Loss on disposal 1 200
Depreciation – equipment 1 800
e
Melody
Extract from statement of financial position at 30 September 20–7
$ $ $
deprecation value
Non-current assets 18
Equipment 9 000 4 600 4 400
22 a
Dave
Income statement for the year ended 31 July 20–9
$ $ $
Fees 102 000
Less Office expenses 11 550
Wages and salaries 42 500
Bank charges 140
Depreciation fixtures and fittings 950
Depreciation motor vehicle 4 480 74 350
Less Loan interest (300 + 300) 600

b
Dave
$ $ $
depreciation value
Assets
Non-current assets
Premises 55 000 55 000
Fixtures and fittings 9 500 1 900 7 600
Motor vehicles 28 000 10 080 17 920
92 500 11 980 80 520
Current assets
8 120
Total assets 88 640
Capital
95 050 19

76 450
Loan – QT Limited 10 000
Current liabilities
Trade payables 590
Other payables 300
Bank overdraft (1 160 + 140) 1 300
2 190

23 a
Varsha
Income statement for the year ended 31 December 20–0
$ $ $
Revenue 190 000
Less Cost of sales
Purchases 120 000
Less Goods for own use 940 119 060
126 060
Gross profit 72 440
Add Commission receivable (4 000 + 200) 4 200
Discount received 1 950
78 590
Less Operating expenses 21 200
Wages (31 750 + 2 140) 33 890
Depreciation equipment 1 900
Depreciation motor vehicles 1 536 66 766
20
b
Varsha
Statement of financial positon at 31 December 20–0
$ $ $
depreciation value
Assets
Non-current assets
Premises 40 000 40 000
Equipment 19 000 7 600 11 400
Motor vehicles 12 000 5 856 6 144
71 000 13 456 57 544
Current assets
Inventory 8 500
Other receivables (200 + 960) 1 160
Bank 5 790
29 850
Total assets 87 394


Capital
79 644
Less Drawings (8 480 + 940) 9 420
70 224
Loan – A1 Finance 6 000
Current liabilities
Other payables (2 140 + 90) 2 230
11 170
24 a i Irrecoverable debts are amounts owing to a business which will not be paid by the credit
customers.
ii Debts written off recovered occur when credit customers pay all or some of the amount
owed after the amounts were written off.
iii A provision for doubtful debts is an estimate of the amount which a business will lose in
a financial hear because of irrecoverable debts.
b 21
Waqas
Provision for doubtful debts account
20–2 20–2
Aug 31 Balance c/d 165 Aug 31 Income statement 165
165 165
20–3 20–2
Aug 31 Balance c/d 186 Sep 1 Balance b/d 165
20–3
Aug 31 Income statement 21
186 186
20–4 20–3
Aug 31 Income statement 39 Sep 1 Balance b/d 186
Balance c/d 147
186 186
20–4
Sep 1 Balance b/d 147

c
Waqas
Extract from statement of financial position at 31 August 20–2
$ $ $
Current assets
Less Provision for doubtful debts 165 5 335

$ $ $
Current assets

$ $ $
Current assets
25 a
22
Hiba
J Mavuso account
20–7 20–7
Oct 30 Balance b/d 480 Oct 30 Bank 450
Irrecoverable debts 30
480 480
K Ngwenga account
20–7 20–3
Oct 30 Balance b/d 1 520 Oct 30 Bank 1064
1 520 1 520
L Makamba account
20–7 20–3
Oct 30 Balance b/d 250 Oct 30 Irrecoverable debts 250
250 250

Irrecoverable debts account

20–7 20–3
Oct 30 J Mavuso 30 Oct 31 Income statement 736
K Ngwenga 456
L Makamba 250
736 736

20–7 20–7
Oct 31 Balance c/d 800 Oct 31 Income statement 800
800 800
20–7
Nov 1 Balance b/d 800
b Not following the principles of:

• consistency – once an accounting policy has been decided it should be applied in
successive years unless good reason not to do so
• prudence – not anticipating possible losses
• matching – not matching the sales for which are not likely to be paid against the year in
23
which those sales were made.
Although there has been no significant decrease in trade receivables it is still likely that some
of these will be irrecoverable debts.
Recommendation – reduce provision not remove it.
26 Irrecoverable debts account:
PK Stores – a debt owed by PK Stores was written off as irrecoverable
Double entry – credit PK Stores account
Sellfast & Co – a debt owed by Sellfast & Co was written off as irrecoverable
Double entry – credit Sellfast & Co account
Income statement – the total of the irrecoverable debts for the year was transferred to the
income statement
Double entry – debit income statement
Provision for doubtful debts account:
Balance b/d – the total provision for doubtful debts at the start of the year
Double entry – debit provision for doubtful debts account for the previous financial year
Income statement – the difference between the existing provision and the amount which is
required at the end of the current financial year which represents the surplus amount of the
provision (which is transferred to the income statement as income)
Double entry – credit income statement
Balance – the provision for doubtful debts at the end of the year which is carried down to start
the following financial year
Double entry – debit the provision for doubtful debts account for the current financial year and
credit the provision for doubtful debts account for the next financial year

27 a
Alice
Safat Stores account
20–4 20–4
Nov 1 Balance b/d 590 Nov 27 Bank 490
590 590
El Nil Traders account

20–4 20–4
Nov 1 Balance b/d 1 400 Nov 5 Bank 1 372
Nov 14 Sales 420 Discount 28
1820 Nov 30 Balance c/d 1 420
1 820 1 820
20–4
Irrecoverable debts account

20–4 20–4
Nov 27 Safat Stores 100 Nov 30 Income statement 100
100 100

20–4 20–3
Nov 30 Balance c/d 540 Dec 1 Balance b/d 500
20–4
Nov 30 Income statement 40
540 540
20–4
Debts recovered account

20–4 20–4
Nov 30 Income statement 50 Nov 25 Bank (Ramsis Road 50
Traders)
50 50

b
Alice
Extract from income statement for the year ended 30 November 20–4
$
Income
Debts recovered 50
Expenses
Provision for doubtful debts 40
c
Alice
Extract from statement of financial position at 30 November 20–4
$ $ $
Current assets
d One from:
• principle of prudence – ensures that the profit for the year is not overstated and that the
trade receivables are shown at a realistic value in the statement of financial position
• principle of matching – the amount of sales for which Alice is unlikely to be paid is
regarded as an expense of the year in which those sales are made. 25
28
Thabo
Income statement for the year ended 28 February 20–7
$ $ $
Income from customers 42 000
Add Commission receivable 2 420
44 420
Less Motor expenses (2 850 − 62) 2 788
Insurance 1 970
Repairs and maintenance 2 590
Wages 26 100
Provision for doubtful debts
((5% × 4 300) − 200) 15
Operating expenses (310 + 43) 353
Depreciation equipment
(10 860 − 10 120) 740
Depreciation motor vehicles
(16 000 − 13 850) 2 150 36 856

Thabo
Statement of financial positon at 28 February 20-7
$ $ $
Assets
Non-current assets at valuation
Equipment 10 120
23 970
Current assets
Bank 1 040
5 187
Total assets 29 157
Capital
37 564
Less Drawings 9 200 26
28 364
Current liabilities
Trade payables 750
Other payables 43
793

29 a
Kala
$ $ $
Gross profit 140 000
Add Discount received 3 200
Reduction in provision for doubtful
debts (850 − (3% × (24 300–100)) 124
143 324
Less Rent 13 100
Rates and insurance 8 100
Wages 79 500
Office expenses (2 100 − 122) 1 978
Operating expenses (6 300 + 80) 6 380
Irrecoverable debt 100
Depreciation fixtures and fittings
(10% × (39 000 − 7 410) 3 159
(20% × (18 000 − 6 480) 2 304 114 621
27

b
Kala
$ $ $
depreciation value
Assets
Non-current assets
Fixtures and fittings 39 000 10 569 28 431
Motor vehicles 18 000 8 784 9 216
57 000 19 353 37 647
Current assets
Inventory 39 050
Inventory of stationery 122
Trade receivables (24 300 − 100) 24 200
Bank 12 190
74 836
Capital
Opening balance 70 000 28
98 703
80 903
Current liabilities
Other payables 80
31 580

30 a
Tahir
$ $ $
Gross profit 42 000
Add Commission receivable (2 800 + 160) 2 960
debts (420 − (4% × 9 900)) 24
44 984
Less Administration expenses 4 950
Wages 22 400
Depreciation fixtures and equipment
(15% × 22 000) 3 300
(20% × (18 000 − 6 480) 2 304 40 184
29

b
Tahir
$ $ $
depreciation value
Assets
Non-current assets
Premises 60 000 60 000
Fixtures and equipment 22 000 9 900 12 100
Motor vehicles 18 000 8 784 9 216
100 000 18 684 81 316
Current assets
Inventory 8 200
Other receivables (160 + 600) 760
Bank 3 200
21 664
Capital 30
90 700
Less Drawings 5 500
85 200
6% loan 10 000
Current liabilities
Other payables 300
7 780

Workbook answers
1 D 15 D
2 A 16 B
3 B 17 C
4 D 18 C
5 B 19 C
6 A 20 A
7 B 21 B
8 B 22 B
9 A 23 D
10 C 24 C
11 D 25 D
12 A 26 B
13 C 27 C
14 A
1 Bank statement balance 3 540 + amounts not credited (935 + 242 + 187) 1 364 − cheques not
presented (295 + 182 + 304) 781 = cash book balance 4 123 1
2 a
Christina
Cash book (bank columns only)
20–4 20–4
Nov 1 Balance b/d 3 280 Nov 1 Bank charges 109
Insurance 850
Balance c/d 2 321
3 280 3 280
20–4
Nov 1 Balance b/d 2321
b
Christina
Bank reconciliation statement at 31 October 20–4
$ $
Balance shown on bank statement 208
Add Amounts not yet credited – sales 1 643
Bank error 750
2 601
Less Cheque not yet presented – Wilma 280
Balance shown in cash book 2 321
c 2 321 current asset

3 a Two from:
• to obtain an accurate bank balance
• to identify errors in the bank account or on the bank statement
• to assist in discovering fraud and embezzlement
• to identify items not credited by the bank
• to identify cheques not yet presented
• to identify any ‘stale’ cheques.
b The bank account in the cash book is a record of transactions as they affect the business –
money paid into the bank is debited and money taken out of the bank is credited.
The bank statement is a copy of the customer’s account in the books of the bank. This is a
record of transactions as they affect the bank – money paid in by the customer is credited
(as it increases the amount owed by the bank to the customer) and money taken out is
debited (as it reduces the amount owed by the bank to the customer).
c The opening balances are not the same because there was an unpresented cheque (cheque
number 23 457) for $130 which had been recorded in the bank account in August, but this
did not appear on the bank statement until September.
d
Wendy
20–8 20–8
Oct 1 Dividend received 204 Oct 1 Balance b/d 265
Balance c/d 734 Insurance 195
2
East & West (dis chq) 290
Bank charges 188
938 938
20–8
Oct 1 Balance b/d 734
e
Wendy
Bank reconciliation statement at 30 September 20–8
$ $
Balance shown on bank statement (549)
Add Amounts not yet credited – J Tan 95
sales 1 020 1 115
566
Less Cheque not yet presented – W Tong & Co 1 300
Balance shown in cash book 1 (734)

4 a
Raminder

20–7 20–7
Jan 1 Balance b/d 8 280 Oct 10 Ali 950
4 Aswan 2 400 17 Hassan 3 050
30 Ahmed 784 22 Rates 685
29 Wages 1 550
31 Rent 450
Bank charges 110
Balance c/d 4 669
11 464 11 464
20–7
Feb 1 Balance b/d 4 669
b
Raminder
Bank reconciliation statement at 31 January 20–7
$ $
Balance shown on bank statement 5 435
Add Amounts not yet credited – Ahmed 784
3
6219
Less Cheque not yet presented – wages 1 550
Balance shown in cash book 4 669
c i Unpresented cheques are cheques that have been paid by the business and entered on
the credit side of the cash book but which do not appear on the bank statement.
ii Amounts not yet credited consist of cash and cheques that have been paid into the bank and
entered on the debit side of the cash book, but which do not appear on the bank statement.
d Advantages:
• may have less bank charges
• may have less administration costs.
Disadvantages:
• increased security risk (obtaining and holding cash)
• has to ensure that enough cash is available at the end of the month.
Recommendation – it is preferable to continue the present practice of paying by cheque or
by bank transfer.
5 a i
A bank statement is a document issued by the bank at regular intervals. It is a copy of
the customer’s account in the books of the bank and is a record of transactions as they
affect the bank.
A bank reconciliation statement is prepared by the customer/trader after receipt of the
bank statement to explain the difference between the balance in the bank column of the
cash book and the balance on the bank statement.

ii A credit transfer is an instruction to the bank to transfer by electronic means a fixed

amount to a named individual or business.
A direct debit is an instruction to the bank from the customer to permit a named person
or business to take an amount from his/her bank account – usually varying amounts at
regular intervals.
b
Zodwa
Bank reconciliation statement at 30 June
$ $
Balance shown on bank statement 18
Add Amounts not yet credited – sales 950
Bank error 50
1 018
Less Cheques not yet presented – Charlie 428
Fanwell 910 1 338
Balance shown in cash book (320)
c i
320 – this is the balance in the cash book which is the balance on the books of the
business.
ii Current liabilities – it is a credit balance so is the amount owing to the bank.
6 a
Ben
4
Journal
Date Details Debit Credit
$ $
20–2
May 1 Premises 85 000
Inventory 9 420
Bank 25 100
Cash 200
Loan – father 20 000
Capital 129 220
Assets, liabilities and capital at this date 149 220 129 220
b Three from: purchase of non-current assets, sale of non-current assets, non-regular

transactions and correction of errors.

c The journal is a book in which transactions are recorded before they are entered in the
ledger. A journal entry is a note of what entries are required in the ledger with a short
explanation of why these entries are required.
7
Melissa
Journal
$ $
20–5
Nov 30 Sales 74 300
Income statement 74 300
Transfer of sales for the year to income statement

Rates 1 040
Transfer of the rates for the year to income statement

Inventory 4 650
Transfer of opening inventory to income statement
Inventory 5 110
Income statement 5 110 5
Transfer of closing inventory to income statement
Equipment 5 200
SQ Limited 5 200
Omission of purchase of equipment now corrected
Roddy 56
Writing off irrecoverable debt
Income statement 56
Transfer of total irrecoverable debts to income
statement
Income statement 790

Provision for depreciation of equipment 790
Annual depreciation charge transferred to income
statement

8 a
Sabeena
Journal
$ $
20–9
Jan 31 Income statement 33 100
Purchases 33 100
Sales returns 1 290
b
Sabeena
Journal
$ $
20–9
Jan 31 Drawings 100
Office expenses 100
Office expenses 910
6
c
Sabeena
Journal
$ $
20–9
Jan 31 Provision for depreciation of motor vehicle 5 124
Disposal of motor vehicle 5 124
Motor vehicle 10 500
Scrappers Ltd 4 000

d
Sabeena
Journal
$ $
20–9
Jan 31 Irrecoverable debts 140
Raj 140
Income statement 80
Provision for doubtful debts 80
9 a Two from:
• to balance the trial balance
• to allow draft financial statements to be prepared
• to provide a temporary account for holding the errors until they are located and corrected
b
Yee
Journal
$ $
20–0 7
Aug 31 Drawings 220
Purchases 220
Omission of goods for own use now corrected
Suspense 18
Kuso 18
Error in posting amount paid to Kuso now
corrected
Motor vehicle expenses 199
Motor vehicles 199
Error in posting motor vehicle expenses to motor
vehicles now corrected
Suspense 360
Rent payable 180
Rent receivable 180
Error of posting rent received to rent payable now
corrected
Office expenses 15
Suspense 15
Petty cash payment not posted to ledger now
corrected
Sales returns 100
Suspense 100
Sales returns under-cast, now corrected

c
Yee
Suspense account
20–0 20–0
Aug 31 Kuso 18 Aug 31 Difference on trial
Rent receivable 180 balance 263
Rent payable 180 Office expenses 15
Sales returns 100
378 378
d Only errors affecting the balance of a trial balance require a correcting entry in the suspense
account. Errors 1 and 3 do not require entries in the suspense account as they do not affect
the balancing of the trial balance.
10 a
Nyasha
Journal
$ $
Suspense 100
Purchases 100
K Khan 285 8
J Khan 285
Begum Stores 190

Suspense 190
Electricity expense 74
Suspense 74
[No entry]
Suspense 90
b
Nyasha
Suspense account
20–6 20–6
Jun 30 Difference on trial Jun 30 Begum Stores 190
balance 254 Electricity expenses 74
Purchases 100 Discount allowed 90
354 354

c It would appear that all the errors have been discovered as the suspense account is closed.
d
Nyasha
Statement of corrected profit for the year ended 30 June 20–6
$ $
Profit for the year from income statement 21 410
Add Purchases over-cast 100
21 510
Less Electricity understated 74
Discount allowed omitted 90 164
Corrected profit for the year 21 346
11 a
Osama
Statement of corrected profit for the year ended 31 December 20–5
$ $
Add Sales under-cast 500
Rates and insurance prepaid omitted 40
Goods for own use 280 820
2 530
Less Depreciation omitted 1 750 9
Bank charges omitted 81

Creation of provision for doubtful debts omitted 53
Office expenses omitted 20 1 904
Corrected profit for the year 626

b
Osama
Corrected Statement of financial positon at 31 December 20–5
$ $ $
depreciation value
Assets
Non-current assets
17 500 1 750 15 750
Current assets
Inventory 1 830
4 467
Total assets 20 217

Capital
Plus Profit for the year 626
21 626
Less Drawings (5 100 + 280) 5 380
16 246 10
Current liabilities
Bank (790 + 81) 871
3 971
12 a
Safiya
Purchases ledger control account
20–5 20–5
Jul 1 Balance b/d 20 Jul 1 Balance b/d 1 740
Jul 31 Purchases returns 29 Jul 31 Purchases 1 860
Bank 1 617 Interest 15
Contra entry 90
Balance c/d 1 826
3 615 3 615
20–5
Aug 1 Balance b/d 1826

b i Cash book
ii Cash book
iii Journal
c When a business is both a supplier and a customer of the trader there will be an account in
both the sales ledger and the purchases ledger. A contra item occurs when the balance on
one account is set against the balance on the other account.
13 a
Marvan
Sales ledger control account
20–9 20–9
Mar 1 Balance b/d 4 520 Mar 31 Sales returns 210
31 Sales 5 180 Bank 3 977
Interest 10 Discount allowed 123
Balance c/d 90 Irrecoverable debts 58
Contra entry 45
Balance c/d 5 387
9 800 9 800
20–9 20–9
Apl 1 Balance b/d 5 387 Apl 1 Balance b/d 90
b Two from:
• to assist in locating errors 11
• to prove the arithmetical accuracy of the sales ledger

• to obtain the total owing by trade receivables quickly
• to enable financial statements to be prepared quickly
• to reduce fraud
• to provide a summary of the transactions affecting trade receivables.
c Two from:
• overpayment by a credit customer
• credit customer returning goods after paying the account
• credit customer paying in advance for goods
• cash discount not deducted before payment was made.
d 123/(3 977 + 123) × 100 = 3%

14 a
Jaswant
Purchases ledger control account
20–8 20–8
Feb 28 Purchases returns 42 Feb 1 Balance b/d 3 490
Bank 2 925 28 Purchases 3 920
Discount received 75 Balance c/d 46
Contra entry 212
Balance c/d 4 202
7 456 7 456
20–8 20–8
Mar 1 Balance b/d 46 Mar 1 Balance b/d 4 202
b There appears to be an error in either the purchases ledger or in the purchases ledger
control account.
c Any errors would not be revealed if the information in the purchases ledger was used as a
source of information for the purchases ledger control account.
15 a Three from:
• assist in locating errors when a trial balance fails to balance
• proof of the arithmetical accuracy of the ledgers they control
• the balances provide the total trade receivables and total trade payables quickly
• enable financial statements to be prepared quickly 12
• help to reduce fraud
• provide a summary of the transactions affecting the trade receivables and trade
payables for the period.
b Three from: sales journal, sales returns journal, cash book and journal.
c
Sourav
Sales ledger control account
20–3 20–3
Jul 1 Balance b/d 19 760 Jul 1 Balance b/d 344
31 Sales 24 145 31 Bank 18 870
Bank (dis. chq.) 460 Discount allowed 370
Balance c/d 196 Irrecoverable debts 175
Returns 738
Contra entry 242
Balance c/d 23 822
44 561 44 561
20–3 20–3
Aug 1 Balance b/d 23 822 Aug 1 Balance b/d 196

d Two from:
• provision for doubtful debts – this does not affect an individual debtor’s account and is
the provision in existence at the beginning of the month
• cash sales – these do not affect an individual debtor’s account as they are debited to
the cash account and credited to the sales account
• discount received –this does not affect an individual debtor’s account as it is discount
received when payment was made to creditors.
e If the purchases returns are overstated by $100 the balance on the purchases ledger control
account will be understated by the same amount.
16 a i Margin is the gross profit measured as a percentage of the selling price.
ii Mark-up is the gross profit measured as a percentage of the cost price.
b
Ansie
Income statement (trading section) for the year ended 31 July 20–9
$ $ $
Revenue 40 200
Less Sales returns 200 40 000
Less Cost of sales
Purchases 31 600
Less purchases returns 400 31 200
33 500
Less Closing inventory 3 500 30 000 13
Gross profit 10 000
[Gross profit = 25% × Revenue]
17
Govinder
Income statement (trading section) for the year ended 31 December 20–1
$ $ $
Revenue 56 700
Less Cost of sales
Purchases 48 250
51 250
Gross profit 9 450
[Cost of sales = 13.5 × ((3000 + 4000) ÷2)

Gross profit = 20% × Cost of sales = 9450]

18 a
Belinda
Statement of affairs at 1 September 20–5
$ $ $
Assets
Non-current assets
Premises at cost 80 000
Fixtures and equipment at cost 6 000
Motor vehicles at cost 11 800
97 800
Current assets
Bank 2 500
6 600
Capital
Balance 83 800
Loan – HiFinance Limited 20 000
Current liabilities
Other payables 600
14

b
Belinda
Statement of affairs at 31 August 20–6
$ $ $
depreciation value
Assets
Non-current assets
Premises 80 000 80 000
Fixtures and equipment 7 000 1 400 5 600
Motor vehicle 11 800 2 360 99 440
98 800 3760 95 040
Current assets
Total assets 99 790
Capital
Balance 87 800
Loan – HiFinance Limited 10 000
Current liabilities
Other payables 570
1 990
15
c
Belinda
Calculation of profit for the year ended 31 August 20–6
$ $
Capital at 31 August 20–6 87 800
Less Capital at 1 September 20–5 83 800
4 000
Add Drawings 4 500
d Full details about assets, liabilities, revenues and expenses not available
Preparation of financial statements more difficult
Calculation of profit/loss for the year may not be accurate
Decision-making more difficult
Less control over the business activities
Greater risk of fraud
Comparison with results from previous years and other businesses not possible
Information not available for reference or for interested parties e.g. potential lenders

19 a
Nabil
Statement of affairs at 1 April 20–7
$ $ $
Assets
Non-current assets
Machinery at cost 38 000
Equipment at cost 13 500
Motor vehicles at cost 9 400
60 900
Current assets
Inventory 5 300
Bank 1 580
Petty cash 100
11 370
Total assets 72 270
Capital
Balance 53 200
Loan – El Tahir Loans 15 000
Current liabilities
16
Other payables 120
4 070

b
Nabil
Statement of affairs at 31 March 20–8
$ $ $
depreciation value
Assets
Non-current assets
Machinery 38 000 7 600 30 400
Equipment 13 500 2 025 11 475
51 500 9 625 41 875

Motor vehicles at valuation 8 100
49 975
Current assets
Inventory 6 050
Petty cash 100
10 854
Total assets 60 829
Capital 17
Balance 45 715
Loan – El Tahir Loans 5 000
Current liabilities
Other payables 170
10 114
c
Nabil
Calculation of profit/loss for the year ended 31 March 20–8
$ $
Capital at 31 March 20–8 45 715
Less Capital at 1 April 20–7 53 200
(7 485)
Add Drawings cash 4 400

goods 685 5 085
(2 400)
Less Capital introduced 10 000
Loss for the year 12 400

d Three from:
• increase the quantity of goods sold
• increase selling prices
• reduce cost of purchases (buy in bulk / buy from cheaper supplier)
• reduce expenses
• try to find other sources of income.
20 a
Chi Chi
Total trade receivables account
20–4 20–5
Nov 1 Balance b/d 4 970 Oct 31 Bank 43 120
20–5 Discount 880
Oct 31 Sales 44 280 Balance c/d 5 250
49 250 49 250
20–5
b
Chi Chi
Total trade payables account
18
20–5 20–4
Oct 31 Bank 43 290 Nov 1 Balance b/d 6 250
Discount 1 110 20–5
Balance c/d 6 950 Oct 31 Purchases 45 100
51 350 51 350
20–5
c
Chi Chi
Income statement (trading section) for the year ended 31 October 20–5
$ $ $
Revenue (44 280 + 15 720) 60 000
Less Cost of sales
Purchases (45 100 + 330) 45 430
49 300
Gross profit 13 800
d Rate of inventory turnover

46 200/(3870 + 3100/2) = 13.26 times

21 a
Balbir
Summarised bank account
20–4 20–5
May 1 Capital 16 000 Apl 30 Trade 57 915
payables
20–5 Operating 160
expenses
Apl 30 Trade receivables 68 385 Machinery 120
repairs
Wages 6 556
Rates and 930
insurance
Drawings 9 850
Balance c/d 8 854
84 385 84 385
20–5
b
Balbir
Total trade payables account
19
20–5 20–5
Apl 30 Bank 57 915 Apl 30 Purchases 77 200
Discount 1 485
Returns 150
Balance c/d 17 650
77 200 77 200
20–5
c
Balbir
Total trade receivables account
20–5 20–5
Apl 30 Sales 83 000 Apl 30 Bank 68 385
Discount 2 115
Returns 970
Irrecoverable debt 230
Balance c/d 11 300
83 000 83 000
20–5

d
Balbir
Income statement (trading section) for the year ended 30 April 20–5
$ $ $
Revenue 83 000
Less Sales returns 970 82 030
Less Cost of sales
Purchases 77 200
Less Purchases returns 11 150
77 050
Less goods for own use 1 1 550 75 500
Gross profit 16 406
[ Grossprofit = 20% × Sales = 16 406]
e
Balbir
Income statement (profit and loss section) for the year ended 30 April 20–5
$ $ $
Gross profit 16 406
Add Discount received 1 485
17 891 20
Less Operating expenses 160
Machinery repairs 120
Wages 6 556
Rates and insurance 930
Depreciation of machinery 1 400 11 511

f
Balbir
Statement of affairs at 30 April 20–5
$ $ $
depreciation value
Assets
Non-current assets
Premises 50 000 50 000
Machinery 14 000 1 400 12 600
64 000 1 400 62 600
Current assets
Inventory 9 876
Bank 8 854
30 030
Total assets 92 630
Capital
86 380
Less Drawings (9 850 + 1 550) 11 400 21
74 980
Current liabilities
22 a
Zabeel Social Club
Receipts and payments account for the year ended 31 December 20–2
Receipts $ Payments $
20–2 20–2
Jan 1 Balance b/d 420 Dec 31 Clubhouse rent 825
Dec 31 Subscriptions 1 900 Insurance 320
Balance c/d 440 General expenses 515
Furniture 1 100
2 760 2 760
20–3

b Two from:
• R & P records all money received and paid (capital and revenue items), I & E records only
revenue receipts and revenue payments
• R & P does not have any adjustments for accruals and prepayments, I & E has
adjustments for accruals and prepayments
• R & P does not include non-monetary items, I & E includes non-monetary items
• R & P is a summary of the cash book and shows the balance of money (cash/bank)
held at the start and end of the year, I & E is the equivalent of an income statement and
shows the surplus or deficit for the year.
c i Subscriptions – the total amount received is included in the receipts and payments
account and no adjustments are made for accruals and prepayments.
ii Rent – the total amount paid is included in the receipts and payments account and no
adjustment is made for rent prepaid.
d i The balance on 1 January 20–2 represents money that the club possessed at that date.
ii The balance on 31 December 20–2 represents a bank overdraft.
e Depreciation is a non-monetary expense and only monetary expenses are included in the
receipts and payments account.
23 a
Mahamba Sports Club
Income and expenditure account for the year ended 31 March 20–6
$ $ $
Income
Subscriptions (5 500 − 200 − 300) 5 000
Competition – entrance fees 950 22
Competition – expenses 370 580

Interest received 11 30
5 610
Expenditure
Insurance (624 − 156 + 140) 608
Office expenses (1 720 + 30) 183
Repairs and maintenance 97
Depreciation equipment 1 620
(10% × (15 000 − 1 000 + 2 200)) 2 508
Surplus for the year 3 102

b
Mahamba Sports Club
Statement of financial positon at 31 March 20–6
$ $ $
Assets
Non-current assets
Clubhouse at cost 57 000
Sports equipment at book value
(16 200 − 1 620) 14 580
71 580
Current assets
Bank (3 000 + 7 480 − 3 474) 77 006
7 7 162
Total assets 78 742
Accumulated fund and liabilities
Accumulated fund
Opening balance
(57 000 + 15 000 + 3 000 + 200 + 140) 75 340
Surplus for the year 3 102
78 442
Current liabilities
Subscriptions prepaid 300 23
Total liabilities 78 742
24 a
Ansari Rugby Club
Income and expenditure account for the year ended 31 May 20–6
$ $ $
Income
Subscriptions (4 750 − 90 + 170) 4 830
Refreshments – sales 290
cost 207 1283
4 913
Expenditure
Rent 2 000
Rates (1 950 − 30) 1 920
General expenses (486 + 93) 579
Repairs to equipment 282
Loss on disposal of equipment 52
(250 − 198)
Depreciation equipment 380 5 213
Deficit for the year 5 300

b One from:
• opening balance – this represents the money owned by the club at the start of the year
• closing balance – this represents the money owed by the club to the bank at the end of
the year (bank overdraft)
• new equipment – this is capital expenditure and only revenue expenditure is included in
the income and expenditure account
• proceeds of sale – this is a capital receipt; only the loss or profit on the sale of an asset is
included in the income and expenditure account.
c One from:
• depreciation of equipment – this is a non-monetary expense and cannot, therefore,
appear in the receipts and payments account
• loss on sale of equipment – this does not represent money received or paid and cannot,
therefore, appear in the receipts and payments account.
d The accumulated fund is the equivalent of the capital of a business. It is the total of the
surpluses (less any deficits) earned by the club since its formation.
25 a
Scar Top Athletics Society
Income statement for the year ended 30 September 20–5
$ $ $
Revenue 8 100
Less Cost of sales
Purchases (3 905 + 415) 4 320
Less Closing inventory 3 370 24
Cost of goods sold 3 950
Wages of shop assistant 3 750
Depreciation shop fittings 150 7 850
Profit on shop 2 250
b
Scar Top Athletics Society
Income and expenditure account for the year ended 30 September 20–5
$ $ $
Income
Subscriptions (4 820 − 160) 4 660
Profit on shop 250
Competition – ticket sales 1 020

– expenses 1 950 70
Interest received 51 44
5 024
Expenditure
General expenses (585 − 15) 570
Rent and rates (3 190 − 284) 3 474
Insurance 1 070 5 114
Deficit for the year 5190

c Considerations:
Income would increase by 466 to 5 126.
Bank balance would increase by 466.
It may result in members leaving the club so total subscriptions may actually fall.
It is only the first year of existence so membership may increase next year when club is more
established.
The shop fittings are a one-off purchase and will not occur in following year
Consider raising funds by other means.
Recommendation – see what the position is at the end of the second year before increasing
fees and in the meanwhile, try to increase income from other sources and reduce costs.
26 a
Kaunda Street Music Society
Subscriptions account
20–1 20–2
Dec 1 Balance b/d 330 Nov 31 Bank/cash 4 860
20–2 Irrecoverable debts 30
Nov 30 Income & expenditure 4 830 Balance c/d 420
Balance c/d 150
5 310 5 310
20–2 20–2
25
Dec 1 Balance b/d 420 Dec 1 Balance b/d 150
b 3 861 − 319 + 293 = 3 835

c
Kaunda Street Music Society
Refreshments income statement for the year ended 30 November 20–2
$ $ $
Revenue 5 982
Less Cost of sales
Opening inventory 466
Purchases 3 835
4 301
Less Closing inventory 514 3 787
Profit on refreshments 2 195

27 a
Island Drama Society
Calculation of accumulated fund at 1 August 20–3
$ $
Assets
Equipment at book value 17 500
Subscriptions owed by members 320
Cash at bank 2 890
Insurance prepaid 120
53 830
Less Liabilities
Subscriptions prepaid 150
Staff wages accrued 350 500
53 330
b Amount paid for general expenses

(Opening bank balance 2 890 + receipts 8 323)11 213 − (recorded payments 6 941 + closing
bank balance 3 402)10 343 = 870
c
Income and expenditure account for the year ended 31 July 20–4
26
$ $ $
Income
Subscriptions (5 880 + 150 − 320 + 90) 5 800
Concert – ticket sales 1 943
Concert – expenses 1 007 936
6 736
Expenditure
General expenses 870
Insurance (744 − 124 + 120) 740
Wages (2 290 – 350 + 290) 2 230
Depreciation equipment 3 980 7 820
(20% x(17 500 − 500 + 2 900))

d
$ $ $
Assets
Non-current assets
Equipment at book value
(17 500 + 2 900 − 500 − 3 980) 15 920
48 920
Current assets
Subscriptions accrued 90
Bank (2 890 + 8 323 − 6 941 − 870) 3 402
33 616
Total assets 52 536
Accumulated fund and liabilities
Accumulated fund
52 246
Current liabilities 27
Total liabilities 52 536
28 a Sole trader
Advantages: Disadvantages:
Entitled to all the profit Responsible for any losses
Can make decisions quickly No consultation before taking decisions
No risk of disputes/arguments No assistance with workload/responsibilities
Capital limited to what trade is able to invest
b Partnership
Advantages: Disadvantages:
Additional finance is available Profits have to be shared among the partners
Additional knowledge, experience and Decisions have to be recognised by all partners
skills are available
The responsibilities are shared Decisions may take longer to put into effect
The risks are shared One partner’s actions on behalf of the business
are binding on all the partners

c It is necessary to prepare an appropriation account to show how the profit for the year is
shared between the partners. The profit for the year is transferred to this account from the
income statement. Any interest on drawings charged to the partners increases the amount
available to share and this must be added to the profit. Interest on capital and partners’
salaries are deducted. The remaining amount, the residual profit, is shared between the
partners in the agreed profit-sharing ratio.
d A capital account records permanent increases or decreases in the capital invested by the
individual partner. A current account records anything which the partner becomes entitled
to, such as interest on capital, interest on loan, partner’s salary and profit share (which are
credited), and anything which the partner is charged with, such as drawings and interest on
drawings (which are debited).
Maintaining both a capital account and a current account for each partner means it is easy to
see the amount invested and to calculate the interest on capital. The current account shows
the profit retained and whether the drawings exceed the total profit share.
29 a
Precious and Marcia
Profit and loss appropriation account for the year ended 31 May 20–2
$ $ $
Interest on drawings Precious 450
Marcia 630 1 080
26 180
Less Interest on Precious 4 500
capital
28
Marcia 3 500 8 000
Partner’s salary Marcia 12 000 20 000
6 180
Profit shares Precious 3 708
Marcia 2 472 6 180
b To avoid future disagreements and misunderstandings

c i To compensate the partner investing the most capital.
ii To deter partners from making drawings and to penalise the partner making the most
drawings.
iii To reward the partner who has the greatest share of the work and responsibilities.

30 a
John and David
Profit and loss appropriation account for the year ended 31 January 20–8
$ $ $
Interest on drawings John 220
David 180 400
14 600
Less Interest on John 1 500
capital
David 1 200 2 700
Partners’ salaries John 8 000
David 6 000 14 000 16 700
(2 100)
Loss shares John 1 050
David 1 050 2 100
b
John
Current account
20–7 20–8
29
Feb 1 Balance b/d 1 750 Jan 31 Interest on capital 1 500
20–8 Salary 8 000
Jan 31 Drawings 11 000 Balance c/d 4 520
Interest on drawings 220
Loss share 1 050
14 020 14 020
20–8
Feb 1 Balance b/d 4 520
David
Current account
20–8 20–7
Jan 31 Drawings 8 000 Feb 1 Balance b/d 2 260
Interest on drawings 180 20–8
Loss share 1 050 Jan 31 Interest on capital 1 200
Balance c/d 230 Salary 6 000
9 460 9 460
20–8
Feb 1 Balance b/d 230
[Accounts could have been displayed in columnar format]

c
John
Capital account
20–8 20–8
Feb 2 Current 3 000 Feb 1 Balance b/d 50 000
50 000 50 000
20–8
Mar 1 Balance b/d 47 000
David
Capital account
20–8 20–8
Feb 28 Balance c/d 47 000 Feb 1 Balance b/d 40 000
3 Bank 7 000
47 000 47 000
20–8
Mar 1 Balance b/d 47 000
30
31 a
Terry and Candy
Profit and loss appropriation account for the year ended 31 August 20–5
$ $ $
Interest on drawings Terry 480
Candy 720 1 200
40 700
Less Interest on capital Terry 4 800
Candy 3 000 7 800
Partners’ salary Candy 17 000 24 800
15 900
Profit shares Terry 10 600
Candy 5 300 15 900

b
Terry
Current account
20–4 20–5
Sep 1 Balance b/d 3 250 Aug 31 Interest on capital 4 800
20–5 Profit share 10 600
Aug 31 Drawings 12 000 Balance c/d 330
Interest on drawings 480
15 730 15 730
20–5
Sep 1 Balance b/d 330
Candy
Current account
20–5
Aug 31 Drawings 18 000 Sep 1 Balance b/d 1 050
Interest on drawings 720 20–5
Balance c/d 7 630 Aug 31 Interest on capital 3 000
Salary 17 000 31
Profit share 5 300
26 350 26 350
20–5
Sep 1 Balance b/d 7 630

c
Terry and Cindy
Terry Cindy
$ $ $
Capital accounts 80 000 50 000 130 000
Current accounts (330) 7 630 7 300
137 300

32 a
Bill and Ben
Statement of financial position at 31 March 20–4
$ $ $
Assets
Non-current assets at book value 87 100
Current assets 38 300
Bill Ben Total
Current accounts
Opening balance 2 950 (1 700)
Interest on capital 1 500 750
Partner’s salary 6 000
Profit shares 4 960 2 480
9 410 7 530
Less Drawings 6 000 12 000
Interest on drawings 180 360
6 180 12 360
3 230 (4 830) (1 600)
73 400
32
Non-current liabilities 12 000
Current liabilities 40 000
b Ben’s current account had a debit balance of 1 700 at the start of the year and a debit
balance of 4 830 at the end of the year. His drawings are exceeding the amount to which he is
entitled. He should be advised to reduce his drawings. He is withdrawing funds which could
be used within the business.
Bill is concerned about the erosion of the bank balance and the effect on the business.

33 a
Ravi and Iqra
Income statement for the year ended 30 April 20–3
$ $ $
Fees from clients 106 075
Less Wages (57 870 + 1 090) 58 960
Repairs to equipment 2 720
Insurance (3 450 − 360) 3 090
Printing and stationery 320
Provision for doubtful debts
((5% × 8 000) − 360) 40
Depreciation equipment
(20% × 21 000) 4 200
(25% × (32 000 − 8 000) 6 000 81 345
Less Loan interest (600 + 600) 1 200
33
b
Ravi and Iqra
Profit and loss appropriation account for the year ended 30 April 20–3
$ $ $
Less Interest on capital Ravi 3 500
Iqra 2 000 5 500
18 030
Profit shares Ravi 9 015
Iqra 9 015 18 030

c
Ravi ad Iqra
Statement of financial position at 30 April 20–3
$ $ $
depreciation value
Assets
Non-current assets
Premises 70 000 70 000
Equipment 21 000 8 400 12 600
Motor vehicles 32 000 14 000 18 000
123 000 22 400 100 600
Current assets
Bank 23 280
Cash 2 540
33 780
Ravi Iqra Total
Capital accounts 70 000 40 000 110 000 34
Current accounts
Opening balance 1 020 (150)
Interest on capital 3 500 2 000
Loan interest 600
14 135 10 865
1 935 (955)
980
110 980
Loan - Ravi 20 000
Current liabilities
3 400

34 a
Nicola and Lydia
Income statement for the year ended 31 October 20–8
$ $ $
Gross profit 19 000
Add Discount received 630
Commission receivable 1 090
debts (179 − (4% × 3 850)) 25
20 745
Less Discount allowed 940
Wages 5 670
Rent and rates (2 120 − 48) 2 072
Motor vehicle expenses (950 + 105) 1 055
Depreciation furniture and fittings
(10% × 10 500) 1 050
(20% × (19 000 − 6 840) 2 432 16 875
35
b
Nicola and Lydia
Profit and loss appropriation account for the year ended 31 October 20–8
$ $ $
Less Interest on capital Nicola 400
Lydia 400 800
2 870
Profit shares Nicola 1 722
Lydia 1 184 2 870

c
Nicola and Lydia
Statement of financial position at 31 October 20–8
$ $ $
depreciation value
Assets
Non-current assets
Furniture and fittings 10 500 3 150 7 350
Motor vehicles 19 000 9 272 9 728
29 500 12 422 17 078
Current assets
Inventory 7 745
Petty cash 50
11 539
Total assets 28 617
Nicola Lydia Total
Current accounts 36

Interest on capital 400 400
2 240 1 784
140 (116) 24
20 024
Current liabilities
Other payables 105
Loan 4 000
8 593

35 a
Yassin and Muneen
Statement of corrected profit for the year ended 30 November 20–6
$ $
Add Insurance prepaid omitted 60
19 840
Less Depreciation omitted 1 800
Creation of provision for doubtful debts omitted 232
Damaged inventory 1 200 3 232
Corrected profit for the year 16 608
Profit shares Yassin 11 072
Muneen 5 536 16 608
b
Yassin and Muneen
Corrected Statement of financial position at 30 November 20–6
$ $ $
depreciation value
Assets
Non-current assets
Premises 50 000 50 000 37
Machinery 24 000 4 800 19 200
Furniture and equipment 18 000 5 400 12 600
92 000 10 200 81 800
Current assets
Inventory (23 200 − 1 200) 22 000
Petty cash 50
33 478

Yassin Muneen Total
Current accounts
2 672 (1 064) 91 608
96 608
Current liabilities
18 670

36 a i Work in progress is the goods which are partly completed at the end of the financial year.
ii Direct expenses are those expenses which a manufacturer can directly link with the
product being manufactured.
iii Indirect factory expenses are sometimes referred to as factory overheads. These are
costs of operating the factory which cannot be directly linked with the product being
manufactured.
b Prime cost
Cost of materials consumed: opening inventory of raw materials 23 500 + purchases
287 560 − closing inventory of raw materials 21 500 = 289 560
Direct factory wages 199 450, direct expenses 8 740
Prime cost: 497 750
c Cost of production
Prime cost 497 750 + overheads (indirect factory expenses) 186 330 + opening work in
progress 9 880 − closing work in progress 10 040 = 683 920
37 a The purpose of a manufacturing account is to calculate how much it has cost the business to
manufacture the goods produced in the financial year.
b i rime cost is the total of the three elements of cost – direct material, direct labour and
P
direct expenses. Cost of production is the prime cost plus the factory overheads.
ii irect labour is the cost of the wages of the people who are employed in the factory
D
making the goods. Indirect labour is the cost of the wages of the people who are
employed in the factory but not actually involved in the production of the finished goods.
c
The Vasant Vihar Manufacturing Company
38
Manufacturing account for the year ended 31 December 20–4
$ $ $
Cost of material consumed
Opening inventory of raw material 16 650
Purchases of raw materials 210 500
Carriage on raw materials 3 120 213 620
230 270
Less Closing inventory of raw material 17 720 212 550
Direct wages (197 280 − 1 850 + 1 990) 197 420
Prime cost 409 970
Factory overheads
Factory supervisors’ wages 32 100
Factory rent and rates 15 500
Factory insurance (4 800 + 760 − 800) 4 760
Factory general expenses 12 700
Depreciation factory machinery
(20% − (56 000 − 20 160)) 7 168 72 228
482 198
Add Opening work in progress 18 222
500 420
Less Closing work in progress 19 115
Cost of production 481 305

38 a
Homi Modi Manufacturers
Manufacturing account for the year ended 31 March 20–9
$ $ $ $
Purchases of raw material 98 730
Less Closing inventory of raw material 108 610
Direct wages 8 170 100 440
Prime cost 95 680
Factory overheads 196 120
Factory indirect wages 37 250
Factory insurance (10 500 × 2/3) 7 000
Factory light and heat (13 300 × 4/5) 10 640
Factory operating expenses
(18 210 × 2/3) 12 140
Depreciation factory machinery 9 750 76 780
272 900
279 020
39
b
Homi Modi Manufacturers
Income statement (trading section only) for the year ended 31 March 20–9
$ $ $
Revenue 400 500
Less Cost of sales
Opening inventory of finished
goods 16 380
Purchases of finished goods 22 540
310 470
Less Closing inventory of finished
goods 13 280 297 190
c Reduce cost of production – source cheaper supplies / obtain higher trade discount / buy in
bulk, reduce cost of wages, reduce factory overheads.
Increase revenue – increase selling price / reduce trade discount allowed.
Reduce cost of purchases of finished goods – purchase cheaper finished goods / consider
making them rather than buying if possible.

39 a
Strand Road Manufacturing Limited
Manufacturing account for the year ended 30 June 20–5
$ $ $
Purchases of raw materials 26 830
30 970
Less Closing inventory of raw material 2 870 28 100
Cost of jars and labels

Opening inventory of jars and labels 3 120
Purchases of jars and labels 15 250
18 370
Less Closing inventory of jars and labels 3 390 14 980
43 080
Direct wages 32 560
Prime cost 75 640
Factory overheads
Factory indirect wages 6 120
Factory light and power 9 440
40
Factory operating expenses 4 910
Depreciation factory machinery 5 500 25 970
101 610
102 805
b
Strand Road Manufacturing Limited
Income statement (trading section only) for the year ended 31 March 20–5
$ $ $
Revenue 295 600
Less Cost of sales
Opening inventory of finished goods 8 190
109 170
Less Closing inventory of finished goods 7 940 101 230

40 a T
he liability of the owners/shareholders of the business for the debts of that business is
limited to the amount they agree to contribute to the capital of the business.
b Advantages of operating as a limited company:
Shareholders are only liable for the debts of the company up to the amount they agree to
contribute.
A company is a separate legal entity.
It is possible to access a greater capital than a sole trader/partnership.
It is usually easier for a company to obtain loans than it is for a sole trader/partnership.
A company has continuity of existence.
Disadvantages of operating as a limited company:
Many legal requirements have to be observed to form and operate as a limited company.
Annual financial statements have to be prepared and provided to shareholders and these
must also be filed with the registrar of companies.
c i Issued share capital is the amount of share capital actually issued to the shareholders.
ii Called-up share capital is that part or the issued share capital for which payment has
been requested from shareholders.
iii Paid-up share capital is that part of the called-up share capital for which the company
has received payment from shareholders
d Equity is the total funds provided by the shareholders of a limited company. This consists
of ordinary share capital, non-redeemable preference shares, general reserve and retained
earnings.
41 a
Ordinary shareholders receive a dividend after preference share dividend has been
accounted for. The dividend is not a fixed amount but varies according to the profits of the
41
company. If the company is wound up the ordinary shareholders are not repaid until all the
other liabilities and preference shares have been paid. Ordinary shareholders are usually
entitled to vote at the annual general meeting.
Preferences shares receive a fixed rate of dividend which is payable before any dividend on
ordinary shares. If the company is wound up the preference shareholders are repaid after
outside liabilities but before the ordinary shareholders. Preference shareholders are not
usually entitled to vote at the annual general meeting. There are several different types of
preference shares such as redeemable and non- redeemable.
b The difference between redeemable and non-redeemable preference shares is important
because it affect the treatment of dividend and how they are included in the statement of
financial position.
Redeemable preference share dividend is included as a finance cost in the income
statement and the shares are included in the non-current liabilities in the statement of
financial position. The dividend on non-redeemable preference shares is included in the
statement of changes in equity and the shares are included in the equity in the statement of
financial position.
c Retained earnings are the profits which have accumulated in the company in the form of
profits not appropriated for dividend. These are carried forward to later years and appear in
the equity and reserves section of the statement of financial position.
d Debentures are long-term loans. They carry a fixed rate of interest, which is payable
irrespective of profits. The loan interest is included in the finance costs in the income
statement. The debentures are included in the non-current liabilities in the statement
of financial position. Debenture holders are repaid before shareholders in the event of a
winding-up. As the debenture holders are not members of the company they are not entitled
to vote at the annual general meeting.

Ordinary shareholders receive a dividend after debenture interest and preference share
dividend have been accounted for. The dividend is not a fixed amount but varies according
to the profits of the company. If the company is wound up the ordinary shareholders are
not repaid until all the other liabilities, including the debentures and preference shares have
been paid. Ordinary shareholders are usually entitled to vote at the annual general meeting.
42 a 700 000
b 9 000
c 2 500
d The retained earnings are the profits which have not been distributed as dividends but have
been retained within the company.
e The general reserve is the total of annual profits which have been transferred from the
retained earnings as a means of ploughing back profits within the company.
f Dividends proposed are those dividends which remain unpaid at the end of the financial
year (they have been proposed by the directors but not yet approved by the shareholders).
Dividends paid are sometimes referred to as interim dividends and are those dividends
which have been paid to shareholders during the financial year.
g Debenture interest paid appears in the income statement because it is interest on a loan.
Ordinary share dividend paid appears in the statement of changes in equity as it represents
the share of the profits paid to ordinary shareholders.
43 a 20 000 − 2 500 = 17 500
b
LY Limited
Statement of changes in equity for the year ended 31 July 20–3
Ordinary General Retained Total 42
share reserve earnings

capital
$ $ $ $
On 1 August 20–2 80 000 7 500 87 500
Profit for the year 17 500 17 500
Interim ordinary share dividend for the year
ended 31 July 20–3 (1 600) (1 600)
Transfer to general reserve 8 000 (8 000)
Balance at 31 July 20–3 80 000 8 000 15 400 103 400

44 a 41 000 − 1 200 − 6 000 − 3 000 = 30 800

b
H Limited
Statement of changes in equity for the year ended 30 June 20–4
Ordinary General Retained Total
capital
$ $ $ $
On 1 July 20–3 200 000 21 000 18 500 239 500
ended 30 June 20–4 (4 000) (4 000)
Balance at 30 June 20–4 200 000 30 000 36 300 266 300
c
H Limited
Extract from statement of financial position at 30 June 20–4
$ $ $
Equity and reserves
Ordinary share capital 200 000
General reserve 30 000
Retained earnings 33 300 43
266 300
45 a
KT Limited
Statement of changes in equity for the year ended 30 June 20–6
capital
$ $ $ $
On 1 July 20–5 150 000 15 000 9 620 174 620
ended 30 June 20–6 (3 000) (3 000)
Balance at 30 June 20–6 150 000 20 000 19 730 189 730

b
KT Limited
Statement of financial positon at 30 June 20–6
$ $ $
depreciation value
Assets
Non-current assets
Non-current assets 237 000 65 000 172 000
Current assets
Inventory 42 000
Other receivables 4 210
Bank 11 130
94 390
Total assets
266 390
Equity and liabilities
Equity
Retained earnings 19 730
44
189 730
6% debentures 30 000
Current liabilities
446 660
46 a 18 200 − 3 600 = 14 600

b 12 500 + 14 600 − 5 000 − 3 000 = 19 100
c 6%
d 6%
e Ordinary share dividend is not a fixed amount/fixed percentage (although many companies
try to maintain a similar rate each year). It depends on the trading results of the company.
f To plough back a certain amount of profit to indicate that it is for long-term use within the company.
g This is a ‘half way’ dividend which is paid during the financial year to which it relates.

47 a
NN Limited
Statement of changes in equity for the year ended 31 May 20–9
capital
$ $ $ $
On 1 July 20–8 170 000 10 000 5 200 185 200
ended 31 May 20–9 (3 600) (3 600)
Balance at 31 May 20–9 170 000 14 000 17 100 201 100
b
NN Limited
$ $ $
depreciation value
Assets
Non-current assets
Premises 129 000 129 000
Machinery and equipment 82 000 32 800 49 200
45
Motor vehicles 28 000 15 750 12 250
239 000 48 550 190 450
Current assets
Inventory 25 320
Less Provision for doubtful debts 44 428 20 972
Bank 31 300
878 425
Equity and liabilities
Equity
Retained earnings 17 100
201 100
4% debentures 50 000
Current liabilities
17 775
Total capital and liabilities 268875

c Considerations:
The profit for the year will decrease by the additional debenture interest of $2 800, so the
amount of profit available for the ordinary shareholders will decrease.
Is the profit for the year expected to increase as a result of the expansion and when will this
take effect?
If the profit does increase by more than $2 800 it may result in more profit available for
ordinary shareholders.
The debenture holders have a prior claim on the profits on the company in the event of a
winding-up.
48 a 24.00% b 13.00% c 19.10 times
d 1.73 : 1 e 1.20 : 1 f 15.05%
49 a i Capital owned is the amount owed by a business to the owner(s) of that business.
ii Capital employed is the total funds which are being used by a business. This can be
calculated as capital provided by owner(s) plus non-current liabilities. An alternative
calculation is total assets less current liabilities.
b i 22.50% ii 13.46% iii 13.55% iv 11.51 times
c i orking capital is the difference between the current assets and the current liabilities
W
and is the amount available for the day-to-day running of the business.
ii Two from:
• cannot meet current liabilities when they are due
• may experience difficulties in obtaining supplies on credit
• cannot take advantage of cash discounts 46
• cannot take advantage of business opportunities when they arise.
iii Two from:
• introduction of further capital
• obtaining long term loans
• disposal of surplus non-current assets
• reduction of drawings/dividends.
iv 1. No effect. Current assets increase by $500 and current liabilities increase by same
amount.
2. Decrease by $2 500. Current assets decrease by $2 500. No effect on current liabilities.
3. Increase by $5. Current assets decrease by $75 but current liabilities decrease by $80.
4. Increase by $200. Inventory decreases by $800 and trade receivables increase by
$1 000, so the current assets increase by $200. No effect on current liabilities.
50 a i 1.94 : 1 ii 0.82 : 1 iii 30 days iv 42 days
b Current ratio slightly less in 20–7, but no significant changes. The current assets are almost
double the current liabilities.
The liquid (acid test) ratio has fallen by almost half. The liquid assets are now less than the
current liabilities and the company may have problems paying debts when they fall due.
The credit customers are taking an average of six more days to pay their accounts. The credit
control procedures may need tightening as the company has to wait longer to obtain the
money.
The company is taking an average of seven more days to pay the credit suppliers. This
may be a ‘knock on’ effect from the late-paying customers, but may result in the suppliers
refusing further supplies.

c Considerations:
In general, discontinuing cash discount will result in an increase in the profit for the year as
the expenses are decreased.
However, the average credit customer is taking 30 days to pay their account so cash discount
will not be awarded to the majority of customers in any event.
Cash discount may act as an encouragement to pay promptly but does not seem to be
having that effect in this case.
Prompt payment reduces the risk of irrecoverable debts, but the incentive of cash discount
is ineffective in this case.
Recommendation – Continue to offer discount as it makes little difference to the profit for
the year. But as this is not encouraging credit customers to pay within the credit period
recommend improve credit control procedures.
51 a i 12.23 times
• One from: Reduce inventory levels
• Generate more sales activity
b i 43 days
ii Unsatisfied; The credit customers are taking 13 days more than the period of credit
allowed.
iii Two from:
• improve credit control policy
• offer cash discounts for early settlement
• charge interest on overdue accounts 47
• refuse further supplies until outstanding debt is cleared
• invoice discounting and debt factoring.
c i 32 days
ii Has the use of the money within the business for a longer period of time.
iii One from:
• the suppliers may refuse credit in the future
• the suppliers may refuse further supplies
• any cash discount for early settlement will be lost
• the relationship with the suppliers may be damaged.
iv If credit customers do not settle their accounts promptly the business may not be able
to pay the credit suppliers promptly.
52 a i 16.67%
ii Two from:
• measures the success in selling goods
• shows the gross profit earned for every $100 of sales
• can be compared with previous years
• can be compared with other businesses
• shows the percentage of sales income spent on the cost of goods (83% in this case).
b i 11.90%
ii Two from:
• measures the overall success of the business
• shows the profit for the year earned per $100 of sales

• can be compared with previous years

• can be compared with other businesses
• shows the percentage of sales income spent on expenses (5% in this case).
c The difference between the gross margin and the profit margin represents the percentage of
expenses to revenue. The lower the percentage the more control the business has over the
expenses.
d This is what was previously Part c
e This is what was previously Part d
53 a T
he gross profit is overstated by $5 500. The sales returns, $4 000, were omitted so the
revenue was overstated resulting in the gross profit being overstated. The closing inventory
was overstated by $1 500, so the gross profit is also overstated.
b The rate of inventory turnover is understated by 1.79 times. Using the original figures the cost
of sales was $180 000 and the average inventory was $9 500 so the rate of turnover was 18.95.
After correcting the error the cost of sales is $181 500 and the average inventory is $8 750,
making the rate of turnover 20.74 times.
c The revenue is overstated by $4 000 as sales returns of that amount were omitted.
d The expenses were not affected by either of the errors.
e The profit for the year is overstated by $5 500. The gross profit was overstated by $5 500 and
the expenses were unchanged so the profit for the year is overstated by $5 500.
f The equity at 31 December 20–8 is overstated by $5 500. The profit for the year was
overstated by $5 500 but there is no change to the opening equity or the drawings so the
closing equity is overstated by $5 500.
54 a i he bank manager is interested to know whether there is adequate security to cover any
T
loan or overdraft which may be granted, whether it can be repaid when due and whether 48
interest can be paid when due.
ii A credit supplier is interested in the liquidity position and the payment period for trade
payables. These may be considered in determining the credit limit and the length of
credit allowed.
iii An employee is interested to know if the company is able to continue operating, and
so jobs will be maintained and wages (and sometimes contributions to private pension
schemes) will continue to be paid.
iv A potential buyer of the business is interested in the profitability of the business and the
market value of the assets of the business.
b i oney measurement means that only information which can be expressed in monetary
M
terms can be recorded in the accounting records. This means that there are many
important factors which influence the performance of a business which will not appear,
e.g. goodwill, quality of management, skill of the workforce, government policies,
competition, etc.
ii All businesses should apply the basic accounting principles of prudence and
consistency, but there are several acceptable accounting policies which may be applied
in the accounting records, e.g. different methods of depreciation. Where businesses have
used different policies it is difficult to make a meaningful comparison of their results.
iii Historic cost means that transactions are recorded at the actual cost price. Comparing
transactions taking place at different times can be difficult because of the effect of inflation.
55 a i 23.00% ii 8.15% iii 11.43 times iv 8.93%
v 11.72% vi 2.11 : 1 vii 1.04 : 1

b i ave has the better gross margin. This is probably because he is trading in clothing
D
which has a higher mark-up than food.
ii Dave has a much lower profit margin. This will be affected by the different types of
expenses; Dave will have rent which Ann and Susan do not have (although they will have
the expense of managers’ salaries).
iii Dave has a much lower rate of inventory turnover. This will be affected by the fact that
the businesses trade in different goods and food has a much quicker rate of turnover
than clothing.
iv Dave has the lower return on capital employed. This may be affected by the fact that his
business is only two years old. It may be that Dave is not employing the capital in the
most effective way.
v Dave achieved a slightly lower return on his capital employed. This will be influenced
by the fact that some of Dave’s long term funds were in the form of loans. If all the funds
had been in the form of capital the rate would have been even lower. This will probably
also be influenced by the fact that Dave’s business is only two years old.
vi Dave’s ratio is satisfactory as his current assets are twice the amount of the current
liabilities. Ann and Susan’s current ratio would appear to be more than adequate and may
indicate that they are not making the most efficient use of their immediate assets. They
will not have any trade receivables so the assets will consist only of inventory and money.
vii Dave’s ratio is satisfactory as his liquid assets are equal to his immediate liabilities. Ann
and Susan’s liquid ratio would appear to be more than adequate as the assets in the
form of money are twice the immediate liabilities. This may indicate that they are not
using the immediate funds in the most efficient way.
c Excluding factors given in question (type of goods, business structure, management,
ownership of premises / renting, life of business, terms of trade), five from: 49
• application of different accounting policies
• non-monetary items
• details not shown in accounts
• statements are for one year only
• year-end at different point in trading cycle
• effect of inflation on historic cost figures.

Cambridge IGCSE and O Level Accouting Workbook Answers

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Cambridge IGCSE and O Level Accouting Workbook Answers

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Cambridge IGCSE and O Level Accounting

© Cambridge University Press 2018

7 a Provide information about the assets and liabilities of the business

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Purchases returns account

Aswan Traders account

Commission receivable account

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Office expenses account

b The balance of the account is shown after every transaction.

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May 1 Balance b/d 860

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Operating expenses account

Carriage outwards account

Sales returns account

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ABC Finance Loan account

13 a Mar 1 Amount owed by Anwar to Akinola

Double entry: debit sales returns account

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Rent and rates 4 700

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© Cambridge University Press 2018

b To encourage customers to pay their accounts promptly.

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HiFinance Loan account

Motor vehicles account

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Motor expenses account

Sales returns account

Carriage inwards account

Discount allowed account

Discount received account

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Southern Traders account

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Fixtures and fittings account

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Commission receivable account

Purchases returns account

Machine repairs account

Discount allowed account

Discount received account

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26 High Street Trading Co 19 19

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6 Cleaner's wages 30 30

Postages & stationery account

c Credit cash column in cash book

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f i Purchases ledger ii Sales ledger

Purchases returns journal

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Purchases returns account

Pet Products Ltd account

10 a i Capital expenditure is money spent on purchasing non-current assets, or improving