+-LCCI Level 1 - How To Pass Book-Keeping (Recommeded Book) - +

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How to Pass
Book-keeping
FIRST LEVEL Teachers Guide
Keith F Bird
MSc BSc (Econ) ACIS
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First published 1999 LCCI CET 1999 British Library Cataloguing-in-Publication Data Bird, Keith F How to Pass Book-keeping, First Level 2nd ed. Teachers guide 1. Book-keeping Study and teaching I.Title 657.20071 ISBN 1 86247 060 X All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of the Publisher. This book may not be lent, resold, hired out, or otherwise disposed of by way of trade in any form of binding or cover, other than that in which it is published, without the prior consent of the Publisher. 10 9 8 7 6 5 4 3 2 1
Typeset by the London Chamber of Commerce and Industry Examinations Board Printed and bound in Hong Kong by Peninsula Publishers
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Contents
About the author Acknowledgements Introduction Cross-references to How to Pass Book-keeping, First Level (students book) Lesson 1 The accounting equation Transactions through double entry 2 Purchases, sales, and returns 3 Expenses: profit or loss 4 Balancing accounts: the trial balance 5 Trading and Profit & Loss Accounts 6 The balance sheet 7 Final accounts: more features 8 The division of the ledger 9 Bank facilities Cash Book: 2 columns 10 Cash Book: 3 columns cash discount 11 Purchases and Sales Day Books 12 Returns Day Books 13 Accruals and prepayments expenses 14 Accruals and prepayments income 15 Depreciation of fixed assets 16 Bad debts and provision for doubtful debts 17 Bank reconciliation statements 18 Petty Cash Book imprest system 19 Capital and revenue expenditure 20 The journal 21 Errors in the accounts 1 22 Errors in the accounts 2 23 Final accounts and adjustments further considered Stock valuation 24 Club and society accounts 25 The presentation of answers Page vii vii viii x
1 11 19 23 27 32 36 44 49 60 70 78 88 99 105 120 132 141 151 158 168 174 178 188 198
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Appendix 1: Exercises, some worked solutions, and support material Appendix 2: Summarized answers to selected exercises Appendix 3: Glossary Notes
201 312 321 326
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About the author

Keith Bird has had over 35 years experience lecturing in business studies in further and higher education and has taught professional courses at all levels. He is the author of the students book How to Pass Book-keeping, First Level, published by the London Chamber of Commerce and Industry Examinations Board (LCCIEB). He has also written several study manuals that have been published for professional courses. Keith Birds association with the LCCIEB extends over 25 years and, for much of that time, he has served as a Chief Examiner in First Level Book-keeping and Second Level Book-keeping and Accounts. Acknowledgements In the preparation of this book, my thanks are due to Derek Skidmore MSc, FCCA, ACMA, co-author of How to Pass Book-keeping and Accounts, Second Level, for his review of the draft of the book and for his helpful suggestions. My thanks are also due to the staff of the LCCIEB Publishing Department for preparing this text for publication.
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Introduction
The How to Pass Book-keeping, First Level:Teachers Guide is closely geared to the LCCIEB First Level Book-keeping Extended Syllabus. It is intended for a teaching course that extends over 60 hours.There are 24 lessons concerning book-keeping, each of 2 1/4 hours duration. The remaining teaching time should be used for Lesson 25, which covers the important topic of presenting examination answers, together with revision and pre-examination preparation. The book is addressed to the teacher. It indicates the importance of particular topics and subject points and provides hints about how to present material. The Teachers Guide is intended to complement the students book How to Pass Book-keeping, First Level. At the same time, with a few exceptions, the explanations, examples, and exercises are free standing, providing the teacher with a store of additional teaching resource. The Teachers Guide should be used in combination with the students book and, for this purpose, cross-references between the two books are provided on page x. Individual cross-references are also given at certain points within the text. The approach adopted in the Teachers Guide is that of keeping in mind the question Why? At each stage, the stress should be on developing the students understanding of the need for, and effect of, the various book-keeping entries, as well as of the subject as a whole. Only by this means can inappropriate examination answers be prevented and a sound basis be provided for applying knowledge in the business world and/or for further accounting studies. As the book progresses, the material becomes more difficult. The early stages of the book assume that the student has only a limited knowledge of business and accounts. Gradually, more elements, features, and terms are introduced that sometimes require the modification of methods for recording transactions already learnt. For example, at first, transactions are recorded in the ledger only. With the introduction of day books, the system of recording transactions changes. The time spent on the ledger only entries is not, however, wasted because it enables the student to appreciate the relationship between the ledger and the day books. Inevitably, some students will come to the course with some knowledge or awareness of aspects of book-keeping and, understandably, they might question why a particular matter is not taken account of at a certain stage.This situation might apply in the case of the depreciation of fixed assets, which is not dealt with until Lesson 15. The progressive nature of the course is discussed at the beginning of Lesson 2. At that stage, the teacher might find it helpful to explain to the class that different features are to be included as the course develops. The text includes numerous examples, together with short reinforcement exercises. Appendix 1 contains exercises for Lessons 124 and support material. Certain of the exercises are immediately followed by worked solutions; they are marked with an asterisk (*) both in the Appendix and in the main part of the book. The exercises are suitable for photocopying as required.Appendix 2 contains summarized answers, where appropriate, to questions for which solutions are not provided. These summarized answers include the
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results of certain calculations, key account entries, and other significant figures such as gross profit, net profit, asset totals, and trial balance totals. Other answers or parts of answers, too detailed for inclusion, such as account or journal entries, may be established by reference to the text of the book as well as by reference to the fully worked solutions in Appendix 1. It is advisable to make full use of the Glossary.
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Cross-references to How to Pass Book-keeping, First Level (students book)

Teachers Guide Page Lesson 1 1 The accounting equation Transactions through double entry 10 2 Purchases, sales, and returns 17 3 Expenses: profit or loss 21 4 Balancing accounts: the trial balance 25 5 Trading and Profit & Loss Accounts 30 6 The balance sheet 33 7 Final accounts: more features 43 8 The division of the ledger Vertical layout of the balance sheet 49 9 Bank facilities Cash Book: 2 columns 56 10 Cash Book: 3 columns cash discount 65 11 Purchases and Sales Day Books 73 12 Returns Day Books 83 13 Accruals and prepayments expenses 94 14 Accruals and prepayments income 99 15 Depreciation of fixed assets 113 16 Bad debts and provision for doubtful debts 124 17 Bank reconciliation statements 132 18 Petty Cash Book imprest system 142 19 Capital and revenue expenditure 148 20 The journal 157 21 Errors in the accounts 1 (types of error) 163 22 Errors in the accounts 2 (adjusting for errors; the effects of errors) 167 23 Final accounts and adjustments further considered Stock valuation 177 24 Club and society accounts 187 25 The presentation of answers How to Pass Book-keeping, First Level Chapter Page 1 1 2 9 3 15 4 22 5 30 6 38 7 49 8 54 9 66 8 60 10 73 11 79 12 85 13 96 14 104 15 120 15 120 16 133 17 18 19 20 21 22 152 164 180 189 201 210
22 23 23 24 Appendices 1, 2, and 3
210 231 237 246 27284
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Lesson 1: The accounting equation Transactions through double entry

Topic summary

The need for accounting records The information that needs to be recorded The means of obtaining resources, ie assets: ownership v. external sources of funds The business as an entity The dual effect of a business transaction Double-entry recording of transactions
Extended Syllabus references

1.1 1.2 1.3 1.4 Explanation and use of the terms debtor, creditor, asset, liability, capital The accounting equation: assets = capital + liabilities and its expression in the balance sheet The effect upon the accounting equation of basic business transactions (including the single-side transaction, eg use of bank balance to buy fixed assets) The effect upon the accounting equation of the dual-type transaction, ie where the effect upon one side of the equation is matched by a combination of 2 (or possibly more) effects on the other side Purpose of the use of debit and credit for the recording of transactions The preparation of T-type accounts Specifying a transaction/entry within an account, ie date together with, normally, the name of the other account/day book involved in that particular transaction/ entry Completion of debit and credit entries recording individual transactions
2.1 2.2 2.3
2.4
The underlying purpose of this lesson is to develop recognition of the need for, and purpose of, recording business transactions and their effects. Understanding the two-fold aspect of any transaction (benefit and detriment, and plus and minus) is essential for a grasp of double-entry book-keeping. In the earlier stages of the lesson especially in meeting the aims of Steps 1 to 3 much can be done by using the question-and-answer method with the class, including a brief discussion of the students responses. The varied backgrounds and experiences of class members should be drawn on whenever possible. Always relate the discussion to a particular aim, listing points on the whiteboard or overhead projector as appropriate.
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The accounting equation
Step 1
Aim: to develop an appreciation of the need for business records of account Following a brief introductory chat with the class, ask the students to form pairs and to discuss and write down answers to the question:Why does a business need to keep records of account? At this stage, the students are likely to give broadly based answers, such as:

to to to to to to to
run (more) effectively and efficiently; know what money is coming in and going out; know what the business is earning and spending; control the business: to make adjustments as necessary; make decisions about the future; provide information for making decisions about the future; deal with the tax authorities.
Step 2
Aim: to recognize the key areas of information that need to be recorded From the answers to the questions in Step 1, identify areas of information that will be required; for example: Cash: availability and movements Amounts owed by the business Amounts owed to the business The possessions - assets Amount of money invested in the business Purchases Sales Expenses Profit Capital
Step 3
Aim: to recognize the resources needed and, broadly, the means of obtaining them: proprietor versus external sources While the students remain in pairs, 1 Ask them to imagine that they are establishing a business, such as a shop or factory. Ask them to write down the resources that they would need.
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2 As the students suggest the resources, list these on the whiteboard in two categories, those that are: (a) measurable in money terms, eg cash, premises, machines, and motor vehicles; and (b) less measurable, eg skills, contacts, and experience. Show that category (a) is recorded in the accounts as assets. Category (b) is less easily recorded, but may be, for example, as skills as part of wage payments. It will be dealt with at a later stage. Explain how the assets might be obtained. Show that, in establishing a business, a proprietor might: (a) treat his or her own motor vehicle to be for use within the business; (b) put his or her money into the business, so that assets can be bought; (c) borrow money, ie obtain a loan. Emphasize that (a) + (b) = capital, ie the proprietors stake; and that (c) = liability.
Step 4
Aim: to understand the business as an entity and to appreciate the accounting equation
1 Explain to the students that a business is an entity that is distinct from its owner. As a result, the accounts are to be kept for the business and they are separate from the owners accounts.You may illustrate the concept like this:
invests in Business accounts withdraws from Personal accounts
2 Explain, with reference to Step 3, that the money a proprietor invests to set up and run a business is usually supplemented by borrowed money. The means of financing a business may be expressed as the accounting equation:
eg Assets = capital + liability (eg a loan) Assets 15,000 = capital 12,000 + liability 3,000
Alternatively, the equation may be expressed as:

eg Assets less liabilities = capital Assets 15,000 less 3,000 = 12,000
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3 Ask the students to work through the following exercise, inserting the missing figure in each of the columns.
Assets 2,430 Capital 1,920 3,060 2,500 4,120 Liabilities 1,040 780 0
(1) (2) (3) (4) (5)
6,530 5,830
Step 5
Aim: to understand the effect of business transactions; their double aspect
1 Show that the financial position of a business at any point in time the accounting equation can be expressed in the form of a balance sheet, eg:
F Lim Balance sheet at 1 March Year 3 Office furniture Motor vehicle Cash at bank 800 5,300 1,900 8,000 Capital Loan from J Black 7,000 1,000 8,000
2 Explain the term business transaction. Show, using the following example, the effect of transactions, stage by stage, upon a balance sheet. It is important not to confuse the students with transaction moves that are too rapid. Ensure they fully understand the effect of each transaction before you move onto the next. The transactions (which are defined in brackets) of F Lim in Year 3 are as follows: (a) On 2 March, a typewriter (classed as office equipment) is bought by drawing a cheque on the bank for 150. (Purchase of an asset, with payment by cheque.) (b) On 4 March, goods are bought from T Smith on credit for 500. (Purchase of an asset on credit.) (c) On 9 March, Lim sells some of the goods that had cost 200 for the same amount, receiving a cheque in exchange. (Sale of asset, with immediate payment.)
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(d) On 12 March, Lim sells some goods that had cost 200 to K Woolf on credit for the same amount. (Sale of asset on credit.) (e) On 16 March, Lim sends a cheque for 300 towards the amount owing to T Smith. (Payment of an amount owing.) (f) On 21 March, Lim receives a cheque for 200 from his debtor, K Woolf. (Receipt of money from a debtor.) 3 Use the following example to show the effect of transaction (a) on F Lims balance sheet:
F Lim Balance sheet at 2 March Year 3 Office furniture 800 Office equipment (+ 150) 150 Motor vehicle 5,300 Cash at bank (- 150) 1,750 8,000 Capital Loan from J Black 7,000 1,000
8,000
This example shows that only the assets have changed. 4 Use the following example to show the effect of transaction (b) on the balance sheet:
F Lim Balance sheet at 4 March Year 3 Office furniture Office equipment Motor vehicle Goods Cash at bank 800 150 5,300 500 1,750 8,500 Capital Loan from J Black Creditor T Smith 7,000 1,000 500
8,500
This balance sheet shows that both the assets and liabilities have increased. 5 Use the following example to show the effect on the balance sheet after transaction (c):
F Lim Balance sheet at 9 March Year 3 Office furniture Office equipment Motor vehicle Goods (- 200) Cash at bank (+ 200) 800 150 5,300 300 1,950 8,500 Capital Loan from J Black Creditor T Smith 7,000 1,000 500
8,500
Here, there has been a switch between two assets.
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6 Use the following to show the effect after transaction (d):

F Lim Balance sheet at 12 March Year 3 Office furniture 800 Office equipment 150 Motor vehicle 5,300 Goods (-200) 100 Debtor K Woolf (+ 200) 200 Cash at bank 1,950 8,500 Capital Loan from J Black Creditor T Smith 7,000 1,000 500
8,500
From this balance sheet, a change of assets can be seen. 7 Use the following to show the effect after transaction (e):
F Lim Balance sheet at 16 March Year 3 Office furniture Office equipment Motor vehicle Goods Debtor K Woolf Cash at bank (- 300) 800 150 5,300 100 200 1,650 8,200 Capital 7,000 Loan from J Black 1,000 Creditor T Smith (-300) 200
8,200
From this balance sheet, a reduction in assets matched by a reduction in liabilities can be seen. 8 Use the following to show the effect after transaction (f ):
F Lim Balance sheet at 21 March Year 3 Office furniture Office equipment Motor vehicle Goods Cash at bank (+ 200) 800 150 5,300 100 1,850 8,200 Capital Loan from J Black Creditor T Smith 7,000 1000 200
8,200
Here, there is a change of assets: an increase in bank and the removal of the debtor balance from the balance sheet.
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9 A list of terms and their definitions follows. Explain the terms to the students. credit sales debtor creditor on account goods sold with payment to be received by an agreed future date a person or organization to whom goods have been sold on credit and from whom money is due a person or organization from whom goods have been bought on credit and to whom money is owed payment towards an amount owing; part payment
It is vital that students understand the meaning of terms as they are used. For the following lessons, reference should be made to the Glossary on pages 3215. 10 Explain that a transaction may involve a combination of assets or liabilities. For example, a motor vehicle is bought for 6,000.The purchase is paid for by: (a) drawing on the bank account; and (b) a loan from Birclays Finance Limited. Consequently:
Assets + 6,000 - 2,000 4,000 Motor vehicle Bank Liabilities Birclays Finance Limited + 4,000 4,000
11 Emphasize the equation:

assets = capital + liabilities
12 Give the students each a copy of exercises T/1.1, T/1.2, and T/1.3 in the Appendix (page 201) and ask them to work through them.
Step 6
Aim: to be able to record transactions through double entry
1 Explain the necessity of keeping separate accounts for information and control needs. Updating the balance sheet each time a transaction occurs takes up too much time; keeping separate accounts is a quicker and clearer method of updating records.
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2 Explain that the two-sided form of recording accounts (which has long been in use) is to be followed:
Left-hand side = debit side (or Dr) Right-hand side = credit side (or Cr)
3 Set out the rules for double entry, which are as follows, on the overhead projector or whiteboard:
Assets Liabilities Capital an increase a decrease an increase a decrease an increase a decrease debit credit credit debit credit debit
Alternatively, you may show the following layout:

Asset account increases + Liability account decreases Capital account decreases increases + increases + decreases -
4 Emphasize that the purpose of debit and credit is to allow for the two-fold effect of each transaction. Always ensure that, for each transaction, students understand the logic of the entries. By making sure that the logic is clear, the account entries will have meaning, helping the students to avoid making mistakes. 5 Explain the form of entries for T-type accounts thoroughly. Illustrate the following layout on the whiteboard or overhead projector:
Dr Date Cr Details Date Details
The details column should always show the name of the matching account (ie where the double entry is completed) eg:
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Bank Year 6 1 Jul Capital 10,000 Capital Year 6 1 Jul Bank 10,000
6 Work through the exercise below with the students. For each transaction: (a) emphasize the transaction effect; (b) stress how the double entry is achieved. Exercise (i) Gladys Lane sets up in business on 1 July Year 6 by placing 10,000 into a new business bank account. (ii) On 4 July Year 6, she buys office equipment, paying 400 by cheque. (iii) On 7 July Year 6, she buys goods from Landau Limited for 360 on credit. (iv) On 26 July Year 6, Gladys Lane pays the amount owing to Landau Limited by cheque. Solution
Bank Year 6 1 Jul Capital 10,000 Year 6 4 Jul 26 Jul Capital Year 6 1 Jul Office equipment Year 6 4 Jul Bank 400 Goods Year 6 7 Jul Landau Ltd 360 Landau Limited Year 6 26 Jul Bank 360 Year 6 7 Jul Goods 360 Bank 10,000 Office equipment Landau Ltd 400 360
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7 Emphasize that entries in accounts should not be cramped together, but should be clearly spaced without being too far apart. 8 Remind the students that, in making the entries, they need to: (a) record the date correctly; and (b) correctly enter the name of the related account in the details column. 9 Stress that, in the examination, marks may be lost if account entries are poor.An example of an avoidable error is writing the word Cheque instead of Bank for the name of the matching account, when Cheque is not the name of the account. 10 Ask the students to work through exercises T/1.4 and T/1.5 in the Appendix (page 202).
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Lesson 2: Purchases, sales, and returns

Topic summary

The various meanings of the term purchases Account entries for purchases and sales transactions The return of goods: allowances Account entries for returns inwards and outwards

5.1 5.2 The various possible accounting meanings of the term purchases The effects on (double-entry) accounts of purchases of goods: 5.2.1 for cash 5.2.2 on credit The effects on (double-entry) accounts of the sale of goods/services: 5.3.1 for cash 5.3.2 on credit The process of the return of goods previously bought or sold (or alternatively of an allowance being made in lieu of actual return of goods) Use of the term Returns, both inwards and outwards; the alternative terms in use The effects on (double-entry) accounts of the return of goods (or of an allowance being made for the defective supply of goods/services)
5.3
5.4 5.5 5.6
The approach adopted in the students book, How to Pass Book-keeping, First Level, is to explain the reasons for particular book-keeping methods and to build up understanding of the subject progressively. This approach may mean using a simplified method on a certain matter at one stage to avoid introducing too many points at once. Later, that simplified method might need to be modified as more features are covered. This approach applies because this session deals with the entries concerning purchases and sales.
Step 1
Aim: to recognize the various meanings of the term purchases 1 Explain that the term goods is used for goods bought as part of trade, for selling in due course. The buying and selling of office furniture, motor vehicles, etc, for use in the business, is not included under goods: they are shown separately.
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Purchases, sales, and returns
2 Goods are now to be divided into:

purchases; and sales
with a separate account for each.This division gives more information and helps to keep control of the business. 3 Describe the various meanings of the term purchases, that they are: (a) goods bought to sell, ie as part of trading; (b) goods bought to use in the manufacture and/or retailing of other goods. Stress that just the word purchases or the words bought goods are referring to a part of trading. 4 You may also give the students the alternative terms below. (a) Purchases for cash which are bought with immediate payment.The payment may be in cash or it may be by drawing on a bank account. (b) Purchases on credit which are bought with payment to be made at a later date.
Step 2
Aim: to be able to record in double-entry form the purchase and the sale of goods for cash and on credit 1 Purchase of goods for cash Show the students the following example to illustrate the account entries made for the purchase of goods for cash. Example In the account entries given below, goods were bought on 15 March Year 3 for 295 and paid for by cheque, which can be understood as immediate payment.
Purchases Year 3 15 Mar Bank 295 Bank Year 3 15 Mar Purchases 295
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This involves:

addition to purchases = debit deduction from bank = credit
2 Purchase of goods on credit Show the students the following example to illustrate the account entries made for the purchase of goods on credit. Example In the account entries that follow, goods were bought on credit, at 19 March Year 3, from L Johnson for 614.
Purchases Year 3 19 Mar L Johnson 614 L Johnson Year 3 19 Mar Purchases 614
A liability has arisen, so a credit entry is made in the account for Johnson, who is a creditor. 3 Work through the following exercise with the students. Exercise
Year 7 3 Mar 12 Mar 30 Mar Purchased goods by cheque 915 Purchased goods from T Watling on credit 736 Paid by cheque the amount due to T Watling
Enter these transactions, as shown below, carefully reviewing each double entry before moving on to the next one.
Purchases Year 7 3 Mar Bank 12 Mar T Watling 915 736 Bank Year 7 3 Mar Purchases 30 Mar T Watling 915 736
(continued)
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T Watling Year 7 30 Mar Bank 736 Year 7 12 Mar Purchases 736
4 Sales Any sale of goods is entered in a separate Sales Account.The account includes both cash sales and credit sales. Remember to point out that the account only includes the sale of goods that the firm trades in. 5 Sales for cash Show the students the following example to illustrate the account entries made for sales for cash. Example At 21 March Year 3, goods were sold for 312 cash.
Sales Year 3 21 Mar Cash Cash Year 3 21 Mar Sales 312 312
Emphasize that the entry in the Sales Account corresponds to what, so far, has been entered in the Goods Account, ie a credit entry. Note The Cash Account is for recording the receipt and payment of bank notes or coins. Transfers between the Bank Account and the Cash Account are made periodically. 6 Sales on credit Show the students the following example to illustrate the account entries made for sales on credit. Example At 23 March Year 3, goods were sold to L Fell on credit for 260.
Sales Year 3 23 Mar L Fell Year 3 23 Mar Sales 260 260
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7 To reinforce the students understanding, show the following summary of the entries below for a credit sale (preferably on the overhead projector): (a) When a credit sale is made, the book-keeper should: debit the customers (debtors) account; and credit the Sales Account. (b) When payment is received from the debtor, the book-keeper should: debit the Bank Account or Cash Account (depending on how the debtor pays, whether by cheque or cash); and credit the debtors account. Note Point out that the Purchases Account and the Sales Account have now replaced the Goods Account. 8 Ask the students to work through the exercise below. Exercise
Year 7 6 Mar 15 Mar 31 Mar Sold goods for cash 327 Sold goods to J Bean on credit 512 Received cheque from J Bean in payment of the amount due
The transactions should be entered by the students as shown below. Review the transactions one by one (see below), ensuring that the concept of double entry is fully understood.
Sales Year 7 6 Mar Cash 15 Mar J Bean Cash Year 7 6 Mar Sales 327 J Bean Year 7 15 Mar Sales 512 Bank Year 7 31 Mar J Bean 512 Year 7 31 Mar Bank 512 327 512
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Step 3
Aim: to understand the nature of returns and to be able to make the required book-keeping entries 1 Explain that purchased goods are sometimes returned to the supplier. Ask why this might be so. 2 Explain that an allowance is made by the supplier, ie that the amount of the return is set against the purchase amount. 3 Show that the returns are recorded in a separate account, called the Returns Outwards Account, using this example: At 24 March Year 3, goods are returned to L Johnson for which 70 is allowed.
Returns outwards Year 3 24 Mar L Johnson L Johnson Year 3 24 Mar Returns outwards 70 Year 3 19 Mar Purchases 614 70
4 Explain that the 70 credit in the Returns Outwards Account offsets the 614 previously shown on the debit of purchases. Ask the students to explain the two entries in Johnsons account. 5 Explain that the opposite can occur: ie goods that have been sold may be returned by a customer, for which an allowance is given. For example, on 27 March Year 3, L Fell returns the goods sold to him on 23 March. This occurrence is the reverse of a sale, so it is termed returns inwards. Ask the students to show the two entries for the returns inwards.Their accounts should look like the one below.
Returns inwards Year 3 27 Mar L Fell 260 L Fell Year 3 23 Mar Sales 260 Year 3 27 Mar Returns inwards 260
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6 Hand out copies of, or show on the overhead projector, exercise T/2.1 in the Appendix (page 203). Ask the students to work through the exercise. 7 Review student answers, drawing attention to items (c) and (f ), in T/2.1, which involve assets for use in the business. Neither of these will be recorded in the Purchases Account. 8 Hand out copies of, or show on the overhead projector, exercise T/2.2 in the Appendix (page 203). Ask the students to work through the exercise.
Step 4
Aim: to strengthen understanding of lesson content Below are a series of questions that you should ask the students, together with the answers. 1 Question (a) What is the difference in wording between the two returns examples? Answers

The example 24 March specifically states that an allowance is made and the amount. The example 27 March merely states that the goods previously sold are returned.
If a question is worded as it is above, the students should assume that the amount of the original sale is fully allowed. 2 Question (b) What is the reason for keeping separate returns accounts instead of making the entries in the Purchases or Sales Accounts? Answer The reason is to have separate totals for returns, otherwise the information would be hidden in the Purchases or Sales Account. 3 Question (c) What might be the various reasons for the return of goods? Answers The goods might be returned because:

the wrong articles were sent; they were damaged in transit; they are not what was shown in the catalogue; parts do not fit.
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4 Question (d) When might an allowance be given although the goods are not returned? Answers When the goods:

are difficult to repack or transport; or are costly to send back.
Stress that, provided an allowance is given, the book-keeping effect is the same as if the goods are actually returned. 5 Check that the students know the alternative names for the accounts, that they may be called:

returns outwards or purchases returns; returns inwards or sales returns.
6 Hand out copies of, or show on the overhead projector, exercises T/2.3 and T/2.4 in the Appendix (pages 203 and 204). Ask the students to work through them.
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Lesson 3: Expenses: profit or loss

Topic summary

The nature and types of expense Combination-type transactions: account entries Recording the withdrawal of profit by drawings Profit as the difference between opening and closing capital

18.1 Profit (or loss) as the difference between opening and closing capital balances; allowing for any drawings or the introduction of additional capital 18.2 The meaning of the term drawings; the various forms of drawings 18.3 The book-keeping entries for drawings 18.4 The possible effect of drawings upon the amount of capital
This lesson is diverse in its content. All the topics are ones that can feature as elements in examination questions. With careful explanation and the familiarity that follows from practice, these subject areas need not be a cause of major difficulty.
Step 1
Aim: to appreciate the nature and types of business expense and the book-keeping entries required 1 Suggest to the class a small business situation and ask what types of expense would be incurred, such as:

employee wages; rent of the premises; and advertising.
Point out that the aim of setting up a business is to make a profit, ie a surplus:
sales less expenses = profit
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Expenses: profit or loss
2 When you explain about recording expenses in the accounts, develop the concept of paying as you go. Illustrate the concept by contrasting, for example, renting premises and purchasing a building, which ties up money. 3 Liken expenses such as rent to very temporary assets; for instance, a purchased asset is debited to the asset account; similarly, an expense account is debited. 4 Explain that it is necessary to have several expense accounts, eg insurance, wages, office cleaning, office expenses, heating and lighting. One account for each category of expenditure helps to provide more information and improve control. The following example illustrates the basic account entries relating to an expense item: Example At 28 March Year 3, insurance on a motor vehicle, costing 110 for the next 6 months, is paid by cheque.
Insurance Year 3 28 Mar Bank 110 Bank Year 3 28 Mar Insurance 110
This can be explained as: Cr = reduction of an asset (bank) Dr = acquisition of a (temporary) asset, ie insurance cover for a fixed period of time. 5 Copy and hand out or show exercises T/3.1 and T/3.2 in the Appendix (page 204) on the overhead projector. Ask the students to work through them.
Step 2
Aim: to be familiar with combination-type transactions and to be able to make appropriate book-keeping entries 1 In Lesson 1, Step 5, reference was made to the possibility of a transaction involving a combination of assets and/or a combination of liabilities. In a combination-type transaction, the effect on one account side will be matched by a combination of two (or possibly more) effects on the other side. Use the following example to illustrate a combination-type transaction.
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Example At 14 April Year 6, a motor vehicle was purchased for 6,800 from Lagonda Garages. A payment of 2,000 was made by cheque and the balance on credit.
Assets + 6,800 - 2,000 + 4,800 Increased by amount of motor vehicle Bank balance is reduced Liabilities Creditor Lagonda Garages + 4,800
+ 4,800
The accounts will appear as follows:

Motor Vehicle Year 6 14 Apr Bank and Lagonda Garages 6,800 Bank Year 6 14 Apr Lagonda Garages Year 6 14 Apr Motor vehicle 4,800 Motor vehicle 2,000
2 Copy and hand out or show exercise T/3.3 in the Appendix (page 205) on the overhead projector. Ask the students to work through the exercise.
Step 3
Aim: to appreciate the meaning of proprietor drawings and the account entries required 1 If the owner takes money out of the business for private use this results in a reduction of capital. Explain that the owner may draw out money in anticipation of the profits for the year, ie to pay for personal living expenses. If the owners withdrawals are more than the businesss profits, then capital is reduced. 2 Drawings are recorded in a separate account, further enabling the accounts to provide as much information as possible. Use the example overleaf to demonstrate this point.
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Example At 6 April Year 3, Joe Seng, the owner, withdrew 170 in cash for his own use.
Cash Year 3 6 Apr Drawings Year 3 6 Apr Cash 170 Drawings 170
3 Explain that, at the end of the year, the Drawings Account will be closed off to the Capital Account. 4 Point out that several drawings might be made over the course of the year and that the drawings could take forms other than cash. For example, the owner may take some of the businesss goods for personal use.
Step 4
Aim: to recognize that profit or loss may be calculated through differences in capital 1 The profit of a business for a given year might be obtained as follows:
profit for the year = number of transactions x profit on each transaction less expenses for the year
or as
profit = capital at end of the year less capital at start of the year or increase of capital over the year
Alternatively, give the students the following formula:

start-of-year capital
*or profit after deduction of drawings
plus
profit* (or loss)
end-of-year capital
2 Hand out copies of, or show on the overhead projector, exercise T/3.4 in the Appendix (page 205). Ask the students to work through the exercise.
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Lesson 4: Balancing accounts: the trial balance

Topic summary

The balancing of accounts Running balance account format The preparation of a trial balance

3.1 The meaning of the term account balance 3.2 Balancing the T-type ledger account, including: 3.2.1 bringing the balance down for the start of the next accounting period 3.2.2 dealing with the nil balance 3.3 The significance of any particular account balance, eg a credit balance on a creditor account, a debit balance on an expense account 3.4 The significance of the term running balance account 3.5 The preparation of accounts in running balance form 3.7 The procedure for other end-of-period balancing, and ruling off, of accounts 11.1 The purpose of the trial balance 11.2 The preparation of a trial balance from a list of account balances
This lesson deals with the practical matter of the layout of accounts, including an alternative format. It is worthwhile giving time to this topic: marks may be lost in the examination if accounts are presented poorly. The lesson also discusses a straightforward method of checking that all double entries have been completed satisfactorily.This checking is done by the preparation of a trial balance.
Step 1
Aim: to be able to balance accounts and to recognize the significance of individual balances 1 Show that the balance on an account is the amount by which one side is greater than the other:
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Balancing accounts: the trial balance
X expense account Dr Year 3 Entries totalling 680 Year 3 Entries totalling Cr 600
Here, there is a debit (Dr) balance of 80. The full balancing of this account at 31 March Year 3 is as follows:
X expense account Year 3 Entries 680 Year 3 Entries 31 Mar Balance c/d 680 1 Apr Balance b/d 80 600 80 680
The balance is first carried down (c/d) and then brought down (b/d), which should always be done and not merely entered on one side.To fail to bring down the balance is to break the double-entry rule. 2 Ask the students to write out and then balance the following creditor account:
K Jacques Year 5 7 May Returns outwards 28 May Bank 50 570 Year 5 3 May Purchases 21 May Purchases 620 415
3 Explain a nil balance:

F Wiles Year 6 4 July Sales 370 370 Year 6 12 July Returns inwards 29 July Bank 40 330 370
Or a variation on the nil balance:

T Stone Year 6 9 Aug 470 Year 6 26 Aug Bank 470
Point out that no totals are required in this instance; just two lines under the figures. 4 Hand out copies of, or show on the overhead projector, exercises T/4.1 and T/4.2 in the Appendix (page 206). Ask the students to work through them.
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Step 2
Aim: to appreciate and to be able to apply the running-balance format 1 Emphasize that, so far, the format used for the accounts has been two-sided, ie:
Left-hand side debits (Dr) Right-hand side credits (Cr)
Balances are calculated at the end of a fixed period usually monthly for debtors and creditors; annually in some other cases; and so on.This layout does not reveal the balance easily or quickly. However, the running-balance format, which is a three-column layout, shows the balance after each transaction is entered. It is used by banks in the (monthly) statements they issue to customers. 2 An example of an account in running-balance format is included in the Appendix (see T/4.3, page 207). Point out that this example is not a specimen of the statements issued by banks. It is an example of the bank account as kept by the customer of the bank. 3 Explain the format, emphasizing that as each transaction is entered the balance on the account is brought up to date. Stress that the notation, either Dr or Cr, must be shown beside the balance figure. 4 Ask the students to show T/4.3 as a two-sided layout, ie the format previously used in this course.Then compare running-balance format with the two-sided layout. 5 Ask the students to work through the exercise below. Exercise Required Using the information in T/4.2 (page 206), prepare debtor and creditor accounts in running-balance format.
Step 3
Aim: to be able to prepare a trial balance 1 Work through exercise T/4.4 in the Appendix (page 207) with the students, following the instructions below. (a) Enter the transactions in appropriate accounts.
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(b) Check with the class that the total of the debit entries equals the total of the credit entries.The total should be 27,220. (c) Next ask the students to enter in pencil, in the margin, the balance on each account either debit or credit. (d) Now list these balances; the total of the debit balances should agree with the total of the credit balances. A trial balance has been produced. 2 Explain that the trial balance is used to check that double entry has been done correctly. If the totals of the two sides of the trial balance are in agreement, then entries have been made accurately. It does not, however, prove that. For example, transactions could have been omitted entirely.This limitation will be considered further in Lesson 21 (see entry 11.5 in the Extended Syllabus). 3 Hand out copies of, or show on the overhead projector, exercises T/4.5 and T/4.6 in the Appendix (page 208). Ask the students to work through them. 4 Show the class the following account, which is an example of a candidates solution to an examination question:
F Leonard Year 5 10 Apr Returns outwards 30 Year 5 6 Apr 10 Apr Purchases Returns outwards 418 30
In this case, a candidate has entered the transaction twice a common mistake. One entry cancels the other for returns outwards.The examiner can only conclude that the candidate does not know how to deal with returns outwards. As a result, no marks will be given for either entry for 10 April.
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Lesson 5: Trading and Profit & Loss Accounts

Topic summary

Structure of income, cost, and profit The preparation of Trading and Profit & Loss Accounts

3.6 The transfer of a balance at period end to Trading Account or Profit & Loss Account, as appropriate 19.1 The Trading and Profit & Loss Accounts as part of the double-entry system 19.2 The basic structure of income, costs, and profit in a business 19.5 The calculation of costs of goods sold 19.7 The difference between trading income and other income 19.8 The difference between gross profit and net profit 19.12 The double entries for expense amounts between the Profit & Loss Account and the individual expense accounts
This lesson reviews the structure of income, cost, and profit, and their relationship to one another. It also deals with the concluding stage of a periods activities, which involves establishing either a profit or a loss. Establishing a profit or loss and showing how they are reached are achieved through final accounts, a broadly used book-keeping term that covers, in part, the Trading and Profit & Loss Account.
Step 1
Aim: to be able to prepare a Trading and Profit & Loss Account 1 Explain the different classes of profit, that they are:

gross profit the excess of sales income over cost of goods sold; and net profit gross profit less other costs.
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Trading and Profit & Loss Accounts
2 Draw the students attention to the structure of income, costs, and profit as it is shown in Figure 5.1. Other income is the income arising from sources other than normal trading activities, eg interest earned on money lent or rent receivable.The composition of total income is as follows:
total income = income from sales + other income (trading income)
Cost of goods sold Income from sales = sales revenue Gross profit
Other income
Running expenses
Net profit Figure 5.1 The structure of income, costs, and profit
3 Ask the students to work through 2 small exercises on the structure of costs, see T/5.1* in the Appendix (page 209).
Step 2
Aim: to be able to prepare a Trading and Profit & Loss Account 1 To show the students how to prepare a Trading and Profit & Loss Account, give them each a copy of the trial balance of T Avis at 31 December Year 5 to work through.The trial balance is labelled T/5.2 in the Appendix (page 210). Work through the example of T Avis with the students as set out below.
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2 The first stage of working through the trial balance involves preparing a Trading Account. Preparing a Trading Account requires a calculation of the cost of goods sold, which is:
purchases less closing stock both stated at cost price
The closing stock has yet to be brought into the accounts. There is no opening stock in this instance because Year 5 was the first year of trading for T Avis. 3 The significant accounts at this stage are the Purchases and Sales Accounts.These would appear as follows:
Purchases Year 5 Sundries 5,160 Sales Year 5 Sundries 6,320
4 Stress the word account in Trading and Profit & Loss Account: it is part of the doubleentry system. For every entry made in the account, there must be a corresponding entry elsewhere in the account system. 5 Prepare the following Trading and Profit & Loss Account with the class, using the data in T/5.2 in the Appendix (page 210):
T Avis Trading and Profit & Loss Account for the year ended 31 December Year 5 Purchases Gross profit c/d 5,160 3,260 8,420 Sales Stock at 31 December Year 5 Gross profit b/d 6,320 2,100 8,420 3,260
6 Show the double-entry effect in the Purchases and Sales Accounts:

Purchases Year 5 Sundries 5,160 Sales Year 5 31 Dec Trading 6,320 Year 5 Sundries 6,320 Year 5 31 Dec Trading 5,160
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7 The entry for stock (at 31 December Year 5) requires careful explanation. So far, only a credit entry has been made.To complete the double entry, a new account is opened:
Stock Year 5 31 Dec Trading 2,100
8 It has been stated that purchases less closing stock equals the cost of goods sold. To reflect this fact, it is usual to deduct stock on the debit side in the Trading Account instead of entering the stock on the credit side. The effect on gross profit is the same. Therefore, the Trading Account, together with the Profit & Loss Account, becomes:
T Avis Trading and Profit & Loss Account for the year ended 31 December Year 5 Purchases less Stock, 31 December Year 5 Cost of goods sold Gross profit c/d Rent payable Office expenses Lighting and heating Net profit 5,160 2,100 3,060 3,260 6,320 700 360 420 2,230 3,710 Sales 6,320
6,320 Gross profit b/d Rent receivable 3,260 450
3,710
9 While compiling the above Profit & Loss Account, the expense and income accounts are closed off as follows:
Rent Payable Year 5 Sundries 700 Year 5 31 Dec Office Expenses Year 5 Sundries 360 Year 5 31 Dec Profit and loss 360 Profit and loss 700
Lighting and Heating Year 5 Sundries 420 Year 5 31 Dec Rent Receivable Year 5 31 Dec Profit and loss 450 Year 5 Sundries 450 Profit and loss 420
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The double entry for gross profit is the credit to the Profit & Loss Account. The double entry for net profit is a credit to the Capital Account: ie profit increases capital. 10 The Drawings Account is closed off to Capital Account.
Capital Year 5 31 Dec 31 Dec Drawings Balance c/d 800 5,430 6,230 Year 6 1 Jan Drawings Year 5 Sundries 800 Year 5 31 Dec Capital 800 Balance b/d Year 5 1 Jan Bank 31 Dec Profit and loss: net profit 4,000 2,230 6,230 5,430
Note Many examination answers show closing stock as a credit entry in the Trading Account, instead of as a deduction on the left-hand side. As a consequence of this error, students lose a mark because they fail to show the cost of goods sold. 11 Copy and hand out or show exercises T/5.3 and T/5.4 in the Appendix (pages 211 and 212) on the overhead projector. Ask the students to work through them. Both exercises involve businesses in their first year of trading. Because the businesses are new, there is no opening stock, a topic that is dealt with in Lesson 7. Explain that the usual practice is to value closing stock at its cost price.This method is considered further in Lesson 23.
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Lesson 6: The balance sheet

Topic summary

The main elements of the balance sheet and its overall purpose The distinction between fixed assets and current assets, and between longer-term liabilities and amounts due within 1 year (current liabilities) The effective grouping of assets and liabilities within the balance sheet

20.1 The function of the balance sheet and, in particular, the recognition that it stands outside the double-entry system 20.2 The significance and use of the terms fixed assets and current assets 20.3 The difference between longer-term liabilities and amounts payable within 12 months (current liabilities); the naming of accounts which might appear under each of these headings 20.4 The preparation of a balance sheet in effective format 20.5 The appropriate grouping of items within the balance sheet: 20.5.1 fixed assets 20.5.2 current assets 20.5.3 capital (or proprietors interest) 20.5.4 longer-term liabilities 20.5.5 amounts payable within 12 months (current liabilities)
Two aspects of study concerning the balance sheet require attention. First, the students need to be able to appreciate the meaning of the contents of a balance sheet. Second, they should be able to prepare one that is meaningful, ie easily understood by the reader.
Step 1
Aim: to appreciate the main elements of the balance sheet and its overall purpose 1 Refer to the trial balance of T Avis at 31 December Year 5 (see page 210). If it has not already been done, the accounts of those items that have already been closed off (eg transferred to Profit & Loss Account) should be ticked. Those left are Capital and Drawings, together with the Asset and Liability Accounts. These accounts and the closing stock are shown in the following balance sheet.
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The balance sheet
T Avis Balance sheet at 31 December Year 5 Assets Fixtures and fittings Motor vehicle Stock of goods Debtors Cash at bank Cash in office 800 1,600 2,100 750 1,040 50 6,340 Capital Placed in bank account add Net profit less Drawings Liability Creditors 4,000 2,230 800 1,430 5,430 910 6,340
2 Draw out the purpose of the balance sheet; that it is to show the financial position of the business at the date the books are made up. 3 Compare the balance sheet with the Trading and Profit & Loss Account, which is a record of performance over a past fixed period (usually a year). 4 Explain that the two sides of the balance sheet should agree in total if the double-entry rule has been followed fully. Note The accounts that have been entered in the balance sheet have not been closed off, ie the balances remain on the accounts. The balance sheet is only a list of balances, it is a statement. It is not itself part of the double-entry system.
Step 2
Aim: to be able to group effectively the items on a balance sheet 1 Explain why it is necessary to group balance sheet items. Grouping the items:
gives meaning to the balance sheet, showing that it is comprised of significant elements and is not just an array of items; shows long-term versus short-term liabilities; shows different timescales among assets, some of which can be quickly turned into cash (liquidity); others represent money tied up, possibly for many years.
2 In discussing this, refer to the balance sheet above. Using the question-and-answer method, review the terms fixed assets and current assets.Ask the students for examples of each.
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The balance sheet
3 Stress that the recognized sequence of listing assets begins with the most permanent and ends with those most easily turned into cash. Demonstrate the sequence as shown below.
Fixed Assets Land and buildings Fixtures and fittings Machinery Motor vehicles from highly fixed to less fixed Current Assets Stock Debtors Bank Cash
increasing liquidity
Other assets will be introduced in due course. 4 Explain that, with fixed assets, the more permanent the assets are likely to be, the more fixed they are considered to be, eg compare land and buildings with motor vehicles. The more liquid an asset, the more easily it can be turned into cash: eg compare the bank balance with stock. 5 Review the normal sequence for capital and liabilities on the right-hand side of the balance sheet.The sequence appears as follows:

capital; longer-term liabilities: ie amounts payable in more than 1 year, such as a 2-year loan (2 years to repayment from the date of the balance sheet); amounts due within 1 year (or current liabilities), eg creditors, bank overdraft, or short-term bank loan.
6 Present the balance sheet of T Avis, grouping and arranging the items in the way shown below.
T Avis Balance sheet at 31 December Year 5 Fixed Assets Fixtures and fittings Motor vehicle Current Assets Stock Debtors Bank Cash 800 1,600 2,400 2,100 750 1,040 50 Capital Placed in bank account add Net profit less Drawings Amount due within 1 year (current liabilities) Creditors 3,940 6,340 2,230 800 4,000 1,430 5,430
910 6,340
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The balance sheet
7 Stress the importance of a good balance-sheet layout. The items need to be suitably grouped and also in a suitable sequence within each group. Marks are lost when a balance sheet is presented poorly. 8 Hand out copies of, or show on the overhead projector, exercises T/6.1*, T/6.2*, T/6.3*, and T/6.4* in the Appendix (pages 21215).Ask the students to work through them.
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Lesson 7: Final accounts: more features

Topic summary

Period-end entries for returns inwards and outwards The different forms of carriage and how they are recorded in final accounts Opening and closing stock figures in the Stock Account and final accounts The review and application of the end-of-year procedure

3.6 3.7 19.3 19.6 19.9 19.10 The transfer of a balance at period end to Trading Account and Profit & Loss Account, as appropriate The procedure for other end-of-period balancing, and ruling off, of accounts Showing returns inwards and returns outwards suitably deducted to reveal net sales and net purchases respectively Showing the make-up of cost of goods sold The function of the Stock Account and the double-entry relationship between the Trading Account and the Stock Account End-of-period transfer of balances from the General Ledger to the Trading Account (Purchases Account, Sales Account, Returns Outwards Account, Returns Inwards Account) The difference between carriage inwards and carrriage outwards and recording them in the Trading Account and Profit & Loss Account respectively Showing income and expenses within the final accounts, with related items being suitably brought together
19.11 19.13
This lesson is concerned with some very practical and detailed matters that appear, from the answers elicited in examinations, to be given limited attention during the course of study. Carriage, in particular, would seem to be neglected. The Stock Account is also a major point of weakness. Candidates are usually able to record opening and closing stocks in the Trading Account although not always in the most favourable position in the Trading Account. However, candidates may have difficulty in correctly recording the Stock Account itself.
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Final accounts: more features
Step 1
Aim: to be able to show period-end entries for returns inwards and outwards 1 Remind the students that the Goods Account is divided into Purchases, Sales, Returns Outwards, and Returns Inwards Accounts. This type of division has not yet been brought fully into the Trading Account. Example A trader in Year 3 has total returns outwards and returns inwards of 450 and 610 respectively.The Returns Accounts might appear as follows:
Returns Outwards Year 3 31 Dec Trading 450 Year 3 Sundries Returns Inwards Year 3 Sundries 610 Year 3 31 Dec Trading 610 450
With the debit transfer (to the Trading Account) entry in the Returns Outwards Account, the matching entry would be expected to appear to the credit of the Trading Account. However, the entry does not appear as a credit, but as a deduction from purchases on the debit side. Conversely, returns inwards appears as a deduction from sales on the credit side of the Trading Account. The aim of showing returns as deductions is to provide a neater and more informative picture of what has happened. This might be seen in a Trading Account as follows:
J Blunt Trading Account for the year ended 31 December Year 3 Purchases less Returns outwards less Stock at 31 Dec Year 3 Cost of goods sold Gross profit 10,300 540 9,760 2,100 7,660 12,980 20,640 Sales less Returns inwards 21,400 760 20,640
20,640
Point out that 9,760 is the sum of the net purchases and that 20,640 is the sum of the net sales. Inform the students that the layout shown for returns in J Blunts Trading Account will always be followed from now onwards.
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2 Ask the students to work through the exercise below. Exercise Required Prepare a Trading Account for F Waldron for the year ended 31 December Year 5 from the following details:
Purchases Sales Returns inwards Returns outwards Stock at 31 Dec Year 5 17,300 37,850 1,320 870 3,200
Solution
F Waldron Trading Account for the year ended 31 December Year 5 Purchases less Returns outwards less Stock at 31 Dec Year 5 Cost of goods sold Gross profit 17,300 870 16,430 3,200 13,230 23,300 36,530 Sales less Returns outwards 37,850 1,320 36,530
36,530
Step 2
Aim: to appreciate the different forms of carriage as an expense and how they are recorded in final accounts 1 Explain carefully the nature of carriage; that carriage is an expense incurred in, or charge made for, the delivery of goods. 2 Make the distinction clear between carriage inwards and carriage outwards: (a) Carriage inwards Carriage on goods coming into the firm, ie on purchases. Instead of paying an inclusive price for purchases that covers carriage, a separate charge is made. Therefore, carriage is added to the cost of purchases and is included in the Trading Account.
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(b) Carriage outwards Carriage on goods going out of the firm, ie on sales. It is regarded as a cost of distributing goods to customers and is entered as a separate item in the Profit & Loss Account. The layout of purchases including adjustments (using different figures) is as follows:
12,800 430 13,230 520 12,710 1,980 10,730
Purchases add Carriage inwards less Returns outwards less Closing stock Cost of goods sold
The adjustments for purchases and sales may be summarized as follows: Net sales = Sales less returns inwards Net purchases = Purchase plus carriage inwards less returns outwards 3 Hand out copies of, or show on the overhead projector, exercise T/7.1 in the Appendix (page 216). Ask the students to work through the exercise.
Step 3
Aim: to be able to record opening and closing stock figures in the Stock Account and final accounts
1 So far, these studies have been limited to the first year of trading, ie there has been no opening-stock figure. From the second year, there will be 2 stock figures: for example, the closing stock at 31 December Year 5 becomes the opening stock at 1 January Year 6. 2 Use the situation of T Avis as an example again (see T/7.2 in the Appendix, page 216). T Avis has prepared a trial balance at the end of his second year of trading.Work through the Trading and Profit & Loss Account, and the balance sheet, with the class.
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T Avis Trading and Profit & Loss Account for the year ended 31 December Year 6 Stock at 1 Jan Year 6 Purchases add Carriage inwards less Returns outwards less Stock at 31 Dec Year 6 Cost of goods sold Gross profit c/d Rent payable Office expenses Lighting and heating Carriage outwards Net profit 9,260 430 9,690 340 9,350 11,450 2,450 9,000 3,570 12,570 1,100 590 610 380 1,340 4,020 Gross profit b/d Rent receivable 2,100 Sales less Returns inwards 13,050 480 12,570
12,570 3,570 450
4,020
Balance sheet at 31 December Year 6 Fixed Assets Fixtures and fittings Motor vehicle Current Assets Stock Debtors Bank Cash 900 1,600 2,500 2,450 1,170 1,230 70 Capital Balance at 1 Jan Year 6 add Net profit less drawings 5,430 1,340 1,100 240 5,670
Amount due within 1 year Creditors 4,920 7,420
1,750 7,420
3 Show the Stock Account for T Avis for his first and second years as follows:
Stock Year 5 31 Dec Year 6 1 Jan 31 Dec Year 7 1 Jan Trading Balance b/d Trading Balance b/d 2,100 2,100 2,450 2,450 Year 5 31 Dec Balance c/d Year 6 31 Dec Trading 31 Dec Balance c/d 2,100 2,100 2,450
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4 Explain that the Stock Account is used only to carry the figure for the balance of stock from one year to the next. No transactions are entered into this account. It is a holding account only. 5 Draw attention to the entry at 31 December Year 5 (encircled).This entry is frequently entered at 1 January Year 6. The correct way to enter it is as 31 December Year 5 initially and then to carry it down, as shown above. 6 Ask the students to work through the following exercise: Exercise
Stock at 31 Mar Year 6 Stock at 31 Mar Year 7 31,680 34,270
Required Show the Stock Account for the period 31 March Year 6 to 1 April Year 7. Note The stock at 1 April Year 6 is the same as the stock at 31 March Year 6. Solution
Stock Year 6 31 Mar Trading 1 Apr Balance b/d 31,680 31,680 34,270 34,270 Year 6 31 Mar Balance c/d Year 7 31 Mar Trading 31 Mar Balance c/d 31,680 31,680 34,270
Year 7 31 Mar Trading 1 Apr Balance b/d
7 Copy and hand out or show exercises T/7.3 and T/7.4 in the Appendix (page 217) on the overhead projector. Ask the students to work through them.
Step 4
Aim: to review and to be able to apply the end-of-year procedure 1 Review the end-of-year procedure by showing Figure 7.1 (overleaf) on the overhead projector. See also T/7.5 in the Appendix (page 218). 2 Draw the students attention to points (a) to (c) overleaf, which are highlighted by Figure 7.1.
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(a) The accounts for which balances are recorded in the balance sheet have not been closed off . They retain their balances, ready for the next trading period or year. The balance sheet is merely a list of items and is not part of the double entry. (b) Transferring a balance, eg for purchases or insurance, into the Trading Account or Profit & Loss Account is part of double entry. Each amount is being carried in the final accounts instead of in the ledger account. The various amounts are channelled through the final accounts to establish a net profit (or net loss). (c) The net profit, to complete the double entry, is credited to the Capital Account (debit the Profit & Loss Account and credit the Capital Account) and so the process re-emerges in the ledger accounts.
Purchases Sales Returns outwards Returns inwards Opening stock Closing stock
account balances transferred to
(b)
Trading Account
Gross profit to Profit & Loss Account (b) Expense accounts Other income accounts account balances transferred to (b) Profit & Loss Account
Net profit to Capital Account (c) (a) Drawings Account Capital Account
Cash/bank accounts Debtor/creditor accounts Asset accounts (a)
Balanced, ie balances c/d on each account
(a)
Balance sheet Figure 7.1 The end-of-year procedure
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3 The preparation of final accounts is an important element of the First Level Book-keeping Syllabus. It is therefore important that students become practised at systematically answering final accounts questions at an early stage. Encourage the students to adopt the following method when answering such examination questions: (i) to read through the question to get an overall understanding, especially noting the required part of the question; (ii) to go through the trial balance (or any alternative list of balances) and to place next to each item a code representing the final account in which it appears; (iii) to tick each item or figure as it is recorded in the final account concerned. 4 Illustrate this method of answering final accounts by applying it to the trial balance of T Avis at 31 December Year 6 (see below). Leave the codes out and ask the students to enter them alongside the items in the trial balance.
T Avis Trial balance at 31 December Year 6 Dr 9,260 430 1,170 1,750 1,100 590 610 450 480 340 380 900 1,600 1,230 70 2,100 1,100 21,020 Key: BS balance sheet T Trading Account P/L (exp) Profit & Loss Account (expenditure) P/L (inc) Profit & Loss Account (income) 5,430 21,020 Cr 13,050 T T T BS BS P/L P/L P/L P/L T T P/L BS BS BS BS T BS BS
Purchases Sales Carriage inwards Debtors Creditors Rent payable Office expenses Lighting and heating Rent receivable Returns inwards Returns outwards Carriage outwards Fixtures and fittings Motor vehicle Cash at bank Cash in office Stock at 1 January Year 6 Drawings Capital
(exp) (exp) (exp) (inc)
(exp)
Note Stock at 31 December Year 6 was valued at 2,450 T, BS. 5 Hand out copies of, or show on the overhead projector, exercise T/7.6 in the Appendix (page 219). Ask the students to work through the exercise.
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Lesson 8: The division of the ledger

Topic summary

The reasons for dividing the ledger and recognizing the usual divisions The different types of ledger account The possible subdivisions of the ledger Producing a balance sheet with a vertical format

4.1 The function of the ledger 4.2 The various possible reasons for subdividing the ledger 4.3 How the ledger might be subdivided, eg Sales Ledger, Purchases Ledger, Cash Book, General Ledger 4.4 Alternative names for the different ledgers, eg Debtors Ledger, Creditors Ledger, Nominal Ledger 4.5 The possible use of a Private Ledger 4.6 The naming of (ie classification of ) the different types of ledger account and explaining the accounts within it 4.7 The distinction between personal, real, and nominal accounts 4.8 How the Sales Ledger might be subdivided 4.9 From a list of accounts, or from transaction details, the naming of the ledger(s) in which each would be recorded
The ledger is the set of accounts of business.These accounts may be kept in a book or series of books (as in a manual system) or on computer disc. Dividing the ledger and classifying accounts commonly give students difficulty. Careful explanation and plenty of practice can help students to achieve success in this topic.
Step 1
Aim: to appreciate the reasons for dividing the ledger and to recognize the usual divisions 1 Outline the possible or likely divisions of the ledger. Encourage the students to identify the possible advantages of a division, and the reasons for the division, by asking them
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The division of the ledger
questions. For example, you could ask the students what advantages there could be to having a separate ledger for customers (ie debtors).The possible divisions of the ledger may be as shown below.
Accounts (a) customers personal accounts, ie Debtor Accounts (b) suppliers personal accounts, ie Creditor Accounts (c) the receiving and paying out of money (d) the remaining accounts (unless a Private Ledger exists) (e) accounts requiring confidentiality, eg Capital Account To be found in the following ledger Sales Ledger (or Debtor Ledger) Purchases Ledger (or Bought Ledger or Creditor Ledger) Cash Book (developed in Lesson 9) General Ledger (or Nominal Ledger) Private Ledger
Draw the students attention to the alternative names for the ledgers that are given in brackets. Point out that not all firms have a Private Ledger.The purpose of a Private Ledger is to maintain confidentiality, with access limited to only a few members of staff. 2 Explain that the reasons for dividing the ledger are that: smaller units are managed more easily; the division provides useful information because parts of the ledger are specialized; it helps to keep control of the various accounts. 3 Ask the students to work through the exercise below. Exercise Required State into which ledger each of the following items should be posted: (i) (ii) (iii) (iv) D Light Customer Account Fixtures and Fittings Account F Masters Supplier of Goods Account Wages Account.
Solution (i) (ii) (iii) (iv) Sales Ledger (or Debtor Ledger) General Ledger (or Nominal Ledger) Purchases Ledger (or Bought or Creditor Ledger) General Ledger (or Nominal Ledger).
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Step 2
Aim: to be able to distinguish between the different types of ledger account 1 Point out that distinguishing between types of account is commonly referred to as the classification of accounts, which is the arrangement of accounts into distinct classes.
ACCOUNTS Impersonal (of things rather than of people)
Personal
Debtors
Capital Creditors Drawings
Real Asset accounts (including cash and bank)
Nominal Income and expense accounts
Figure 8.1 The classification of accounts
2 Hand out copies of, or show on the overhead projector, exercises T/8.1* and T/8.2* in the Appendix (pages 220 and 221). Ask the students to work through them. 3 Draw the students attention to the difference between: (a) the Sales Ledger and the Sales Account (b) the Nominal Ledger and the Nominal Account a name for the various income and expense accounts the account in the General Ledger which records the income receivable from the sale of goods, whether for cash or on credit an alternative name for the General Ledger the ledger containing debtor accounts
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Step 3
Aim: to recognize the various possible subdivisions of the ledger 1 Review the possible sub-divisions of the ledger. Use the students experience to review this topic by asking them questions. For example, you could ask the students why the Sales Ledger might be divided according to sales territories/areas and what advantages might result from this. Suggest that those who are in employment try to find out how the ledger is divided or subdivided within the organizations they work for. A large Sales Ledger might be subdivided for any of the reasons stated in point 2 on page 45. The ways in which the Sales Ledger can be divided are: (a) (b) (c) (d) (e) alphabetically by the customers names; numerically in which each customer is allotted a number; geographically (or territorially) by area or region, eg by sales territories; on a product basis by product categories; by type of customer, eg trade customers, as distinct from private individuals, or according to the level of credit allowed.
2 Hand out copies of, or show on the overhead projector, exercise T/8.3* in the Appendix (page 221). Ask the students to work through the exercise.
Step 4
Aim: to be able to produce a balance sheet with a vertical format 1 Stress that a vertical format is not required for the First Level Book-keeping examination. Explain, however, that a vertical layout offers more scope for presentation, especially when more detail needs to be included concerning fixed assets. More space is provided by this layout, which can greatly help candidates. 2 The balance sheet of T Avis at 31 December Year 6 is presented overleaf in vertical format. See also T/8.4 in the Appendix (page 222). 3 Point out that it is usual to deduct Amounts due within 1 year (current liabilities) from current assets to obtain net current assets. Note Knowledge of working capital (net current assets) is not required by the First Level syllabus.Therefore, students who omit the words net current assets will not be penalized. However, encourage the students to lay out their work well.
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T Avis Balance sheet at 31 December Year 6 Fixed Assets Fixtures and fittings Motor vehicle Current Assets Stock Debtors Bank Cash less Amounts due within 1 year Creditors Net current assets Financed by: Capital balance at 1 Jan Year 6 add Net profit less Drawings 5,430 1,340 1,100 240 5,670 900 1,600 2,500 2,450 1,170 1,230 70 4,920 1,750 3,170 5,670
4 Hand out copies of, or show on the overhead projector, exercise T/8.5* in the Appendix (page 223). Ask the students to work through the exercise. Remind the students to apply the examination method outlined in Lesson 7 (page 43). 5 Explain that after the total amount of fixed assets and net current assets has been established, the Amount due in more than 1 year is deducted.This way of positioning entries is preferred by the LCCIEB to the alternative of placing longer-term liabilities as an addition underneath capital.
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Lesson 9: Bank facilities Cash Book: 2 columns

Topic summary

Basic matters concerning methods of payment and cash and bank records The use of a 2-column Cash Book The significance of a bank overdraft and its effect on the Bank Account The book-keeping relationship between the Bank Current Account and the Bank Deposit Account

7.1 7.2 The main types of bank account and their key features The key aspects of the following methods of payment and receipt of money, and the differences between them: 7.2.1 cash 7.2.2 cheque 7.2.3 credit transfer 7.2.4 standing order 7.2.5 direct debit Significance of the term bank overdraft: how an overdraft might arise The differences between: 7.4.1 interest receivable (by the customer) on a bank account 7.4.2 interest payable on a bank loan or overdraft 7.4.3 bank charges as charged by a bank for operating an account Naming of and use of the following abbreviations: 7.5.1 DD or D/D direct debit 7.5.2 CT or C/T credit transfer 7.5.3 STO or S/O standing order 7.5.4 Div dividend Significance of the following terms: 7.6.1 bank paying-in book 7.6.2 bankers order 7.6.3 cheque book counterfoils/stubs 7.6.4 counter credits 7.6.5 drawer 7.6.6 drawee 7.6.7 remittance (continued)
7.3 7.4
7.5
7.6
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Bank facilities Cash Book: 2 columns
Extended Syllabus references (continued)

8.4 8.6 Transfers between the cash and bank accounts (contra entries) The variations of entry arising on and from the sale of goods for cash, eg the immediate banking of cash as against the delayed banking of cash 8.7 The book-keeping entries required on the transfer of funds between the Bank Current Account and the Bank Deposit Account 8.17 The periodic balancing of the Cash Book, bringing the balance down for the start of the next period
A detailed knowledge of bank facilities is not required for the LCCIEB First Level Book-keeping examination.There is, however, a need to know: the nature of 2 types of bank account: the Current Account and the Deposit Account; the main methods of payment through a bank, eg cheque or credit transfer; the process of cheque clearance (in outline); how the bank account affects the Cash Book.
Reconciliation between the bank statement and the Cash Book is dealt with in Lesson 17 (page 132). You can obtain literature from a bank, that describes the accounts that are available, and methods of payment, together with specimen paying-in slips, for example.
Step 1
Aim: to be able to apply knowledge of bank facilities to answering basic questions on methods of payment and cash and bank records Many students will be aware of bank facilities and may have first-hand experience of holding a bank account. This knowledge can be drawn upon by asking the students questions at appropriate points in the lesson. For example, you could ask them about the type of bank accounts they have, and if any features vary from those of the 2 basic types of account.You could also ask what factors might delay the clearance of a cheque. 1 Bank accounts Ensure that students are aware of the 2 main types of bank account: the Current Account and the Deposit Account. Review the key features of each: Deposit Account normally for earning interest on the balance; withdrawals are infrequent
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Current Account
a working account for regular banking and withdrawal of money; generally interest is earned on the balance only if the balance is kept above a certain minimum
2 Cheques The students should be told the following about cheques: what their purpose is; who the parties to a cheque are. Illustrate this information about cheques by displaying Figure 9.1 on the overhead projector.
instructs Bank
to pay to Drawer Payee or to drawer himself Figure 9.1 The interaction of the parties to a cheque
Note The delay in clearance will increase if P Sempster (the payee) delays paying the cheque into his account.
In the simplified form of cheque shown below:

T Royle is the drawer, ie the party making payment; Albion Bank,York east is the drawee, ie the party upon whom the cheque is drawn and where T Royle has his bank account; P Sempster is the payee, ie the party to whom the cheque is payable.
Albion Bank plc York East branch Pay
7 May Year 4
P Sempster Three hundred and and thirty pence
sixty pounds
360-30 T Royle
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Explaining what the different cheque numbers are will be useful in making cash-book entries and, later on, in preparing bank-reconciliation statements (see the students book How to Pass Book-keeping, First Level, pages 745). 3 Paying-in slip Tell students that the paying-in slip is used for paying cash or cheques into a bank account. It is often referred to in questions requiring the preparation of a Cash Book. 4 Cheque clearance Explain what cheque clearance is. A cheque is cleared when the drawee bank has indicated that it will pay the amount stated on the cheque. Emphasize that there is a time delay before the 2 accounts involved (drawers and drawees) are adjusted. For example, in the journey of a drawn cheque illustrated in Figure 9.2, a cheque is drawn by T Royle (an account holder at Albion Bank,York East branch) payable to P Semster (who holds an account at Derbyshire Bank, Chester branch) also in the Appendix: T/9.1 (page 225).
Year 4 7 May T Royle (drawer) cheque sent to P Sempster (payee) receives cheque T Royle credits bank account
P Sempster debits bank account
8 May
pays cheque into account with Derbyshire Bank Chester branch
9 May
cheque sent to Derbyshire Bank clearance centre sent (with other cheques) to
10 May
10 May
Albion Bank clearance centre Albion Bank York East branch charged against account of T Royle
11 May
Figure 9.2 The journey of a drawn cheque
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5 Other payment methods The 3 methods of which candidates need to be aware are: (a) credit transfer used for: (i) single settlement, eg payment of one bill; or (ii) multiple settlement, eg one instruction to the bank to make a number of payments to different accounts (of persons or organizations). for regular payments: of fixed amounts; at stated dates; to certain persons or firms. credit transfer in reverse: initiated by the creditor, although with the written agreement of the debtor: for either fixed or variable amounts; when the time intervals between payments vary.
(b) standing order
(c) direct debit
6 Counter credits This term literally means the recognition of credit at the bank counter. It relates to payments into a bank account. Counter credits may cover a number of cheques, etc amounting to the sum stated. 7 Explain the following terms: interest receivable (by the customer) on a bank account normally only if the balance is above a certain minimum; interest payable on a bank loan or overdraft; and bank commission (charges), which are charged by a bank for operating an account. Note Explain the terms: bank loan bank overdraft an amount made available for an agreed period; interest is charged on the full amount of the loan regardless of how much is drawn. an overdraft occurs when withdrawals exceed deposits; it may be with or without prior agreement with the bank; interest is charged from day to day on the varying balance.
8 Give each student a copy of the multiple-choice questions (T/9.2 in the Appendix, page 226). Ask the students to work through them.
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Step 2
Aim: to be able to prepare a 2-column Cash Book Answers to examination questions requiring the preparation of a Cash Book are often weak.The weakness may, in part, be due to candidates unfamiliarity with presenting their work in columnar form. 1 Explain that, in a 2-column Cash Book, related accounts, cash and bank, are merely positioned beside each other. Practice in answering questions requiring columnar form should solve any difficulty the students might have. 2 Show the students cash and bank accounts, as they have been introduced so far on the overhead projector, eg:
Cash Year 2 1 Sep Balance b/d 7 Sep Sales 26 Sep R Layburn 43 116 51 210 136 Bank Year 2 1 Sep 8 Sep 12 Sep 25 Sep Balance b/d T Wells Office furniture J Telby 726 315 290 85 1,416 1 Oct Balance b/d 718 Year 2 4 Sep 16 Sep 20 Sep 28 Sep 30 Sep Rent T Laite Insurance V Barnes Balance c/d 240 176 215 167 718 1,416 Year 2 5 Sep 11 Sep 19 Sep 30 Sep Cleaning K Mills Postage Balance c/d 18 37 19 136 210
1 Oct
Balance b/d
3 Show the 2 accounts combined. Make sure you enter the items in correct date order. Carefully tick ( ) the original items as they are entered in the newly presented Cash Book.
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CASH BOOK Year 2 1 Sep 7 Sep 8 Sep 12 Sep 25 Sep 26 Sep Cash Bank 43 726 116 315 290 85 51 Year 2 4 Sep 5 Sep 11 Sep 16 Sep 19 Sep 20 Sep 28 Sep 30 Sep Cash Bank 240 18 37 176 19 215 67 136 718 210 1,416
Balances b/d Sales T Wells Office furniture J Telby R Layburn
Rent Cleaning K Mills T Laite Postage Insurance V Barnes Balance c/d
210 1 Oct Balance b/d 136
1,416 718
Stress the importance of entering the items in date order. 4 Hand out copies of, or show on the overhead projector, exercise T/9.3* in the Appendix (page 227). Ask the students to work through the exercise. 5 Ask the students why it is necessary to keep a separate record in the Cash Book.There are two answers: (a) A golden rule in accounting is to separate, if possible, the handling of, or dealing with, money from other aspects. This action lessens the chance of an employee taking advantage of the system. (b) The volume of work in dealing with the receipt and payment of money might also justify a separate record. 6 Ask the students why it is necessary to keep cash and bank accounts together in columnar format.The answer is that they are so closely related that transfer sometimes takes place between them. 7 Explain that the transfer of cash into the bank would result in:

cash reduced credit cash bank increased debit bank.
8 Illustrate how the transfer of cash into the bank would appear in the Cash Book:
CASH BOOK Year 4 12 Feb Cash Cash C Bank 270 Year 4 12 Feb Cash 270 Bank
Bank C
The C means contra, which is used where a double entry is complete within the Cash Book.
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9 Cash might also be taken out of the bank. Show the Cash Book as it would appear when money is withdrawn from the bank account to increase office cash:
CASH BOOK Year 4 15 Mar Bank C Cash 120 Bank Year 4 15 Mar Cash C Cash Bank 120
10 Hand out copies of, or show on the overhead projector, exercise T/9.4* in the Appendix (page 228). Ask the students to work through the exercise. 11 Check that the students are making the entries correctly in the answer to exercise T/9.4. In particular check that: (a) each transaction is dated; (b) transactions are entered in strict date order; (c) the appropriate wording is entered in the middle details column, which always contains the name of the corresponding account, ie where the double entry is completed. 12 Ask the students if they can spot any bad business practice being followed by W Towcester. The answer is that there is some bad business practice. W Towcester is keeping too much cash in the office at one time, which is a security risk. On 6 April, 470 cash was received for sales, none of which was banked until 9 April. 13 Explain that for reasons of security, the general practice is to bank cash, if possible, on the day of receipt. If cash is banked on the day that it is received, the account entries should be recorded as if a cheque had been banked immediately. For example, on 9 May Year 6,W Towcester receives 590 in cash from sales and banks the cash the same day. The account entry for this transaction would be as follows:
CASH BOOK Year 6 9 May Sales Cash Bank 590 Year Cash Bank
14 Point out that some book-keepers record the entry for cash sales that are banked, first as a debit in the cash column and then separately bank the amount. If the entry has been recorded in this way, the initial entry must be followed by a complete set of contra entries such as credit cash/debit bank. For examination purposes, the method shown in W Towcesters Cash Book above direct entry in the debit bank column is strongly recommended. This method prevents complications and confusion as to the double entry is less likely. A common fault in answers to examination questions on this topic is failing to make the complete contra, which loses marks.
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15 Explain that there is an alternative way of recording cash sales that are banked. This alternative is used when part of the cash received from sales is banked (on the same day) and the remainder is retained as office cash. For example, 5 June Year 6, 985 is received from cash, 900 of which was banked on the same day. This transaction would be recorded as follows:
Method A CASH BOOK Year 6 5 Jun Cash 85 Bank 900 Cash Bank
Sales
If treated as 2 transactions, the entry would be recorded as follows:

Method B CASH BOOK Year 6 5 Jun 5 Jun Cash 985 Bank 900 Year 6 5 Jun Cash 900 Bank
Sales Cash C
Bank C
Method A is to be preferred. It is simpler and less prone to error. 16 Hand out copies of, or show on the overhead projector, exercise T/9.5* in the Appendix (page 229). Ask the students to work through the exercise.
Step 3
Aim: to be aware of the significance of a bank overdraft and its effect on the bank account 1 Explain that a bank overdraft might arise because: the bank has agreed that the account may be overdrawn, subject to a limit; the customer (intentionally or otherwise) has drawn more out of the account than it contains. 2 Tell the students that the effect of an overdraft is to create a minus or negative balance from the customers viewpoint.The balance changes from debit to credit and from asset to liability (the amount owed to the bank). 3 Illustrate the significance of a bank overdraft and its effect by referring in the Appendix, page 229 to the Cash Book of F Swaine (see T.9.5/A). If a cheque for 9,000 had been drawn from F Swaines account on 30 November Year 5, the Cash Book would appear as follows:
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F Swaine CASH BOOK Year 5 1 Nov 3 Nov 8 Nov 17 Nov 20 Nov 23 Nov 30 Nov Cash Bank 12,000 11,500 860 130 315 210 700 1,455 Year 5 3 Nov 5 Nov 10 Nov 13 Nov 15 Nov 17 Nov 18 Nov 28 Nov 29 Nov 30 Nov 30 Nov Cash Bank Bank C 11,500 Motor vehicle 4,200 Wages 270 Purchases 1,040 Carriage 43 Cash C 130 Wages 290 Drawings 150 F Glubb 460 S Royal 9,000 Balance c/d 87 12,340 14,830 1,455
Capital Cash C Sales Bank C T Dart Sales Balance c/d
12,340 14,830 1 Dec Balance b/d 87
1 Dec Balance b/d
4 Point out that:
The credit balance for bank will appear in the balance sheet of F Swaine as a liability, ie under the heading of Amounts due within 1 year. Cash never has a credit balance. Negative cash is an impossibility.
Particularly stress the second point; this will help prevent students from wrongly showing a concluding credit balance for cash.
Step 4
Aim: to appreciate the book-keeping relationship between the bank Current Account and the bank Deposit Account Remind the students that the bank Current Account is very much a working account that is used for regular banking and withdrawal of money. The Deposit Account, however, has money paid into it or withdrawn from it infrequently.The Current Account is recorded in the Cash Book; the Deposit Account is kept in the General Ledger because entries are infrequent. Thus, if there were a transfer on 12 April Year 4 of 2,000 from the Current Account into the Deposit Account, the entries would be recorded as follows:
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CASH BOOK Year 4 12 Apr General Ledger Bank Deposit Account Year 4 12 Apr Bank (Current a/c) 2,000 Cash Bank Deposit a/c Bank 2,000
If there were a withdrawal from the bank Deposit Account into the bank Current Account the entries would, of course, be the reverse of those shown above.
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Lesson 10: Cash Book: 3 columns cash discount

Topic summary

The significance of cash discount Account entries in respect of cash discount Preparing the 3-column Cash Book, including entries for discounts, and posting discount totals to the General Ledger

Use of the 3-column Cash Book (the bank columns recording the Bank Current Account only) 8.3 The posting of individual transactions from the Cash Book to the ledger 8.5 The differences in book-keeping entries regarding the withdrawal of funds from the bank, as between: 8.5.1 that for use in the business a contra entry 8.5.2 that for private use drawings 8.8 Cash discount as part of the terms of sale 8.9 The impact of cash discount upon the seller (discount allowed) and the buyer (discount received) respectively 8.10 The double-entry effect of discount allowed and discount received respectively 8.11 The purpose and use of discount columns in the Cash Book 8.18 The periodic posting of discount-column totals from the Cash Book to the Discount Allowed and Discount Received Accounts in the General Ledger 8.2
One of the topics that causes students difficulty is discounts. Cash discount is a rather misleading term: it is really an allowance given to encourage payment within a certain period of time. Understanding what cash discount means is the key to solving at least part of the students difficulty. A debtor is entitled to a cash discount only when the payment condition is met.
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Cash Book: 3 columns cash discount
Step 1
Aim: to appreciate the significance of cash discount 1 Discuss the purpose of cash discount. Explain that its purpose is to induce prompt or early payment by a customer who has been sold goods on credit. By receiving payment early, the seller is able to use the money to purchase and then sell more goods. Cash discount, as part of the sellers terms of sale, also serves to attract the would-be purchaser.The terms of sale might state, for example, that:

a period of credit of one month is allowed; if payment is made within 10 days of buying the goods, a cash discount of 2% will be allowed.
2 Explain that the term cash discount is misleading; it is an allowance given to encourage the purchaser to pay an account within a certain period of time. The allowance is calculated as a percentage (%) of the price of the goods. For example, if the price of the goods is 250 and the cash discount for payment within 10 days is 2%, then:
Amount of cash discount: Net amount to be paid 250 x 2/100 = 5 245
3 Stress that the buyer of goods (on credit) is not automatically entitled to a cash discount. It is conditional, although it may be part of the terms of sale, ie the buyer has to meet certain conditions to receive the discount. For example, he or she must: (a) pay by a certain date (10 days after the date of sale, in the example above) (b) pay in a duly acceptable form (eg in cash or with a cheque drawn on a reputable bank). It is the first of these two conditions with which students will be concerned. If, in the example above, the purchaser pays the account 13 days after the date of purchase, then he or she foregoes any entitlement to cash discount and must pay the full list price, ie 250. 4 Copy and hand out, or display on the overhead projector, the simple examples below. Ask the students to work through them. Example (a) On 3 June Year 6, X sells goods on credit to Y for 480. The terms of sale allow a period of credit of one month but, if payment is made within 7 days of purchase, a cash discount of 2 1/2 % will be allowed. Y pays the account on 8 June Year 6. Y is entitled to the cash discount because he or she has paid the account within the conditional 7-day period.
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Selling price less 21/2% cash discount Payment made
480 12 468
Example (b) On 7 August Year 6, A sells goods on credit to B for 350. The terms of sale allow a period of credit of one month but, if payment is made within 14 days of purchase, a cash discount of 2 1/2% will be allowed. B pays the account on 5 September Year 6. B settles the account after a lapse of more than 14 days, foregoing entitlement to the cash discount. He or she has to pay the full list price of 350. However, B has taken advantage of most of the period of credit, which expires on 7 September Year 6. In Example (a), for X, the seller/creditor, the discount is described as discount allowed; for Y, the purchaser/debtor, the discount is described as discount received. This situation can be illustrated thus:
Sale of goods on credit Purchase of goods on credit debtor creditor discount allowed discount received
Firms, as both buyers and sellers of goods, can be both allowers and receivers of cash discount. 5 Make it clear to the students that the term cash covers payments in actual cash, and through the banking system.
Step 2
Aim: to be able to make account entries in respect of cash discount 1 Discount allowed Remind the students that discount allowed represents discount from the sellers viewpoint. Illustrate discount allowed with the example below. Example On 1 July Year 3, L Green owes A Brown, a trader, 100. The terms of sale allows a 2 1/2 % discount for payment within 14 days. L Green meets this condition and so pays
100 less the 2.50 discount = 97.50
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In account terms, the transaction would appear as follows:

Transaction effect (a) Cash Debtor: L Green (b) Discount allowed Debtor: L Green + 97.50 - 97.50 + 2.50 - 2.50 Book-keeping action Debit Cash Account Credit L Green Debit discount allowed Credit L Green
Point out that Discount Allowed is an expense account of A Brown and is kept in the General Ledger. It also represents a holding account, which holds the balance of the discount allowed until it is transferred to the Profit & Loss Account at the end of the period. Illustrate the account on the overhead projector or board as follows:
CASH BOOK Year 3 9 Jul Cash 97.50 Bank Cash Bank
L Green
L Green Year 3 1 Jul Balance b/d 100 Year 3 9 Jul 9 Jul Discount Allowed Year 3 9 Jul L Green 2.50 Cash Discount allowed 97.50 2.50
Hand out copies of, or show on the overhead projector, the following exercise and ask the students to work through it. Exercise On 2 May Year 5, B Hall, a trader, sells goods worth 720 on credit to F Trill.The terms of sale allow a 2 1/2% cash discount for payment within one month. F Trill pays his account by cheque on 30 May Year 5. Required Record these transactions in the books of B Hall. Solution
CASH BOOK Year 5 30 May Cash F Trill Bank 702 Cash Bank
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F Trill Year 5 2 May Sales 720 Year 5 30 May Bank 30 May Discount allowed 702 18
Discount Allowed Year 5 30 May F Trill 18
2 Discount received Remind the students that discount received represents discount from the buyers viewpoint, ie by receiving cash discount the buyer pays less to settle the account. Illustrate discount received with the example below. Example A Brown the trader (see page 62) is now a debtor who owes T Wells the sum of 500 at 1 July Year 3. The terms of sale allow 2% cash discount for payment within 14 days and A Brown meets this condition.Thus, A Brown pays only
500 less the 10 discount = 490
In account terms, the transaction would appear as follows:

Transaction effect (a) Bank Creditor: T Wells (b) Creditor: T Wells Discount received - 490 - 490 - 10 + 10 Book-keeping action Credit bank account Debit T Wells Debit T Wells Credit discount received
Point out that discount received is an income (or revenue) account of A Brown and is kept in the General Ledger. It also serves as a holding account, which holds the balance of the discount received until it is transferred to the Profit & Loss Account at the end of the period. Illustrate the account entries on the overhead projector or board as follows:
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CASH BOOK Cash Bank Year 3 10 Jul Cash T Wells Bank 490
T Wells Year 3 10 Jul 10 Jul Bank Discount received 490 10 Year 3 1 Jul Balance b/d 500
Discount Received Year 3 10 Jul T Wells 10
Hand out copies of, or display on the overhead projector, the following exercise. Ask the students to work through it. Exercise On 3 June Year 5, B Hall buys goods worth 840 on credit from Laken Ltd.The terms of sale allow 3 3/4 % cash discount for payment within one month. B Hall pays the account by cheque on 29 June Year 5. Required Record this transaction in the books of B Hall. Solution The amount of cash discount = 840 3 3/4 /100 = 31.50 Therefore the amount to be paid = 840 - 31.50 = 808.50
CASH BOOK Cash Bank Year 5 29 Jun B Hall Laken Ltd Year 5 29 Jun Bank 29 Jun Discount received 808.50 31.50 Year 5 29 Jun 840 Cash Bank 808.50
Discount Received Year 5 29 Jun Laken Ltd 31.50
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Step 3
Aims: to be able to prepare a 3-column Cash Book, including entries for discounts; and to be able to post discount totals to the General Ledger 1 Explain the disadvantage of going to the General Ledger every time an entry is made for cash discount. It makes less work to have discount columns in the Cash Book.The discount entry can then be made when entering either the receipt or payment of money. 2 Show the Cash Book entries for A Brown that would be recorded in place of those shown on pages 63 and 65.
CASH BOOK Disc Alld Cash Bank 2.50 97.50 Disc Recd Cash Bank 10 490
Year 3 9 Jul
L Green
Year 3 10 Jul
T Wells
Point out that the entries in the personal (debtor/creditor) accounts are unchanged. Because these entries remain unchanged, discount amounts can be collected in the discount columns and the totals transferred periodically into the General Ledger as shown below.
total of left-hand discount column to total of right-hand discount column to
Discount Allowed Account (debit side)
Discount Received Account (credit side)
3 Explain that when payment is made by cheque, it is common practice to include the number of each cheque in the Cash Book. If cheque numbers are included in a question, these numbers should be stated in the answer beside the name of the payee in brackets. Cheque numbers appear only on the credit side of the Cash Book, ie in respect of cheques drawn by the firm for which the entries in the Cash Book are being recorded. It is sufficient for the students to show the last 3 numbers only, eg a payment of 315 by cheque number 235212 to F Smith would appear as:
CASH BOOK Dr Cr Disc Cash Bank Year 4 17 Feb F Smith (212) 315
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4 Display exercise T/10.1 in the Appendix (page 230) on the overhead projector. Work through it with the class. This exercise illustrates the use of the 3-column Cash Book, as well as the immediate postings to ledger accounts and the end-of-the-month transfer of column totals to the respective discount accounts. Solution to T/10.1
CASH BOOK Disc Alld Cash Bank 93 1,040 7 343 11 429 80 Disc Recd Cash Bank 56 7 273 190 80 291 117 978 173 1,812
Year 5 1 May 11 May 24 May 28 May
Bals b/d R Vine A Croft Bank C
Year 5 13 May Stationery 18 May T Dole (214) 21 28 30 31 May May May May
18 1 Jun Bals b/d
173 117
1,812 978 SALES LEDGER A Croft
Insurance (215) Cash (216) C W Kone (217) 9 Bals c/d 16
Year 5 1 May Balance b/d
440 440
Year 5 24 May Bank 24 May Discount allowed
429 11 440
R Vine Year 5 1 May Balance b/d 350 350 PURCHASES LEDGER T Dole Year 5 18 May Bank 18 May Discount received 273 7 280 Year 5 1 May Balance b/d 280 280 W Kone Year 5 30 May Bank 30 May Discount received 291 9 300 Year 5 1 May Balance b/d 300 300 Year 5 11 May Bank 11 May Discount allowed 343 7 350
(continued)
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GENERAL LEDGER Stationery Year 5 13 May Cash 56 Insurance Year 5 21 May Bank 190 Discount Allowed Year 5 31 May Sundries 18 Discount Received Year 5 31 May Sundries 16
5 Direct the students attention to the following points in the Cash Book and ledgers shown above, that:
the total of each discount column is transferred to the same side (Dr or Cr) in the ledger; there is no balancing of discount columns; prompt postings are made of other items, eg to personal accounts, stationery, or insurance; use of the word sundries in each discount account.
Note Explain that the word sundries has a general application and has been used elsewhere in this text. In this subject, it means a number of entries amounting to the sum stated. 6 Common errors made by candidates Draw the attention of students to the following points as they work through the exercises listed on page 69. (a) The reversal of entries: payments debited and income credited. (b) When recording money received from cash sales that is banked the same day candidates may fail to do the full contra (see Lesson 9, page 49). They make the entry in Dr cash but then either debit or credit the bank column. (c) Showing a credit balance of cash.This type of entry is the equivalent of a deficit of cash, which is impossible. If a Cr cash balance emerges there is something wrong with the entries. (d) Sometimes discount columns have been omitted from the Cash Book when the entries should be included. (e) Cash discount added to the amount of a cheque.
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(f ) The discount columns are balanced, ie a balance is found between the totals of the 2 columns. (g) When the candidates post entries to the discount accounts (in the General Ledger) they may make one of two errors; they: post individual items, which is quite wrong and defeats the purpose of having the discount columns; post the column totals to the wrong side of each discount account. 7 Give the students each a copy of exercise T/10.2 in the Appendix (page 231) and ask them to work through it. However, before they start work on the exercise, point out that sometimes a payment or receipt of money to or from a debtor or creditor is described as being in settlement of the amount due or in settlement of a debt.These terms indicate that a cash discount has been either received or allowed. For example a cheque for 720 received in settlement of an amount of 750 means that a cash discount of 30 has been allowed, and this amount should be recorded in the discount allowed column of the Cash Book. Hand out copies of exercises T/10.3 and T/10.4 in the Appendix (pages 2323) to the class and ask the students to work through them. Both these exercises are from past LCCIEB First Level Book-keeping papers. They require information from different sources to be brought together. For example, for T/10.3, information from the bank paying-in book, cheque-book counterfoils, and record of movements of cash is required.Tell the students that they must keep the entries in strict date order. In T/10.3 certain information picked up from the bank statement is to be entered after an initial balancing.
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Lesson 11: Purchases and Sales Day Books

Topic summary

The invoice or copy invoice as the source document for credit purchases or sales The preparation of a Sales Day Book for a given period and posting entries to ledger accounts The function of the Sales Day Book The book-keeping significance of trade discount and how it contrasts with cash discount The preparation of a Purchases Day Book for a given period and posting entries to ledger accounts

Use of the term source document: in particular, the part played in book-keeping by the invoice and the credit note 5.8 The significance of trade discount 5.9 The calculation of trade discount, from list price to obtain net price 6.1 The function of Purchases, Sales, Returns Outwards, and Returns Inwards Day Books 6.2 The alternative names used for these various day books 6.3 The recording of individual transactions in the day books 6.4 Making individual postings from the day books to personal accounts 6.5 Making postings of period day-book totals to the Purchases, Sales, and Returns Accounts in the General Ledger 8.12 The differences between trade discount and cash discount and the different book-keeping effects 5.7
Day books is a topic that sometimes results in the loss of examination marks.The problem arises largely from failure of students to understand the function of the day books. So often, day books are prepared as if they are ledger accounts. Entries in the day books require an authorized source such as an invoice or copy invoice. Trade discount also has to be considered.
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Purchases and Sales Day Books
Step 1
Aim: to recognize the invoice or copy invoice as the source document for credit purchases or sales 1 Explain that when goods are sold on credit, the seller will send an invoice to the buyer, setting out:

the parties to the transaction details of the goods sold their prices the terms of sale.
2 Show a specimen invoice (Figure 11.1) on the overhead projector. INVOICE

Tempster & Fall 25 The Square Northbridge NT3 5WR
7 April Year 4
Invoice no 5622 To: R Maundy 17 The Luttens Wednesbury WD4 3ET
Quantity
Description
Unit price 7 12 20
Total 280.00 240.00 200.00 720.00
40 20 10
Moveable shelves Lockable containers Storage cabinets
less trade discount at 12 / %
12
90.00 630.00
Terms: 21/2% cash discount for payment within 30 days Figure 11.1 A specimen invoice
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If possible, obtain actual invoices for the students to see. 3 Explain that the seller will pass a copy of the outgoing invoice to his or her book-keeper. The copy invoice will then be the basis of entry into the accounts, ie it will be the source document.
Step 2
Aim: to be able to prepare a Sales Day Book for a given period and to post entries to ledger accounts 1 On the board or overhead projector, show the Sales Day Book of Tempster & Fall, below, and:

explain that the sources of the entries are copy invoices; show the postings to the ledger one by one; show clearly how the double entry is achieved.
SALES DAY BOOK Invoice no Year 4 2 Apr 7 Apr 20 Apr 26 Apr A Trumble R Maundy W Trent F Skane 5621 5622 5623 5624 To Sales Account Amount 433 630 290 375 1,728
Point out that invoice numbers might not be included in some examination questions, and so the invoice no column would be left out. 2 The double entry for Tempster & Falls transactions is achieved as follows: (a) the individual amounts are posted to the debtor accounts as soon as possible, ie they are debit entries; (b) the total of the credit sales for April Year 4 is transferred at the end of the month to the credit of the Sales Account in the General Ledger.
SALES LEDGER Dr Year 4 2 Apr A Trumble Sales 433
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R Maundy Year 4 7 Apr Sales 630 W Trent Year 4 20 Apr Sales 290 F Skane Year 4 26 Apr Sales 375 GENERAL LEDGER Sales Year 4 30 Apr
Sundries
Cr 1,728
Check that the total of the 4 debit entries is equal to the amount of the credit entry.
Step 3
Aim: to appreciate the functions of the Sales Day Book 1 Discuss the function of the Sales Day Book. Explain that it is used for:

recording credit sales; carrying transaction detail instead of the Sales Account.
Emphasize that, usually, only credit sales are entered in the day book: cash sales will continue to be entered directly into the Sales Account.1 2 Illustrate the procedure for credit sales by displaying Figure 11.2 on the overhead projector.
Copy invoice (source document) SALES DAY BOOK daily posting monthly posting of total to GENERAL LEDGER Sales Account (CREDIT)
Customer accounts (DEBIT) Figure 11.2 Credit sales procedure
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Stress that the entry in the day book is not part of double entry: it is a note only a form of memorandum. The amounts of credit sales are held in the day book throughout each month. At the end of each month the total is transferred to the Sales Account. Thus, during the month, the debit part of each credit sale has been entered but not the credit part. The double entry is complete when the monthly total is transferred. 3 Ask the students what the advantages are of having a Sales Day Book. The answers should be that:

fewer items need to be passed through the double-entry system; accounting work can be divided among staff, with one person looking after the day book and another the ledger.
4 The day book seems to have limited detail recorded for each transaction. Ask the students if it really helps the ledger that much.The answer is that it is true that day book entries nowadays are much briefer than in the past. Much of the detail is shown on the copy invoice, which can be referred to if necessary. The file of copy invoices can be regarded as supporting the day book. Present-day practice still means that the ledger is helped by not having to carry a lot of detail. 5 Explain that in a computer-based account system, the information included in the manually based Sales Day Book would be recorded to enable many functions to be performed. Thus, the amount of monthly credit sales could be known quickly. Information may also be readily available on the amounts outstanding on individual customer accounts, on the regularity of payments by customers, etc. The print-out of invoices for despatch to customers and other documents could also be part of an integrated system. 6 Hand out copies of or display exercise T/11.1 in the Appendix (page 234) on the overhead projector and ask the students to work through it.
Step 4
Aim: to appreciate the book-keeping significance of trade discount and how it contrasts with cash discount 1 Explain the nature of trade discount and its effect on selling price. Trade discount is normally an allowance to traders for buying in bigger quantities. Any one trader might offer different levels of discount, eg 10%, 121/2 %, or 15%, according to the quantity or amount (in ) of an order. 2 If possible, show examples of trade discount in catalogues or price lists issued by traders. Refer to the trade discount shown on the invoice illustrated on page 71. Show that the entry in the Sales Day Book for R Maundy is 630 (see page 72), ie the net figure on
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the invoice after the trade discount is deducted. From this example, the students will see that trade discount is not recorded in the accounts. However, cash discount is recorded in the accounts: the buyer still has to meet the condition of paying the account by a certain date. 3 Hand out copies of or display the following exercise on the overhead projector and ask the students to work through it. Exercise On 5 January Year 7, K Johnson sells goods on credit to V Lympne, at a list price of 750 and quantity (trade) discount of 20%. A cash discount of 21/2 % is allowed if the account is settled within 30 days of the invoice date. V Lympne pays the account by cheque on 31 January Year 7. Required In the books of K Johnson, show the relevant entries in: (i) the Sales Day Book (ii) the ledger account of V Lympne. Solution In the books of K Johnson:
SALES DAY BOOK Year 7 5 Jan SALES LEDGER V Lympne Year 7 5 Jan Sales 600 600 Year 7 31 Jan 31 Jan Bank Discount allowed 585 15 600 V Lympne 600
Note The trade discount does not appear in any account and need not appear in the Sales Day Book, ie it is sufficient to show the net figure after the deduction of the trade discount. 4 Explain that cash discount does not, as some students think, appear in the Sales Day Book. It does, however, appear on the credit side of V Lympnes account because Lympne has paid the account within the required 30 days. 5 Hand out copies of or display on the overhead projector exercise T/11.2 in the Appendix (page 234) and ask the students to work through it.
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Step 5
Aim: to be able to prepare a Purchases Day Book for a given period and to post entries to ledger accounts 1 Explain that purchases on credit are treated on a similar basis to credit sales. First, they are listed in a Purchases Day Book. Illustrate the procedure for credit purchases by displaying Figure 11.3 on the overhead projector.
Invoice PURCHASES DAY BOOK monthly posting of total to
daily posting
GENERAL LEDGER Purchases Account (DEBIT) Figure 11.3 Procedure for credit purchases
PURCHASES LEDGER Supplier Accounts (CREDIT)
2 Show the following Purchases Day Book of R Maundy on the board or overhead projector:
PURCHASES DAY BOOK Invoice no Year 4 7 Apr 14 Apr 20 Apr 23 Apr Tempster & Fall 980 S Clegg 981 T Roman 982 B Porter 983 To Purchases Account Amount 630 416 528 364 1,938
3 Show the students how to post the transactions recorded in the Purchases Day Book to the ledger accounts:
PURCHASES LEDGER Tempster & Fall Year 4 7 Apr S Clegg Year 4 14 Apr Purchases 630 416
Purchases
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T Roman Year 4 20 Apr B Porter Year 4 23 Apr GENERAL LEDGER Purchases Year 4 30 Apr Sundries 1,938 Purchases 364 Purchases 528
Point out that the sale to R Maundy, in the Sales Day Book of Tempster & Fall, becomes a purchase in the Purchases Day Book of R Maundy.The amount is the same. 4 Inform the students that each entry in the Purchases Day Book is made from an invoice received from the seller. Compare this procedure with that for the copy invoice from which entries are made in the sellers day book. 5 Display exercise T/11.3 in the Appendix (page 235) on the overhead projector, or hand out copies of it to the students. Ask the students to work through the exercise. Note Advise the students that they need to be familiar with the alternative names for the 2 day books dealt with in this lesson to complete the exercise. The alternative names are given below:
Sales Day Book Purchases Day Book or or Sales Journal Purchases Journal
6 Common errors made by candidates concerning day books Draw the attention of the students to the following points. (a) The day books are shown in account format, which demonstrates a basic misunderstanding of the function of the day book. (b) The transactions that have been recorded in the day books are repeated, line by line, in the Purchases Account and/or Sales Account. Only period totals are supposed to be posted to the Purchases and Sales Accounts. (c) The deduction of cash discount in the day books. 7 Display exercise T/11.4 in the Appendix (page 236) on the overhead projector or hand out copies of it to the students. Ask them to work through the exercise. This exercise should help to reinforce the students knowledge about the 3-column Cash Book.
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Page 78
Lesson 12: Returns Day Books

Topic summary

The credit note or copy credit note as the source document for returns entries The function of the Returns Inwards and Returns Outwards Day Books The preparation of a Returns Inwards Day Book for a given period and posting entries to the ledger accounts The preparation of a Returns Outwards Day Book for a given period and posting entries to the ledger accounts The use of the term book of prime entry The reinforcement of learning and practice in regard to the use of day books

5.7 6.1 6.2 6.3 6.4 6.5 6.6 8.1 Use of the term source document: in particular, the part played in book-keeping by the invoice and the credit note The function of Purchases, Sales, Returns Outwards, and Returns Inwards Day Books The alternative names used for these various day books The recording of individual transactions in the day books Making individual postings from the day books to personal accounts Making postings of period day-book totals to the Purchases, Sales, and Returns Accounts in the General Ledger The reason for maintaining separate Returns Accounts instead of entering to the credit or debit, respectively, of Purchases or Sales Account The dual role of the Cash Book as a book of prime entry and an integral part of the double-entry record
Returns, previously introduced in Lesson 2, page 11, should be treated with care by candidates. Candidates examination answers often show confusion between inward and outward returns, as well as about the relevant price to apply to the returned goods.
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Returns Day Books
Step 1
Aim: to recognize the credit note or copy credit note as the source document for returns entries 1 Explain further the process of returns, both inwards and outwards, and various possible reasons for the seller granting an allowance. The reasons might include, for example:

the wrong goods were sent; the goods were damaged before arrival; the goods did not match those described in catalogues, etc; some of the goods were faulty, for which a part allowance may be made.
Stress that the seller grants, and the buyer receives, an allowance against the relevant invoice, whether or not the goods are actually returned. 2 Explain that when making the allowance, the seller will send a credit note to the buyer. A copy of the credit note will be passed to the sellers book-keeper and this serves as the basis of the account entries. An example of a credit note is shown in Figure 12.1, which you can show on the overhead projector.
CREDIT NOTE Tempster & Fall 25 The Square Northbridge NT3 5WR
18 April Year 4
Credit note no 529 To: R Maundy 17 The Luttens Wednesbury WD4 3ET
Reference invoice no 5622 dated 7 April Year 4 Quantity Description Unit price 12 Total 120.00 15.00 105.00
10
Lockable containers
less trade discount at 121/2% Damaged in transit Figure 12.1 An example of a credit note
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Returns Day Books
Relate this credit note to the invoice shown on page 71 in Lesson 11: where trade discount was deducted on the invoice, this must be deducted at the same rate on the credit note.
Step 2
Aim: to appreciate the function of the Returns Inwards and Returns Outwards Day Books 1 Show that, when the seller has agreed to make an allowance against the return of goods, the procedure (in outline) is as illustrated in Figure 12.2.
Seller issues CREDIT NOTE Sent to COPY CREDIT NOTE
CUSTOMER RETURNS INWARDS DAY BOOK (of seller)
RETURNS OUTWARDS DAY BOOK (of customer) Figure 12.2 The procedure on the return of goods
2 Explain that the functions of Returns Inwards and Returns Outwards Day Books are:

to record credit returns; to carry transaction detail instead of the ledger accounts.
Effectively, the entries in the day books represent a reversal of purchase and sales entries. 3 Point out that the Returns Day Books serve basically the same purpose as the 2 day books considered in Lesson 11. They serve to reduce the detail recorded in the ledger and allow staff to specialize in the work they do. In addition, by having separate books for returns, more information is available than if set-off entries (ones that have the effect of reducing the amount of a previous entry) were made in either the Purchases Day Book or Sales Day Book. If the entries were made in the other day books, there would be a danger of information on returns being hidden. 4 Ask the students why a firm needs to have detailed records of returns. The answer is that the record is important for dealing with individual customers or suppliers. It is also important for a supplier knowing how to improve the supply of goods or for a purchaser knowing which firms are the better suppliers.
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Returns Day Books
Step 3
Aim: to be able to prepare a Returns Inwards Day Book for a given period and to post entries to the ledger accounts 1 Show the Returns Inwards Day Book of Tempster & Fall, below, on the board or overhead projector.
RETURNS INWARDS DAY BOOK Year 4 11 Apr 18 Apr 26 Apr Amount A Trumble 528 87 R Maundy 529 105 W Trent 530 42 To Returns Inwards Account 234 Credit note no
2 Record the following postings to ledger accounts, entry by entry:

SALES LEDGER A Trumble Year 4 2 Apr Sales 433 Year 4 11 Apr R Maundy Year 4 7 Apr Sales 630 Year 4 18 Apr W Trent Year 4 20 Apr Sales 290 Year 4 26 Apr Returns inwards 42 Returns inwards 105 Returns inwards 87
GENERAL LEDGER Returns Inwards Year 4 30 Apr Sundries 234
Note The 3 debit entries in the Sales Ledger Accounts were previously posted from the Sales Day Book of Tempster & Fall, shown in Lesson 11, page 72. 3 Point out that the double entry in the Tempster & Fall example is achieved by the debit of 234 in the Returns Inwards Account being matched by the total of the 3 credit entries in the customer accounts.
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Returns Day Books
4 Figure 12.3 illustrates the part played by the Returns Inwards Day Book in the account system. Show the figure on the overhead projector.
Seller issues CREDIT NOTE COPY CREDIT NOTE entered in RETURNS INWARDS DAY BOOK Memorandum only daily postings end-of-month posting of total
Returns Inwards Account
GENERAL LEDGER SALES LEDGER
Customer (debtor) accounts
Figure 12.3 The returns inwards procedure
5 Explain that the double entry is made by means of: (a) prompt postings to the customer accounts = credit; (b) end-of-month posting of the total to the Returns Inwards Account = debit. 6 Hand out copies of, or show on the overhead projector, exercise T/12.1 in the Appendix (page 237). Ask the students to work through the exercise.
Step 4
Aim: to be able to prepare a Returns Outwards Day Book for a given period and to post to the ledger accounts 1 Show the Returns Outwards Day Book of R Maundy (below) on the board or overhead projector:
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Returns Day Books
RETURNS OUTWARDS DAY BOOK Credit note no Year 4 9 Apr 18 Apr 24 Apr J Jolly 2178 Tempster & Fall 529 N Nathan 1165 To Returns Outwards Amount 127 105 38 Account 270
2 Record the following postings to ledger accounts, entry by entry:

PURCHASES LEDGER J Jolly Year 4 9 Apr Returns outwards 127 Tempster & Fall Year 4 18 Apr Returns outwards 105 Year 4 7 Apr N Nathan Year 4 24 Apr Returns outwards 38 GENERAL LEDGER Returns Outwards Year 4 30 Apr Sundries 270 Purchases 630
3 Point out that the 3 debit entries in the Purchases Ledger equal, in total, the amount of the end-of-month credit entry in the Returns Outwards Account. Note The credit entry in Tempster & Falls account was previously posted from the Purchases Day Book of R Maundy, shown in Lesson 11 (page 76). The accounts of Jolly and Nathan would, in practice, have credit entries for purchases previously made. 4 Figure 12.4 (overleaf) illustrates the part played by the Returns Outwards Day Book in the account system. Show the figure on the overhead projector. 5 Explain that the double entry is made by means of: (a) prompt postings to supplier accounts = debit; (b) end-of-month posting of total to Returns Outwards Account = credit.
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Returns Day Books
6 Hand out copies of, or show on the overhead projector, exercise T/12.2 in the Appendix (page 237). Ask the students to work through it.
Buyer receives CREDIT NOTE entered in RETURNS OUTWARDS DAY BOOK daily postings Memorandum only
end-of-month posting of total
Returns Outwards Account Supplier (creditor) accounts PURCHASES LEDGER
GENERAL LEDGER
Figure 12.4 The returns outwards procedure
Step 5
Aim: to be familiar with the use of the term book of prime entry Explain that the term book of prime entry means the stage in the book-keeping system where a transaction is recorded for the first time, before it is entered in the ledger.The term includes the 4 day books already considered. The Cash Book can serve 2 roles. Thus, for cash sales or cash purchases, it is a book of prime entry but, as part of the ledger, it is also a component of the double-entry system.
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Returns Day Books
Step 6
Aim: to reinforce learning and practice in regard to the use of day books 1 Display exercise T/12.3 in the Appendix (page 238) on the overhead projector and work through it with the class. The exercise involves preparation of all 4 day books, together with the postings to the ledger accounts. Note When a question states Returned goods to 26, it can be assumed, unless stated otherwise, that the seller has agreed to make an allowance. In the case of returned goods, when a trade discount has previously been allowed at the purchases or sales stage, the amount of the discount (or a due proportion, when only some of the goods are returned) must be deducted at the returns stage.This applies to the transactions on 8, 15, 19, 27, and 30 October Year 6 in exercise T/12.3. Solution to T/12.3
PURCHASES DAY BOOK Year 6 3 Oct 17 Oct 24 Oct R Varney T Langton R Varney To Purchases Account SALES DAY BOOK Year 6 5 Oct 11 Oct 21 Oct K Petts J Beaver K Petts To Sales Account RETURNS OUTWARDS DAY BOOK Year 6 8 Oct 27 Oct 30 Oct R Varney T Langton R Varney To Returns Outwards Account RETURNS INWARDS DAY BOOK Year 6 15 Oct 19 Oct K Petts J Beaver To Returns Inwards Account 102 72 174 56 37 34 127 357 448 544 1,349 420 296 272 988
(continued)
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Returns Day Books
PURCHASES LEDGER R Varney Year 6 8 Oct 30 Oct Returns outwards Returns outwards 56 34 Year 6 3 Oct 24 Oct (Cr 602) Purchases Purchases 420 272
T Langton Year 6 27 Oct Returns outwards 37 Year 6 17 Oct (Cr 259) SALES LEDGER K Petts Year 6 5 Oct 21 Oct Sales Sales 357 544 Year 6 15 Oct (Dr 799) J Beaver Year 6 11 Oct Sales 448 Year 6 19 Oct (Dr 376) Returns inwards 72 Returns inwards 102 Purchases 296
GENERAL LEDGER Purchases Year 6 31 Oct Sundries 988 Sales Year 6 31 Oct Returns Outwards Year 6 31 Oct Returns Inwards Year 6 31 Oct Sundries 174 Sundries 127 Sundries 1,349
Check that the total creditor balances of 861 (602 + 259) = purchases of 988 less returns outwards of 127, and that the total debtor balances of 1,175 (799 + 376) = sales of 1,349 less returns inwards of 174.
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Returns Day Books
2 Hand out copies of, or show on the overhead projector, exercise T/12.4 in the Appendix (page 239). Ask the students to work through it. This question is mainly a test of knowledge about discounts; the entries are straightforward.The points below might be helpful for the students. (a) The trade discount should be deducted in each case from the list price and only the resulting net figure should be entered in the day book. Cash discount is calculated on the net purchase or sales figure.1 It should be deducted from the net figure only if payment is made within the required period.
Required payment date 17 Jan 26 Jan 27 Jan 5 Feb 2 Feb Payment date 30 Jan 18 Jan 22 Jan Cash discount No Yes Yes
B Stevens F Robins J New P Harper K Burton
(b) Traders allow cash discount to encourage prompt or early payment. 3 Hand out copies of, or show on the overhead projector, exercise T/12.5 in the Appendix (page 240).Ask the students to work through it. In this question, a minimum level of purchase is necessary to qualify for a trade discount. Common errors made by candidates in dealing with returns Draw the following common errors to the attention of the students: (a) confusion between returns inwards and returns outwards; (b) failure to deduct trade discount when this had been allowed in the original purchase or sale transaction; (c) day books shown in account form; (d) transactions repeated, individually, in the General Ledger Account (ie in either the Returns Outwards Account or the Returns Inwards Account). Note Advise the students that they need to be aware of the alternative names for the 2 day books dealt with in this lesson.The alternative names are:
Returns Inwards Day Book or Sales Returns Day Book Returns Outwards Day Book or Purchases Returns Day Book
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Lesson 13: Accruals and prepayments expenses

Topic summary
The meaning of expense accruals and the necessary entries or adjustments in an expense account for expense accrual The meaning of expense prepayment and the necessary entries or adjustments in an expense account for expense prepayment Adjustments for expense accruals and prepayments in final accounts

13.1 13.2 13.3 13.4 13.5 The nature of an accrual End-of-period adjustments in expense accounts for accruals The meaning of an expense prepayment End-of-period adjustments in expense accounts for prepayments Adjustments for end-of-period expense accruals and expense prepayments in the Profit & Loss Account and balance sheet 20.7 The appropriate inclusion of prepayments and accruals under current assets and amounts payable within 12 months respectively
Accruals and prepayments is a topic that book-keeping students often find difficult. It is an important topic: first, because it may be the main subject of a question; second, because it can also occur in other topics in an examination, particularly in the adjustments of final accounts. Therefore explain accrual and prepayments carefully, and make sure that the students have plenty of practice in answering questions on this topic.
Step 1
Aim: to understand expense accruals and to be able to make the necessary entries or adjustments in an expense account Expense accrual 1 Explain that the term accrual refers to an amount that is owing. An expense accrual is an amount payable, in respect of an account period, that remains unpaid at the end of
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Accruals and prepayments expenses
that period.The students aim is to relate the expenses to the periods (usually years) in which the benefit is obtained from the expenditure, whether or not the expense accounts have been paid.This may require making adjustments in the expense accounts. 2 Illustrate accrual by showing the example below on the overhead projector or board. Example Jacqui Tillot commenced in business at 1 January Year 3. She pays 500 rent in arrears at the end of each quarter. At 31 December Year 3, the fourth quarters rent is still unpaid. Her Rent Account appears as follows:
Rent Year 3 31 Mar 30 Jun 30 Sep Bank Bank Bank 500 500 500
3 Ask the students what is wrong with this example. 4 The problem with the example is that this Rent Account records the rent for only 3 quarters; the rent for the fourth quarter will probably be paid early in Year 4. Left as it is, the account gives a misleading picture for Year 3 because Jacqui has benefited from the use of the premises for 4 quarters in that year. The true charge for the rent for Year 3 is:
4 quarters at 500 per quarter = 2,000
Jacqui Tillots Profit & Loss Account for Year 3 should show 2,000. The 500 in respect of the fourth quarter should be treated as a liability. The account would then appear as:
Rent Year 3 31 Mar 30 Jun 30 Sep 31 Dec Bank Bank Bank Balance c/d 500 500 500 500 2,000 Year 3 31 Dec Profit & loss 2,000
2,000 Year 4 1 Jan Balance b/d 500
5 Show the correct Rent Account (above) on the overhead projector or board. 6 Explain that the 2,000 credit entry is matched by a debit of that amount to the Profit & Loss Account. The correct charge for the year is thus made in the Profit & Loss Account. The 500 balance carried down at 31 December Year 3 is matched by the credit brought down at 1 January Year 4. This credit balance represents a liability and appears as such in the balance sheet at 31 December Year 3.
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7 Show the students that early in Year 4, Jacqui Tillots Rent Account might appear as follows:
Rent Year 4 18 Jan Bank 500 Year 4 1 Jan Balance b/d 500
This illustrates that the overdue rent is paid on 18 January, which clears the account. 8 It is essential that the students grasp the meaning of these account entries. Review the key entries, which show that:
the transfer to the Profit & Loss Account is the due amount of rent for Year 3 not what has actually been paid. The transfer ensures that the true charge is made in the Profit & Loss Account; the credit balance (brought down) at 1 January Year 4 represents the amount owing at that date, which would appear as a liability in the balance sheet at 31 December Year 3; the debt is cleared early in Year 4.
9 Ask the students to work through the following exercise. Exercise Douglas Miller commenced in business at 1 October Year 5. He paid monthly staff salaries in arrears by cheque as follows:
Year 5 31 Oct 30 Nov 1,200 1,200
At 31 December Year 5, salaries for December amounting to 1,400 were unpaid. Required Prepare the Salaries Account for the 3 months ending 31 December Year 5, duly balanced at that date. Solution
Salaries Year 5 31 Oct Bank 30 Nov Bank 31 Dec Balance c/d 1,200 1,200 1,400 3,800 Year 5 31 Dec Profit & loss 3,800
3,800 Year 6 1 Jan Balance b/d 1,400
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Step 2
Aim: to understand expense prepayment and to be able to make the necessary entries in an expense account Expense prepayment 1 Explain that the term expense prepayment is a payment made in advance of the account period to which it refers.A prepayment is the opposite of an accrual. However, the transfer to the Profit & Loss Account in the expense account will still be credited. The difference is in the balance, which is brought down as a debit balance, ie as an asset. 2 Illustrate prepayment on the overhead projector or board with the following example. Example James Jewell commenced in business at 1 January Year 7. He paid his rent quarterly and in advance by cheque as follows:
Year 7 2 Jan 28 Mar 26 Jun 1 Oct 28 Dec 450 450 475 475 475
Required Show the Rent Account for Year 7, duly balanced at 31 December Year 7. Solution
Rent Year 7 2 Jan 28 Mar 26 Jun 1 Oct 28 Dec Bank Bank Bank Bank Bank 450 450 475 475 475 2,325 Year 7 31 Dec Profit & loss 31 Dec Balance c/d 1,850 475
2,325
Year 8 1 Jan
Balance b/d
475
3 Review the examples solution by drawing attention to the following points:
the transfer to the Profit & Loss Account includes 2 quarters rent at 450 (900) plus 2 quarters rent at 475 (950), which results in a total transfer of 1,850; the balance (475) brought down at 1 January Year 8 will appear as an asset in the balance sheet of James Jewell at 31 December Year 7.
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4 Explain that, so far, the examples given have had no opening balance since they illustrate the first year of trading. It is more usual to have an opening balance as well as a closing balance. 5 Emphasize the rule about prepayment and accrual:
if a prepayment, the opening balance = Debit if an accrual, the opening balance = Credit
Example From the following details, prepare John Sims Insurance Account for the year ended 31 December Year 6. Balance the account at the year end, showing the transfer to the Profit & Loss Account.
Year 6 1 Jan 23 Mar 29 Sep The balance on the account is 80, representing one quarters insurance paid in advance The amount of 190 is paid by cheque, which covers the insurance for the half-year ended 30 September Year 6 The amount of 210 is paid by cheque, which covers the insurance for the half-year ended 31 March Year 7
Solution
Insurance Year 6 1 Jan Balance b/d 23 Mar Bank 29 Sep Bank Year 7 1 Jan 80 190 210 480 105 Year 6 31 Dec Profit & loss 31 Dec Balance c/d 375 105 480
Balance b/d
Note The transfer to the Profit & Loss Account is made up of:
JanMar AprSep OctDec 80 190 105 375
Explain that the remaining 105 has been paid in advance for the quarter ended 31 March Year 7 and is carried down as an asset (debit) balance.
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6 Point out that expense accounts involving accrual, prepayment, or both (and including an opening balance) are made up of 4 elements: (i) the amount either accrued or prepaid at the beginning of the year; (ii) the amount paid during the year; (iii) the amount to be transferred to the Profit & Loss Account, ie the true cost for the year; (iv) the amount owing or prepaid at the end of the year. These elements may be shown as a single example (see Figure 13.1).The example may be described as a situation of initial accrual and closing prepayment. If 3 of the elements are known, the fourth can be found by preparing an expense account based on the relevant structure.The diagrams can be adapted to each situation. Each situation will be determined by, first, the particular combination of opening and closing balances, such as initial prepayment and closing accrual (see point 8 below); and, second, the respective amounts of the 4 elements as outlined in point 6 above.
Amount accrued b/d
Amount paid during year
Transfer to Profit & Loss Account
Amount prepaid c/d
Amount prepaid b/d Figure 13.1 A pictorial example of an expense account
7 Display the example on the overhead projector. The basic structure can be copied on to a transparency and used as the master diagram, and sample figures can be copied on to a number of other transparencies. Insert the figures progressively by placing the transparencies on top of one another. 8 Ask the students to construct simple diagrams (like the one above) that show the following situations, which should all relate to expense: (a) (b) (c) (d) initial initial initial initial accrual and closing accrual prepayment and closing prepayment prepayment and closing accrual accrual and closing prepayment.
The students may find it helpful to practise constructing simple diagrams (in double-entry account form) that position the various items.
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Another form of prepayment 9 Explain that a prepayment could take the form of items purchased for use in the business, which are separate from ordinary purchases that are for resale. Purchases for use in the business might include stationery, packing materials, or cleaning materials. Any stock of such items at the end of an accounting period represents a form of prepayment. Draw the students attention to the following points:
allowance must be made for stock at the end of an accounting period in the figure charged to the Profit & Loss Account; the value placed on the stock must be carried down as a balance on the expense account.
10 Illustrate the two points above with the following example. Example Stationery bought in the year ended 31 December Year 3 cost 2,750. The stock of stationery held at 31 December Year 3 is worth 250 Required Prepare the Stationery Account for the year ended 31 December Year 3. Solution The amount used is 2,750 - 250 = 2,500. This total is charged to the Profit & Loss Account and the amount remaining (stock) is carried forward as an asset balance.
Stationery Year 3 JanDec Sundries 2,750 2,750 Year 4 1 Jan Balance b/d 250 Year 3 31 Dec Profit and loss 31 Dec Balance c/d 2,500 250 2,750
Stress that any such balance should not be included with the stock-in-trade, but should be shown separately as part of the item prepaid expenses. 11 Copy and hand out or display the following exercise on the overhead projector. Ask the students to work through it. Exercise Cleaning materials bought in the year ended 31 December Year 4 cost 870.The stock of cleaning materials at 31 December Year 4 is worth 130. The cleaning materials bought in the year ended 31 December Year 5 cost 920. The stock of cleaning materials at 31 December Year 5 is worth 150.
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Required Show the Cleaning Materials Account for the 2 years ended 31 December Year 5. Note The stock at 31 December Year 4 (the closing stock) is also the stock at 1 January Year 5 (the opening stock). Solution
Cleaning Materials Year 4 JanDec Sundries 870 870 Year 5 1 Jan Balance b/d JanDec Sundries Year 6 1 Jan 130 920 1,050 150 Year 5 31 Dec Profit & loss 31 Dec Balance c/d Year 4 31 Dec Profit & loss 31 Dec Balance c/d 740 130 870 900 150 1,050
Balance b/d
Note The charge to the Profit & Loss Account is calculated as:
Year 4 Year 5 Purchased stock at 870 less closing stock at 130 = 740 Opening stock at 130 plus purchased stock at 920 = 1,050 less closing stock at 150 = 900
12 Explain that the financial period or year of the firm does not always correspond with that of the supplier of services. Adjustments to deal with this mismatch may be necessary at the end of the accounting period. Example At 1 January Year 5, the Insurance Account has a balance of 90 (Dr). The insurance premium was paid by cheque 330 on 28 April Year 5 for the (insurance) year to 30 April Year 6. Required Show the Insurance Account for the year ended 31 December Year 5, duly balanced at that date. Note It can be concluded that the debit balance at 1 January Year 5 relates to Insurance for the 4 months ended 30 April Year 5. The charge for the remaining 8 months of the financial year is calculated as the due proportion of the annual premium: 330 8/12 = 220. The remaining 110 is carried forward as a prepayment. The charge to the Profit & Loss Account for insurance for Year 5 is: 90 + 220 = 310.
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Insurance Year 5 1 Jan 28 Apr Year 6 1 Jan Balance b/f Bank 90 330 420 110 Year 5 31 Dec Profit & loss 31 Dec Balance c/d 310 110 420
Balance b/d
13 Copy and hand out or display exercise T/13.1* in the Appendix (page 241) on the overhead projector.Work through it with the class. Exercise T/13.1 concerns 3 expense accounts: 2 accounts (rent and insurance) have opening prepayment balances, ie debits; the other (advertising) has an opening accrual balance, ie credit. You should first calculate the amount of the charge for Year 4 for each expense. In examination answers, if workings are shown clearly, marks can be awarded for what is correct. It is clear that the monthly rent is 230 from January to September and 250 from October to December.
Prepayment balance 1 Jan Yr 4 Payment 28 Feb 31 May 31 Aug 30 Sep = = = = = Period of rent (Year 4) Jan Feb, Mar Apr, May, Jun Jul, Aug, Sep Oct
Thus the accrual of 2 months rent at 31 December Year 4 is 2 250 = 500. With regard to insurance:

the initial prepayment of 65 covers the period 1 January to 31 August; the charge for the period 1 September to 31 December Year 4 is the due part of the premium paid on 31 August Year 4, ie 180 4/12 = 60; the other 120 is carried forward as a prepayment for Year 5.
Therefore the total insurance charge for Year 4 is 65 + 60 = 125. The following are major weaknesses shown by candidates in answers to exercise T/13.1 (an LCCIEB past examination question):
failure to calculate correctly the charge to the Profit & Loss Account in the Rent Account; charging an incorrect proportion to the Profit & Loss Account from the insurance premium paid on 31 August Year 4; being confused about applying double-entry rules, which is sometimes done inconsistently.
Draw the students attention to these weaknesses as appropriate.
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Step 3
Aim: to be able to make necessary adjustments for accruals and prepayments in final accounts 1 Remind the students that, at the financial year end, some expenses will be paid in advance of the forthcoming year, while other expenses will be in arrears, ie accrued. This often occurs because the firms financial year and the payment year for the expense do not correspond. Adjustments may therefore be necessary when preparing final accounts. 2 This topic can be developed with reference to the final accounts of T Avis in Lesson 7 (page 40). 3 The following adjustments are to be made in relation to the balances included in the trial balance of T Avis at 31 December Year 6:

rent payable prepaid 100 lighting and heating accrued 60.
4 Trading and Profit & Loss Account The effect of the adjustments is limited to the Profit & Loss Account, so only that need be shown on the overhead projector.
T Avis Profit & Loss Account for the year ended 31 December Year 6 Rent payable (1,100 - 100) Office expenses Lighting and heating (610 + 60) Carriage outwards Net profit 1,000 590 670 380 1,380 4,020 Gross profit Rent receivable 3,570 450
4,020
The effect has been to increase the net profit of the adjustments:
Net profit before adjustment add Rent payable prepaid less Lighting and heating accrued Net profit after adjustment 1,340 100 1,440 60 1,380
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5 Balance sheet To illustrate the remaining effects of the adjustments mentioned in point 3 (page 97), show the following balance sheet on the board or overhead projector:
T Avis Balance sheet at 31 December Year 6 Fixed Assets Fixtures and fittings Motor vehicle Current Assets Stock Debtors Prepayment Cash at bank Cash in office 900 1,600 2,500 2,450 1,170 100 1,230 70 5,020
less Amounts due within 1 year Creditors Accrual
1,750 60
1,810 3,210 5,710
Financed by: Capital balance at 1 Jan Yr 6 add Net profit less Drawings
5,430 1,380 1,100 280 5,710
Note Period-end prepayments should be shown under current assets, and positioned after debtors but before bank. If there is more than one prepayment, these do not have to be listed individually. It is advisable, however, to record the separate amounts (in brackets) beside the total figures.Then candidates can be sure of obtaining marks for the parts that are correct. 6 Point out that period-end accruals should be shown under amounts due within 1 year. If there is more than one accrual, the individual amounts should be shown. 7 Copy and hand out or display exercises T/13.2, T/13.3, T/13.4 in the Appendix (pages 2435). Ask the students to work through them.
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Lesson 14: Accruals and prepayments income

Topic summary

The meaning of income accrual and the entries necessary in an Income Account The meaning of income prepayment and the entries necessary in an Income Account The preparation of an expense account that includes two areas of expense with distinctive balances

13.7 13.8 13.9 13.10 13.11 The nature of income accrual End-of-period adjustments in income accounts for income accrual The meaning of income prepayment End-of-period adjustments in income accounts for income prepayment Adjustments for end-of-period income accrual and income prepayment in the Profit & Loss Account and balance sheet 13.12 The recording of 2 areas of expense within the one expense account, with distinctive balances, eg the Rent & Rates Account 20.7 The appropriate inclusion of prepayments and accruals under current assets and amounts payable within 12 months respectively
Many students experience difficulty with the concept of income accrual and prepayment. Careful explanation of this topic is essential and students should be encouraged to practise working through exercises.
Step 1
Aim: to understand income accrual and to be able to make the necessary entries in an Income Account Income accrual 1 Explain that the topic of income accrual deals with income such as rent receivable or commission rather than sales revenue. Accrual means that income due for the financial year has not been received by the end of the year. Outstanding sales revenue is allowed for by being shown as debit balances on customer personal accounts.
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Accruals and prepayments income
2 Point out that as the income is earned in a given year, it should be included as income for that year, even though payment has not yet been received. 3 Tell the students that, in the Income Account, the accrual should be:

included in the transfer to the Profit & Loss Account; carried down as a debit balance (representing an amount to be received early in the next period).
Explain to them also that, in the balance sheet, the accrual should be shown as a current asset. 4 Illustrate income accrual by displaying the following example on the overhead projector or board. Example Edward Smith is a trader and, in addition to his normal business income from the sale of goods, he receives a commission on services he carries out. During the year ended 31 December Year 6, he received commission as follows:
Year 6 30 Mar 2 Jul 4 Oct Relating to the quarter ended 31 March Year 6 30 June Year 6 30 September Year 6 512 470 630
The amount due, but not yet received, for the quarter ended 31 December Year 6 was 580. The account for Year 6 should appear as follows:
Commission Receivable Year 6 31 Dec Profit & loss 2,192 Year 6 30 Mar 2 Jul 4 Oct 31 Dec Bank Bank Bank Balance c/d 512 470 630 580 2,192
2,192 Year 7 1 Jan
Balance b/d
580
5 Explain that although accrued income should be included with the current assets in the balance sheet, it is common practice in business to include it with debtors. In an examination answer, however, it is safer to show accrued income as a distinct item otherwise a mark may be lost. 6 Copy and hand out or show the following exercise on the overhead projector or board. Ask the students to work through it.
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Exercise Hilary Truelove receives rent from subletting business premises. During the year ended 31 December Year 5, she received the following payments:
Year 5 3 Apr 29 Jun 11 Oct Payment received by cheque for quarter ending 31 March Year 5 30 June Year 5 30 September Year 5 650 650 675
The amount due for the quarter ended 31 December Year 5 was received on 14 January Year 6. Required Show the Rent Receivable Account for the year ended 31 December Year 5, complete with year-end balancing and with as many entries as possible for Year 6. Solution
Rent Receivable Year 5 31 Dec Profit & loss 2,650 Year 5 3 Apr 29 Jun 11 Oct 31 Dec Bank Bank Bank Balance c/d 650 650 675 675 2,650
2,650 Year 6 1 Jan Year 6 14 Jan
Balance b/d
675
Bank
675
Step 2
Aim: to understand income prepayment and to be able to make the necessary entries in an Income Account Income prepayment 1 Point out that in the case of income prepayment the income has been received in advance of the next financial year. 2 Tell the students that, in the Income Account at the end of the financial year, the advance payment should be:

deducted from the amount of income for the year; carried down as a credit balance.
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Explain to them also that, in the balance sheet, the prepayment should be shown under amounts due within 1 year. 3 Illustrate income prepayment by showing the following example on the overhead projector or board. Example Rent is received on sublet premises as follows:
Year 7 12 Jan 6 Apr 4 Jul 29 Sep 21 Dec Payment for quarter ending 31 March Year 7 30 June Year 7 30 September Year 7 31 December Year 7 31 March Year 8 250 250 250 250 250
The The The The
unadjusted income for Year 7 is 5 250 = 1,250. adjusted or true income is 4 250 = 1,000. fifth payment really relates to Year 8 and should be carried forward into that year. account for Year 7 should appear as follows:
Rent Receivable
Year 7 31 Dec Profit & loss 31 Dec Balance c/d
1,000 250
Year 7 12 Jan 6 Apr 4 Jul 29 Sep 21 Dec Year 8 1 Jan
Bank Bank Bank Bank Bank 250 250 250 250 250 1,250 250
1,250 Balance b/d
4 Explain that the 250 received in advance should be shown in the balance sheet under amounts due within 1 year and described as rent received in advance. 5 Copy and hand out or show on the overhead projector exercises T/14.1 and T/14.2 in the Appendix (pages 2478). Ask the students to work through them.
Step 3
Aim: to be able to prepare an account that includes two areas of expense, with distinctive balances 1 Explain that, as candidates, the students might be required to prepare an expense account that includes two areas of expense, eg Rent & Rates Account.
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2 Illustrate this type of acccount by showing the example below on the overhead projector or board. Example At 1 January Year 4, 780 of rates were prepaid and 2,700 of rent payable was accrued. During Year 4, the following payments were made:
Rent Rates 8,700 3,120
At 31 December Year 4, 780 of rates were prepaid and 3,200 of rent was owing. The following amounts were due to be paid for Year 4:
Rent Rates 9,200 3,120
The combined Rent & Rates Account would appear as follows:

Rent & Rates Year 4 1 Jan Balance b/d (rates) JanDec Bank (rent) Bank (rates) 31 Dec Balance c/d (rent) 780 8,700 3,120 3,200 15,800 Year 4 1 Jan 31 Dec Balance b/d (rent) Profit & loss rent rates Balance c/d (rates) 2,700 9,200 3,120 780 15,800
31 Dec
Year 5 1 Jan
Balance b/d (rates)
780
Year 5 1 Jan
Balance b/d (rent)
3,200
3 Emphasize strongly that different categories of expense should be combined only if the examination questions require it. 4 Copy and hand out or show exercise T/14.3* in the Appendix (page 249) on the overhead projector. Ask the students to work through it. T/14.3* is a question requiring the preparation of a combined type of expense account. 5 Common errors made by candidates concerning income and expense accounts Candidates sometimes: (a) lack a grasp of the rules of double entry, eg payments credited to the expense account and income debited to the Rent Receivable Account; (b) adjust actual individual payments or income in some instances, instead of apportioning expense or income at the end of the period;
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(c) make entries inconsistently, often within the same account, eg payments are partly debited or partly credited within an Insurance Account; income is partly debited or partly credited within the Rent Receivable Account; (d) make adjustments according to the calendar year instead of according to the firms financial year; (e) overbalance accounts each time an entry is made (in extreme cases); (f ) interpret show transfers to the Profit & Loss Account as meaning that a Profit & Loss Account is required rather than the transfer of entries within each income or expense account. 6 Copy and hand out or show exercises T/14.4, T/14.5 and T/14.6 in the Appendix (pages 2503) on the overhead projector.Ask the students to work through them. Point out that they should look out for differences between the financial year and the calendar year, particularly when working through T/14.5.
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Lesson 15: Depreciation of fixed assets

Topic summary

The need to allow for fixed asset depreciation The calculation of depreciation by the straight line method and the reducing balance method The purpose, meaning, and significance of a provision The account entries for fixed asset depreciation Suitable entries in the Profit & Loss Account and balance sheet in respect of fixed asset depreciation The calculation of depreciation on fixed assets bought or sold during the course of a financial year The account entries for the disposal of a depreciated fixed asset

14.1 The nature of depreciation of fixed assets and the need for making provision in the accounts (with the awareness that this is not the putting by of cash for replacement) 14.2 The basis of the straight line (or fixed instalment) method of depreciation 14.3 Calculation of the amount of annual depreciation and the effect on the book value of a fixed asset, using the straight line method 14.4 The accounting entries for straight line method depreciation, using a Provision for Depreciation Account 14.5 The basis of the reducing balance (or diminishing balance) method of depreciation 14.6 Calculation of the amount of annual depreciation and the effect on the book value of a fixed asset, using the reducing balance method 14.7 The accounting entries for the reducing balance method of depreciation, using a Provision for Depreciation Account 14.8 A comparison, through basic calculation, between use of the straight line method and use of the reducing balance method 14.9 The accounting entries relating to the sale or scrapping of a depreciated fixed asset, using an Asset Disposal Account 14.10 The entries in the Profit & Loss Account and balance sheet relating to fixed assets and their depreciation 14.11 Significance of the terms aggregate depreciation and net book value and their use in the balance sheet 20.6 The effective presentation of fixed assets to show, if appropriate: cost, aggregate depreciation, net book value
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Depreciation of fixed assets
Depreciation of fixed assets, like accruals and prepayments, is a topic that might occur as a question in its own right or as an element in a question, particularly on final accounts.The First Level Syllabus is concerned with two depreciation methods only: (i) the straight line method (ii) the reducing balance method. This lesson is important also in that it introduces the concept of the provision. Failure to understand a provision is often a major cause of failure in the examination.
Step 1
Aim: to understand the need to allow for fixed asset depreciation
1 Explain why and how the value of fixed assets usually falls over a period of time; that their fall in value may be due to:

being used (wear and tear) the availability of newer superior or more efficient assets, eg the newer assets might run more cheaply or use less fuel.
2 Point out that if fixed assets never fall in value and could, at a later date, be sold for the price they were purchased at, there would be no usage cost of owning the fixed assets (although interest could not be earned on the money paid for the fixed asset, effectively a cost). They do, however, generally fall in value, so that by failing to take account of this:

profit would be overstated fixed assets in the balance sheet would be overstated in value.
3 Explain that if fixed assets are hired, a charge for hiring would appear in the Profit & Loss Account. However, for assets that are owned, depreciation is charged, much like a charge for owning the assets. 4 Discuss the varying ways in which depreciation applies, eg leases on premises as opposed to ownership of motor vehicles. 5 Emphasize that depreciation, as recorded, is the estimate of the fall in value of fixed assets over a period of time. Illustrate this point with the following example.
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Example
original cost of asset 15,000 less estimated disposal or sale amount 1,500 = amount of depreciation 13,500
6 Explain that the calculation for depreciation is necessarily an estimate because:
of the problem of estimating the working life of an asset, ie the number of years of use the amount that will be received on eventual sale of the asset, is being estimated, perhaps several years ahead
7 Point out that, often, simplified methods of measurement are used, therefore any resulting figure is necessarily an estimate. For example, a motor vehicle that is purchased on 1 January Year 4 for 9,000, for use in a business, is estimated to have a working life of 4 years. At the end of that time it is believed that it will be sold for 1,000.The fall in value the cost of ownership and use of the asset is: 9,000 - 1,000 = 8,000. This will have to be written down over the period of 4 years until it is sold.
Step 2
Aim: to be able to calculate depreciation by the straight line method and the reducing balance method 1 Point out that the LCCIEB First Level Book-keeping is concerned with only two methods of calculating depreciation: the straight line and reducing balance methods. 2 The straight line method This is also known as the fixed instalment method.The calculation follows from what was stated in Step 1 about estimation, point 6 above. It involves:

an estimate of the number of years of use (working life); an estimate of the eventual sale (disposal) value; the original cost less sale value = total amount to be written down; total amount to be written down = annual depreciation charge. number of years
Illustrate the straight line method by showing the examples below on the overhead projector or board.
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Example (a) A machine, bought for 20,000, is estimated to have a working life of 6 years and to have a sale value at the end of the 6 years of 2,000. The annual depreciation charge would be:
20,000 - 2,000 = 3,000 6
Note The same result would be obtained by depreciating the total amount to be written down (18,000) by 162/3% each year. Example (b) Calculate the annual depreciation charge in each of the following cases: (i) a motor vehicle, bought for 10,500, is estimated to have a working life of 5 years and to have a resale value at the end of that time of 1,500; (ii) a machine bought for 32,000 is estimated to have a working life of 8 years and at the end of that time to have a zero resale value. Solution (i) 10,500 - 1,500 = 1,800 per annum 5 (ii) There is no resale value (sometimes termed scrap value) and so the original cost is the total amount to be written down. 32,000 = 4,000 per annum 8 3 Reducing balance method This method is also known as the diminishing balance method. Explain that a fixed percentage is written off the reduced balance each year. The reduced balance is the cost of the asset less depreciation to date. Illustrate this method by showing the example below on the overhead projector or board. Example A machine is bought for 15,000 and depreciation is to be provided at 40%. The calculations for the first 4 years would be as follows:
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Cost of machine Year 1 depreciation (40%) Year 2 depreciation (40% of 9,000) Year 3 depreciation (40% of 5,400) Year 4 depreciation (40% of 3,240)
15,000 6,000 9,000 3,600 5,400 2,160 3,240 1,296 1,944
Note that the amounts charged as depreciation fall quite strikingly. Depreciation in Year 1 is nearly three times that of Year 3 and over 4.6 times that of Year 4. 4 Ask the students what advantage the reducing balance method has compared with the straight line method. The answer should be that, in the early years, when repair bills should be low, the depreciation charges are greatest. In later years, when repair bills are likely to rise, depreciation charges are low. This has the effect of smoothing out charges over the life of the asset. With the straight line method, depreciation charges are relatively high in later years when repair bills increase. 5 Copy and hand out or show exercise T/15.1 in the Appendix (page 253) on the overhead projector. Ask the students to work through the exercise.
Step 3
Aim: to have a basic understanding of the purpose, meaning, and significance of a provision 1 Much of the problem experienced by candidates in answering questions involving depreciation result from a failure to understand the purpose and significance of a provision. Explain that a provision is an amount built up by charges in the Profit & Loss Account to provide for a fall in value of certain assets. A provision for depreciation is one example. Such a provision builds up when a charge is made year by year for the estimated depreciation. 2 Point out that any provision is not like a fund of cash: the charge(s) in the Profit & Loss Account creating or increasing a provision do not ensure that cash is conserved for the eventual replacement of the asset. However, creating a provision has the advantage of:
helping to ensure that profits are not overstated, ie provision takes into account the cost of owning and using fixed assets; helping to ensure that the values of fixed assets are cautiously stated as the provision is deducted in the balance sheet from the amount of the fixed asset.
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A provision is usually shown in the balance sheet as a deduction from the amount of the relevant asset. 3 Describe how the net book value of an asset at a particular balance sheet date is not the amount for which it could be sold at that date, ie depreciation calculations are based upon the business as a going concern. It is assumed that the business will continue to operate for at least the period over which depreciation provisions are being built up. If, however, the future of a business is in considerable doubt, the net realizable value of assets might fall below the net book value, so requiring extra depreciation to be charged to the Profit & Loss Account.
Step 4
Aim: to be able to make book-keeping entries relating to fixed asset depreciation 1 Tell the students that it is usual to show the depreciation of fixed assets as follows:

the fixed asset account is kept at cost, without any adjustment for depreciation; a separate provision for depreciation account is maintained that accumulates the amount of depreciation year by year.
2 Emphasize that the LCCIEB requires this method to be used in examination answers. Far too many candidates make the mistake of recording depreciation in both the Asset Account and the Provision Account. In doing so, they break the rules of double entry. 3 Illustrate the correct method of showing the depreciation of fixed assets by displaying the example below on the overhead projector or board. Example A machine, purchased by cheque for 80,000 on 1 January Year 1, is expected to have a working life of 4 years, after which it will be sold for 5,000. The financial year ends on 31 December. The straight line method is calculated as follows:
80,000 - 5,000 = 75,000 = 18,750 per annum 4 4
The reducing balance method is based in this instance on a 50% write down. Note Any questions requiring the use of this method will state the percentage rate of the write down to be applied.
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The calculation for the reducing balance method is as follows:

Cost of machine Year 1 depreciation Year 2 depreciation Year 3 depreciation Year 4 depreciation 80,000 40,000 40,000 20,000 20,000 10,000 10,000 5,000 5,000
The accounts for each of the methods appears as follows:

Machine Year 1 1 Jan Bank 80,000
Straight line method Provision for depreciation on machine Year 1 31 Dec Balance c/d Year 2 31 Dec Balance c/d 18,750 Year 1 31 Dec Profit & loss* Year 2 1 Jan Balance b/d 31 Dec Profit & loss* 18,750
37,500 37,500
18,750 18,750 37,500
Year 3 31 Dec Balance c/d
56,250 56,250
Year 3 1 Jan Balance b/d 31 Dec Profit & loss* Year 4 1 Jan Balance b/d 31 Dec Profit & loss*
37,500 18,750 56,250 56,250 18,750
* or Depreciation expense
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Reducing balance method Provision for depreciation on machine Year 1 31 Dec Balance c/d Year 2 31 Dec Balance c/d 40,000 Year 1 31 Dec Profit & loss* Year 2 1 Jan Balance b/d 31 Dec Profit & loss* 40,000
60,000 60,000
40,000 20,000 60,000
Year 3 31 Dec Balance c/d
70,000 70,000
Year 3 1 Jan Balance b/d 31 Dec Profit & loss* Year 4 1 Jan Balance b/d 31 Dec Profit & loss*
60,000 10,000 70,000 70,000 5,000
Note In reality, a firm would use only one method.The two are shown here for comparison. An examination question might require both methods to be shown. The provision accounts are left open in Year 4 to deal with the sale of the machine. This feature will be dealt with in Step 7. 4 Draw the students attention to the key points illustrated by the example:
the Asset Account has a debit balance (unchanged in amount and the same for the two depreciation methods); provision for depreciation has a credit balance; the provision for depreciation builds up (accumulates) the amounts of depreciation year by year; the difference between the asset balance and the provision balance is the book value or net book value of the asset.
5 Common error made by candidates concerning depreciation The common error is to show the provision for depreciation with a debit balance, which is fundamentally wrong. Emphasize that a provision account always has a credit balance. 6 Underline the fact that a provision exists because the charge to the Profit & Loss Account creating it (or increasing it) lessens the net profit and thus lessens the addition to the Capital Account. Instead of being part of Capital Account (Cr balance), the amount is shown as a provision (Cr balance).
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Step 5
Aim: to be able to make suitable entries in the Profit & Loss Account and balance sheet in respect of fixed asset depreciation 1 Point out that the provision accounts, shown in Step 4 in the details column, state Profit & loss or Depreciation expense.The use of a Depreciation Expense Account to carry the debits of asset write down is standard practice. The account serves as a collection point for depreciation charges and is especially useful when a business has a number of depreciation provision accounts. At the end of the year the total of the Depreciation Expense Account is transferred to the Profit & Loss Account and therefore only one entry has to appear there. The use of a Depreciation Expense Account is therefore an indirect way of achieving the same result as a direct debit to the Profit & Loss Account. The LCCIEB will accept either entry. First Level candidates may find the further stage in the process (ie recording depreciation in a Depreciation Expense Account) somewhat confusing. 2 The Profit & Loss Account Creating or increasing a depreciation provision results in the double entry appearing as follows:
the Profit & Loss Account is debited (or the Depreciation Expense Account for later transfer to the Profit & Loss Account); the Provision for Depreciation Account is credited.
3 Balance sheet Usually leads to each fixed asset (or class of fixed asset) being shown at cost less total depreciation to date, resulting in the net book value. 4 Show the following typical layout of fixed assets in a balance sheet on the overhead projector or board.
Fixed Assets Premises Fixtures and fittings Motor vehicles Cost 120,000 9,500 17,800 147,300 Accumulated depreciation 4,200 5,200 9,400 Net book value 120,000 5,300 12,600 137,900
The total of the net book value, 137,900, is to be added in due course to the other assets in the balance sheet.
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5 Copy and hand out or display the following exercise on the overhead projector.Ask the students to work through the exercise. Exercise On 1 April Year 5, L Johns purchased a machine for 30,000. He decided to depreciate it at the rate of 40% using the reducing balance method. He keeps a provision for depreciation account. Required Show, as an extract, how the asset would appear in the balance sheet of L Johns at 31 March Year 8. Solution
L Johns Balance sheet (extract) at 31 March Year 8 Fixed Assets Machine Cost 30,000 Accumulated depreciation 23,520 Net book value 6,480
Step 6
Aim: to be able to calculate depreciation on fixed assets bought or sold during the course of a financial year 1 Explain that sometimes fixed assets are either bought or sold during the course of a financial year and the instructions given in the examination question need to be followed with care.The question will state what to do when a fixed asset is purchased part of the way through a firms financial year. There are various ways in which candidates can answer the question, including: (a) charging depreciation for the part of the year the asset is owned, eg if the financial year ends on 31 December, then for a fixed-asset purchase on 1 May the charge for the year to 31 December would be 8/12 of the annual amount of depreciation; (b) charging a full years depreciation for assets purchased in the first half of the financial year and charging a half years depreciation for those purchased in the second half of the financial year; (c) providing depreciation for the whole year on assets held at the end of the year.
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The following example illustrates the calculation of depreciation on fixed assets purchased during the course of the financial year. Example The financial year of Sands & Co ends on 31 December. During Year 1, the following fixed assets were purchased:
Date of purchase Fixed Assets Motor vehicle Fixtures and fittings 5 February Year 1 11 September Year 1 Cost 9,000 6,000
The assets are depreciated using the following bases:

Motor vehicles Fixtures and fittings 40% per annum, using the reducing balance method 20% per annum, using the straight line method
The policy for assets purchased during the year is as follows:
a full years depreciation is charged for assets purchased in the first half of the financial year; a half years depreciation is charged for assets purchased in the second half of the financial year.
Required In a statement, show the amount of the depreciation on each asset for each of the years ended 31 December Year 1 and 31 December Year 2. Solution
Depreciation Year 1 Year 2 Motor vehicles 3,600 2,160 Fixtures and fittings 600 1,200
2 For asset sales during a financial year there are also different ways of dealing with depreciation, eg: (a) ignoring part periods and calculating a full periods depreciation only on those assets owned at the end of the period.Thus, assets sold during the period will have no provision for depreciation made for that last period; whereas assets bought during the period will have a full periods depreciation provision; (b) calculating the depreciation provision according to the proportion of time the asset was owned (probably calculated to the nearest whole month); (c) making no provision for depreciation on assets sold in the first half of the financial year and half the annual provision for assets sold in the second half of the year. 3 Copy and hand out or show exercises T/15.4 and T/15.5 in the Appendix (page 2556) on the overhead projector. Ask the students to work through the exercises.
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Step 7
Aim: to be able to make book-keeping entries concerning the disposal of a depreciated fixed asset 1 Identify the 3 elements involved in the sale of a fixed asset, which are

the original cost of the asset the depreciation provided to date the sale proceeds
Explain that there is often a profit or a loss arising out of the sale: the original calculations regarding the working life and sales value of the asset were only estimates. 2 Review the book-keeping entries regarding the disposal of an asset.The entries are: the original cost of the asset (i) Dr Disposals Account (ii) Cr Fixed Asset Account the depreciation provided to date (i) Dr Provision for Depreciation Account (ii) Cr Disposals Account the sale proceeds (i) Dr Bank/Cash Account (ii) Cr Disposals Account loss on sale (i) Dr Profit & Loss Account (ii) Cr Disposals Account profit on sale (i) Dr Disposals Account (ii) Cr Profit & Loss Account.
3 Illustrate the calculation and account entries for an asset sold at a profit by displaying the example below on the overhead projector.The data are taken from the example in Step 4 on page 111.The straight line method has been used to calculate depreciation. Example The machine is sold on 31 December Year 3 for 27,200. At that date, the Provision for Depreciation Account has a credit balance of 56,250.
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The calculation for profit/loss appears as follows:

Cost of machine less Provision for depreciation to 31 Dec Yr 3 Sale price Profit on sale 80,000 56,250 23,750 27,200 3,450
The book-keeping entries, excluding bank account, are:

Machine Year 1 1 Jan Year 2 1 Jan Year 3 1 Jan Bank 80,000 Year 1 31 Dec Balance c/d Year 2 31 Dec Balance c/d 80,000
Balance b/d
80,000
80,000
Balance b/d
80,000
Year 3 31 Dec Disposal of machine 80,000
Provision for depreciation of machine Year 3 31 Dec Disposal of machine 56,250 56,250 Disposal of machine Year 3 31 Dec Machine 31 Dec Profit & loss (profit on sale) 80,000 Year 3 31 Dec Prov for deprecn machine 31 Dec Bank 56,250 27,200 83,450 Year 3 1 Jan Balance b/d 31 Dec Profit & loss* 37,500 18,750 56,250
3,450 83,450
Profit & Loss Account for the year ended 31 December Year 3 Profit on sale of machine
3,450
4 Illustrate the calculation and account entries for an asset sold at a loss by displaying the example overleaf on the overhead projector.
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Example Using the same data and the same disposal date, this time the machine is sold for 22,100. The calculation for profit/loss is as follows:
Cost of machine less provision for depreciation to 31 December Year 3 Sale price Loss on sale Machine Year 1 1 Jan Year 2 1 Jan Year 3 1 Jan Bank 80,000 Year 1 31 Dec Balance c/d Year 2 31 Dec Balance c/d 80,000 80,000 56,250 23,750 22,100 1,650
Balance b/d
80,000
80,000
Balance b/d
80,000
Year 3 31 Dec Disposal of machine 80,000
Provision for depreciation of machine Year 3 31 Dec Disposal of machine 56,250 56,250 Disposal of Machine Year 3 31 Dec Machine 80,000 Year 3 31 Dec Prov for deprecn machine 31 Dec Bank 31 Dec Profit & loss (loss on sale) 56,250 22,100 1,650 80,000 Year 3 1 Jan Balance b/d 31 Dec Profit & loss* 37,500 18,750 56,250
80,000 Profit & Loss Account for the year ended 31 December Year 3 Loss on sale of machine 1,650
In the examples above, a full years depreciation has been charged in the year of disposal, ie Year 3.
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5 Point out that the so-called profit or loss on disposal is only a depreciation adjustment. In practice, it is usual for profit or loss to be added to depreciation, which in the first instance of the disposal, would be:
18,750 less 3,450 = 15,300 for the year
If the policy is to charge no depreciation in the year of disposal, then (again in the first instance) the calculation would be:
Cost less Accumulated depreciation Net book value Sale of the machine Loss/depreciation 80,000 37,500 42,500 27,200 15,300
6 Explain that loss is really another word for depreciation. 7 Common errors made by candidates regarding depreciation Draw the students attention to the errors they should avoid, such as: (a) recording depreciation to the credit of both the Provision Account and the Asset Account, breaking the rules of double entry; (b) using the Provision Account as merely a calculating stage: ie entering the amount to the credit of the Provision Account, and then transferring it to the Asset Account (Dr provision, Cr asset); (c) debiting depreciation to the Provision Account; (d) failing to accumulate the depreciation from year to year; (e) failing to follow the instruction regarding the due proportion of annual depreciation where the asset is purchased during the year; (f) wording account entries poorly. 8 Copy and hand out or show exercise T/15.6 in the Appendix (page 256) on the overhead projector. Ask the students to work through the exercise.
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Lesson 16: Bad debts and provision for doubtful debts

Topic summary

The meaning of bad debts and the effect of writing off a debt Recording the writing off of customer debts The function of the provision for doubtful debts and the creation of such a provision The increase or decrease of the provision for doubtful debts and making book-keeping entries accordingly The effect on debtors of a doubtful debts provision (i) within a balance sheet or (ii) as a balance sheet extract Making specific provision for the non-recovery of certain debts as well as a general provision for doubtful debts Recording the recovery of debts previously written off

15.1 The process of debts becoming irrecoverable and being written off, in whole or in part 15.2 The accounting entries for writing off individual debtor balances, in whole or in part, using a Bad Debts Account 15.3 The end-of-period transfer of total debts written off from the Bad Debts Account to the Profit & Loss Account 15.4 The reasons for the creating of, and subsequent adjusting of, a provision for doubtful debts 15.5 Given certain data, the creating of a provision for doubtful debts and the adjusting of it, as necessary, for subsequent accounting periods 15.6 The entries in the Profit & Loss Account and balance sheet relating to the provision for doubtful debts 15.7 Making specific provision for certain bad debts as well as general provision for doubtful debts 15.8 The accounting entries relating to the recovery of debts previously written off 15.8.1 if recovered within the same financial period in which the debt was written off; and/or 15.8.2 if recovered after the year of writing off
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Bad debts and provision for doubtful debts
Writing off amounts due from debtors (bad debts), in whole or in part, is not usually a great problem for LCCIEB book-keeping students. They can have more difficulty with creating and/or adjusting a provision for doubtful debts, which arises largely from the failure to grasp the concept of the provision. Careful explanation and illustration is therefore required. The recovery of debts that have been written off is often neglected in book-keeping studies and yet it is a relatively straightforward exercise.
Step 1
Aim: to appreciate the meaning of bad debts and the effect of writing off a debt 1 Explain that a bad debt is an amount that a firm is unable, for a number of reasons, to collect from a customer; it is a debt beyond any hope of recovery. The amount is written off in the firms accounts as being irrecoverable. Sometimes, however, a debtor will pay part of the amount owing and the balance of the debt will be written off. 2 Tell the students that the aim in writing off bad debts is to ensure that the figure shown in the balance sheet for debtors represents the total of collectable debts, ie that the figure for debtors is not overstated. 3 Point out that writing debts off involves charging the amount written off in the Profit & Loss Account.The effect of charging this amount is to reduce the net profit for the year in question.As the net profit is reduced, so the addition to capital is lessened, which is matched by the reduction in the total of the current assets. 4 Outline the fact that the frequency with which debts are written off may vary. For example, they may be written off:

at intervals throughout the year yearly (e.g. as part of a year-end review) as the need arises.
Step 2
Aim: to be able to record the writing off of customer debts 1 Explain that the role of the Bad Debts Account is to be a collection point for amounts written off, which are later transferred in total to the Profit & Loss Account.
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2 Illustrate the role of the Bad Debts Account by displaying the example below on the overhead projector or board. Example T Jackson and J Grand are debtors whose balances are outstanding. In the annual review of debtors on 31 December Year 7, the following accounts are shown in the Sales Ledger:
T Jackson Year 7 1 Jan Balance 530 Year 7 13 Apr J Grand Year 7 11 Mar Sales 415 Bank 90
T Jackson has managed to pay part of the amount due, but it is now clear that he will be unable to pay the balance due.The decision is made to write off this balance and the whole amount due from J Grand.
T Jackson Year 7 1 Jan Balance 530 530 J Grand Year 7 11 Mar Sales 415 Year 7 31 Dec Bad debts Bad Debts Year 7 31 Dec T Jackson 31 Dec J Grand 440 415 855 Year 7 31 Dec Profit & loss 855 855 415 Year 7 13 Apr Bank 31 Dec Bad debts 90 440 530
Profit & Loss Account for the year ended 31 December Year 7 Bad debts 855
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3 Set out the rule below for bad debt entries on the overhead projector or board: (a) Dr Bad Debts Account Cr Individual debtor accounts (or debtors if only a total figure is stated in the question) (b) Dr Profit & Loss Account Cr Bad Debts Account 4 Copy and hand out or show the exercise below on the overhead projector or board.Ask the students to work through the exercise. Exercise During the year ended 31 December Year 4,W Glossop had written off debts due from customers that amounted to 1,306. On 31 December Year 4, he received a cheque for 73 from J Hinge in part payment of the amount of 295 that was due. W Glossop believed that it was now unlikely that any further payment would be received from this debtor and that the balance of the debt should be written off. Required Show the following accounts for the year ended 31 December Year 4: (i) J Hinge (ii) Bad Debts (iii) Profit & Loss as an extract. Solution
J Hinge Year 4 1 Jan Balance 295 295 Bad debts Year 4 JanDec Sundries 31 Dec J Hinge 1,306 222 1,528 Year 4 31 Dec Profit & loss 1,528 1,528 Year 4 31 Dec Bank 31 Dec Bad debts 73 222 295
Profit & Loss Account (extract) for the year ended 31 December Year 4 Bad debts 1,528
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Step 3
Aim: to be able to understand the function of the provision for doubtful debts and to be able to create such a provision 1 Explain the practice of firms allowing for a certain number of debts becoming bad, i.e. irrecoverable. It is never certain which debtors will be unable to pay, but experience makes it possible to calculate the total amount of debts that will need to be written off approximately, eg 2% of total debtor balances. A provision for doubtful debts is then created and maintained. Draw attention to the term doubtful.The calculation is really a broad estimate and is not the result of a close analysis of the position of individual debtors. 2 Distinguish the provision for doubtful debts from writing off bad debts.The procedure for creating a provision for doubtful debts is as follows: (a) a gross debtors figure is calculated by totalling the balances on individual debtor accounts; (b) individual debtor balances may have to be written off; (c) the provision for doubtful debts is calculated on the total of remaining debtor balances. 3 Illustrate this procedure with the following on the overhead projector or board.
Gross debtors (at 31 Dec Yr 5) less Bad debts written off less Provision for doubtful debts at 3% 38,360 960 37,400 1,122 36,278
The account entries appear as follows:

Profit & Loss Account for the year ended 31 December Year 5 Provision for doubtful debts 1,122 Provision for Doubtful Debts Year 5 31 Dec Profit & loss 1,122
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4 Explain that, like any provision, a provision for doubtful debts remains in the books until it is changed.The provision is likely, in practice, to be reviewed annually because:
if the provision is kept at a certain percentage of debtors, the amount of the provision has to be adjusted as the total of debtors changes; it may be considered desirable from time to time to change the percentage rate.
5 Copy and hand out or display the following exercise on the overhead projector.Ask the students to work through the exercise. Exercise At 31 December Year 3, Ellen Tamworth has debtors totalling 25,130. During Year 3, she has written off 540 of debts. She decides to write off a further 330 of debts. In addition, she creates a provision for doubtful debts of 4% of the remaining debtors. Required Show the following accounts for the year ended 31 December Year 3: (i) Bad Debts (ii) Provision for Doubtful Debts (iii) Profit & Loss as an extract. Solution Working: 25,130 - 330 = 24,800 4% of 24,800 = 992
Bad debts Year 3 JanDec Debtors 31 Dec Debtors 540 330 870 Year 3 31 Dec Profit & loss 870 870
Provision for Doubtful Debts Year 3 31 Dec Profit & loss Profit & Loss Account for the year ended 31 December Year 3 Bad debts Provision for doubtful debts 870 992 992
Note Point out that the 540 was written off during Year 3 and is therefore removed before 31 December Year 3.Thus, only 330 has to be deducted from debtors.
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Step 4
Aim: to be able to increase or decrease the provision for doubtful debts and make book-keeping entries accordingly 1 Make it clear that the provision, once created, carries on as it is in the book until it is either increased or reduced. 2 Increase in the provision Continuing with the last example, it is supposed that, at 31 December Year 4, the amount of debtors after writing off bad debts is 29,400. The 4% rate is unchanged. The calculation is:
4% of 29,400 less Amount of existing provision Increase in provision 1,176 992 184
The book-keeping entries are:

Profit & Loss Account for the year ended 31 December Year 4 Increase in provision for doubtful debts 184 Provision for Doubtful Debts Year 3 31 Dec Balance c/d Year 4 31 Dec Balance c/d 992 Year 3 31 Dec Profit & loss Year 4 1 Jan Balance b/d 31 Dec Profit & loss 992
1,176 1,176
992 184 1,176
Year 5 1 Jan
Balance b/d
1,176
Stress that only the increase in the provision is debited to the Profit & Loss Account. 3 Decrease in the provision It is supposed that, at 31 December Year 5, the amount of debtors after writing off bad debts is 26,800.The 4% rate is unchanged.
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The calculation is:

4% of 26,800 less Amount of existing provision Decrease in the provision 1,072 1,176 104
The book-keeping entries are:

Profit & Loss Account for the year ended 31 December Year 5 Reduction in provision for doubtful debts Provision for Doubtful Debts Year 3 31 Dec Balance c/d Year 4 31 Dec Balance c/d 992 Year 3 31 Dec Profit & loss Year 4 1 Jan Balance b/d 31 Dec Profit & loss 992 104
1,176 1,176
992 184 1,176
104 1,072 1,176
Year 5 1 Jan
Balance b/d
1,176 1,176
Year 6 1 Jan
Balance b/d
1,072
Step 5
Aim: to be able to show the effect on debtors of a doubtful debts provision (i) within a balance sheet or (ii) as a balance sheet extract 1 Explain that the provision, although having a credit balance, is always deducted from debtors in the balance sheet. 2 Relate this deduction to the deduction of a provision for depreciation from the relevant fixed asset.The principle of obtaining a figure net of the provision is the same.
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3 Illustrate a doubtful debts provision within a balance sheet on the overhead projector with the following:
Current Assets Debtors less Provision for doubtful debts 36,800 1,840 34,960
4 Inform the students that if a balance sheet extract is required, then a suitable heading should be included, eg:
F Lucas Balance sheet (extract) at 30 September Year 6 Current Assets Debtors less Provision for doubtful debts 41,300 1,239 40,061
5 Copy and hand out or display the following exercise on the overhead projector or board. Ask the students to work through the exercise. With reference to Step 4, show each of the following as balance sheet extracts: (a) The debtors at 31 December Year 4, following the example on page 125. (b) The debtors at 31 December Year 5, following the examples on pages 126 and 127. Solutions (a)
Balance sheet (extract) at 31 December Year 4 Current Assets Debtors less Provision for doubtful debts 29,400 1,176 28,224
(b)
Balance sheet (extract) at 31 December Year 5 Current Assets Debtors less Provision for doubtful debts 26,800 1,072 25,728
6 Copy and hand out or show exercises T/16.1 and T16.2 in the Appendix (pages 2578). Ask the students to work through them.
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Step 6
Aim: to be able to make specific provision for the non-recovery of certain debts as well as a general provision for doubtful debts 1 Explain that some firms create 2 categories of debt provision. (a) After writing off known bad debts, a specific provision is made on a few debtors when there is a high chance that they will become bad debts. They are not yet known as bad debts but information suggests they might become so. The full amount of each high-risk debt might be included in the provision. (b) A general provision is made on the remaining balance of debtors. The provisions dealt with in Steps 3 and 4 are known as general provisions. The calculation involving both a specific provision and a general provision might be as follows:
Gross amount of debtors less Bad debts written off less Specific provision (ie the total of certain high-risk debts) less general provision at 3% 32,970 870 32,100 1,100 31,000 930 30,070
The balance sheet is shown as follows:

Current Assets Debtors less Provision for bad and doubtful debts 32,100 2,030 30,070
2 Copy and hand out or show exercise T/16.3* in the Appendix (page 259) on the overhead projector. Ask the students to work through the exercise.
Step 7
Aim: to be able to record the recovery of debts previously written off 1 Debts that have been written off are sometimes recovered, ie the debtor may, after all, be able to pay part of the original debt. Point out that it is necessary to distinguish between:
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(a) debts recovered within the same year as the debt was written off; (b) recovery after the year the debts were written off. 2 Explain that if the debts are recovered within the same financial year as the debt was written off, the entries would be: Dr debtor Cr bad debts Dr cash/bank Cr debtor which reinstates the debt (or part of it) on the debtors account which effectively cancels the previous write off which clears the account
Taking the year as a whole, the debtor is a late payer rather than a bad debtor.The credit on the Bad Debts Account reduces the balance of bad debts to the sum of debts written off and still not received by the year end. 3 If recovered after the year of write off, demonstrate that the entries would be: Dr Cr Dr Cr debtor bad debts recovered cash/bank debtor
At the end of the year of recovery, the balance on the bad debts recovered account would be transferred to the Profit & Loss Account: Dr Cr bad debts recovered Profit & Loss Account
4 Advise the students that the LCCIEB believes that, on recovery of a debt (or part of it) that was previously written off, the amount should be reinstated in the account of the debtor.The debtor has made the effort to clear the debt, even if later than anticipated, and this should be recognized in the account. In any case, decisions about granting credit in the future should not be decided by account entries alone. 5 Copy and hand out or show exercises T/16.4 and T/16.5 in the Appendix (pages 2601) on the overhead projector. Ask the students to work through them. 6 Common errors made by candidates relating to bad debts and provision for doubtful debts Draw the students attention to common errors, which include: (a) not appreciating that the purpose of the Bad Debts Account is to store the amounts of debt written off during a trading period; (b) wrongly transferring each amount written off to the Profit & Loss Account; it is the period total that should be transferred; (c) failure to grasp the meaning of the provision: an especially common mistake is to enter the whole of the latest provision amount in the Profit & Loss Account, regardless of any existing provision;
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(d) the provision account showing a debit balance; (e) incorrect calculation of the provision, which should be a percentage of the debtor balance after any further bad debts have been written off; (f ) taking bad debts that have been written off to the provision for doubtful debts account (see the Extended Syllabus, paragraph 15.3) Bad Debts Account should not be written off against the Provision Account; (g) poor wording of entries in Bad Debts Account and Provision for Doubtful Debts Account.
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Lesson 17: Bank reconciliation statements

Topic summary

The need for reconciling the Cash Book with the bank statement Updating the Cash Book from the bank statement Preparing a bank reconciliation statement The meaning and effects of a cheque being dishonoured Reconciling the Cash Book and bank statement where a bank overdraft is involved Drafting a bank statement from the data provided

8.13 8.14 8.15 9.1 9.2 9.3 The periodic updating of the Cash Book from the bank statement The possible reasons for the dishonouring of a cheque and its signficance The book-keeping entries arising on the dishonouring of a cheque The need for periodic reconciliation between the balance in the bank statement and the balance in the Cash Book (Bank Current Account) The updating of the Cash Book (bank column) with as yet non-recorded items which are revealed in the bank statement Understanding of and use of the terms: 9.3.1 unpresented cheques (or cheques drawn, not yet presented) 9.3.2 cheques paid in (lodged ), not yet credited The preparation of a statement reconciling the balance in the Cash Book (Bank Current Account) with that shown in the bank statement, in respect of items still causing a difference From data provided, the drafting of a bank statement
9.4
9.5
Knowledge of bank facilities and practice with the Cash Book (see Lessons 9 and 10) are an essential basis for answering questions relating to bank reconciliation. Candidates are often unaware of the purpose of the bank statement and of what should be done by the customer on receiving it from the bank. Only when the Cash Book has been brought up to date should bank reconciliation begin formally.
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Bank reconciliation statements
Step 1
Aim: to understand the need for reconciling the Cash Book with the bank statement 1 Outline the records used to keep the bank and account holder up to date with a bank account:

the Cash Book: the firms record of transactions with the bank; the bank statement: issued by the bank at regular intervals, eg monthly or weekly, it is the banks record of the firms account.
2 Explain that differences will arise between the two records, due to:
timing differences, eg a cheque being paid into the account that the bank has not yet recorded; the Cash Book not yet showing items that appear on the bank statement, ie the account holder can update the Cash Book by including items from the bank statement.
3 Explain and discuss with students the main timing differences. Link the discussion with Lesson 9, focusing in particular on how cheque clearance can affect timing. For example:
a drawn cheque may not be recorded on a bank statement until 2-3 days after it has been drawn; the time delay is increased if the payee delays paying the cheque into his or her bank account; amounts paid into the bank may not yet be included in a current bank statement because the amounts were paid into a different branch of the account holders bank; alternatively, they may have been paid in late in the banking day and crediting could be further delayed if the next day(s) are not working days.
Step 2
Aim: to be able to update the Cash Book from the bank statement 1 Tell the students that when the bank statement has been received, they should: (a) compare the Cash Book with the bank statement, tick ( ) off the items that correspond (which might include most items in both sets of record), and look carefully for any mistake made by the bank or the customer; (b) look for any items in the bank statement that should be entered in the Cash Book before it is (finally) balanced; the items relate to transactions that have already taken place and that should no longer cause any difference between the two records; such items include:
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various means of bank transfer, eg credit transfer, standing order, direct debit for either the payment or receipt of money (see Lesson 9,Other payment methods, page 53); bank charges for operating the account or interest charged for a bank overdraft; interest paid by the bank to the account holder, which applies to some bank accounts if the account balance is over a certain minimum figure.
2 Illustrate how to update the Cash Book from the bank statement by showing the example below on the overhead projector or board. Example It is supposed that Alec Simmons Cash Book for August Year 4 appears as follows:
CASH BOOK (bank columns) Year 4 1 Aug 3 Aug 9 Aug 19 Aug 30 Aug Balance b/d J Slade T Medway N Thorne L Nathan 790 125 363 95 156 1,529 338 Year 4 5 Aug 14 Aug 26 Aug 29 Aug 31 Aug R Clapton (316) W Rigden (317) B Tallon (318) P Gaul (319) Balance c/d 280 406 190 315 338 1,529
31 Aug Balance b/d
The above represents only a preliminary (first) balancing. An alternative practice is not to record a balance at this stage, but to keep a separate note of the preliminary balance. Alec Simmons receives the following bank statement:
Year 4 1 5 7 8 10 11 17 20 22 27 Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Balance b/f J Slade Credit transfer (C/T): K Jordan R Clapton (214316) Direct debit (D/D): Midshire Gas Co T Medway W Rigden (214317) N Thorne Credit transfer (C/T): Wilders Ltd Standing order (S/O): DVS Publications Balance c/f Paid out Paid in 125 96 280 62 363 406 95 310 174 Balance 790 Cr 915 Cr 1,011 Cr 731 Cr 669 1,032 626 721 1,031 Cr Cr Cr Cr Cr
31 Aug
857 Cr 857 Cr
Note Show that the reconciliation of the 2 balances should be carried out by:
ticking ( ) the items that appear in both the Cash Book and bank statement and watching out for errors;
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entering the unticked items on the bank statement into the Cash Book and checking for errors; balancing the Cash Book finally to provide the updated balance; using the unticked items in the Cash Book to prepare the bank reconciliation statement.
The updated Cash Book appears as follows:

CASH BOOK (bank columns) Year 4 1 Aug 3 Aug 9 Aug 19 Aug 30 Aug Balance b/d J Slade T Medway N Thorne L Nathan 790 125 363 95 156 1,529 338 96 310 744 508 Year 4 5 Aug 14 Aug 26 Aug 29 Aug 31 Aug R Clapton (316) W Rigden (317) B Tallon (318) P Gaul (319) Balance c/d 280 406 190 315 338 1,529 62 174 508 744
31 Aug Balance b/d 31 Aug K Jordan credit transfer (C/T) 31 Aug Wilders Ltd credit transfer (C/T) 1 Sep Balance b/d
31 Aug Midshire Gas Co direct debit (D/D) 31 Aug DVS Publications standing order (S/O) 31 Aug Balance c/d
Note Point out that the items obtained from the bank statement are entered at the last date of the period, ie 31 August Year 4.
Step 3
Aim: to be able to prepare a bank reconciliation statement 1 Emphasize that only the final stage of reconciliation is recorded in the bank reconciliation statement, ie after the Cash Book has been updated. 2 Display the reconciliation for the data regarding Alec Simmons shown overleaf on the overhead projector or board.
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Alec Simmons Bank reconciliation statement at 31 August Year 4 Balance as per Cash Book add Unpresented cheques: B Tallon (318) P Gaul (319) less Cheque paid in, not yet credited: L Nathan Balance as per bank statement 508 190 315
505 1,013 156 857
3 An alternative way of showing the reconciliation would be to start with the bank statement balance. If so, the items appear in reverse order to those shown above. The bank reconciliation statement for Alec Simmons would then be:
Alec Simmons Bank reconciliation statement at 31 August Year 4 Balance as per bank statement add Cheque paid in, not yet credited: L Nathan less Unpresented cheques: B Tallon (318) P Gaul (319) Balance as per Cash Book 857 156 1,013 190 315
505 508
4 Ensure that the students are able to prepare a bank reconciliation statement in both ways: starting either with Cash Book balance or the bank statement balance. 5 Common errors made by candidates concerning bank reconciliation statements Draw the students attention to the common errors, which are:

failing to update the Cash Book before preparing the bank reconciliation statement; attempting the wrong reconciliation, eg attempting to reconcile the closing bank statement balance with the opening Cash Book balance, which is sometimes done even though the students have updated the Cash Book.
6 Copy and hand out or show exercises T/17.1, T/17.2, and T/17.3 in the Appendix (pages 2625) on the overhead projector. Ask the students to work through them.
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Step 4
Aim: to understand the meaning and effects of a cheque being dishonoured 1 Explain that the meaning and significance of a cheque being dishonoured is that the drawers bank refuses to accept (ie to honour) the cheque. 2 Tell the students that a cheque may be dishonoured because: (a) the cheque has been prepared incorrectly, which may not have been noticed before; (b) the cheque may have become stale (ie too old to be accepted by the paying bank); a cheque is usually considered stale 6 months after the date on the cheque, although practice varies; (c) the drawer has insufficient funds in his or her bank account. 3 Illustrate the effects of a cheque being dishonoured by showing the example below on the overhead projector or board. Example It is supposed that on 9 July Year 8 a cheque for 3,000 is received from J Fargo in settlement of a debt.
Bank Year 8 9 Jul J Fargo 3,000 J Fargo Year 8 1 Jul Balance b/f 3,000 Year 8 9 Jul Bank 3,000
On 14 July Year 8, the bank returns the cheque marked refer to drawer. The bank account needs to be adjusted and the debt reinstated on Fargos account.
Bank Year 8 9 Jul J Fargo 3,000 Year 8 14 Jul J Fargo cheque dishonoured 3,000
J Fargo Year 8 1 Jul 14 Jul Balance b/f Bank cheque dishonoured 3,000 3,000 Year 8 9 Jul Bank 3,000
J Fargo is once again a debtor.
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Step 5
Aim: to be able to reconcile the Cash Book and bank statement where a bank overdraft is involved Candidates tend to find reconciling the Cash Book and bank statement more difficult if the procedure involves a bank overdraft. The measure of the problem depends upon the stage at which the overdraft arises. If, for instance, the Cash Book opens with an overdraft, this overdraft might be turned into a positive balance once the Cash Book is updated. The positive balance removes the difficulty of dealing with the overdraft. An overdraft is problematic, however, when it exists at the stage of formal reconciliation, ie after the Cash Book has been updated. Example The example that follows can be used to show the students how to produce a bank reconciliation statement when an overdraft is involved.The following Cash Book has been updated from the bank statement at the bottom of the page.
CASH BOOK Year 6 3 Apr 18 Apr 29 Apr 30 Apr 30 Apr 30 Apr J Drake L Trim A Simes Balance c/d T Lofter credit transfer (C/T) Balance c/d 57 203 59 694 1,013 68 796 864 1 May Balance b/d Bank statement Year 6 1 4 11 13 18 23 30 Apr Apr Apr Apr Apr Apr Apr Paid out Balance b/f J Drake Credit transfer (C/T): T Lofter R Upton: 217572 96 L Trim Direct debit (D/D): Uplands Services 142 Bank interest 28 Paid in 57 68 203 Balance 715 O/D 658 O/D 590 O/D 686 O/D 483 O/D 625 O/D 653 O/D Year 6 1 Apr 9 Apr 17 Apr 25 Apr 30 Apr 30 Apr 30 Apr Balance b/f R Upton (572) T Gunge (573) P Skate (574) Balance b/d Uplands Services direct debit (D/D) Bank interest 715 96 115 87 1,013 694 142 28 864 796
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Note O/D on the bank statement means that the account is overdrawn. In this case, not only is the opening Cash Book balance overdrawn but an overdraft also exists at the stage of formal reconciliation. The bank reconciliation statement might be shown as follows:
Bank reconciliation statement at 30 April Year 6 Balance per Cash Book overdraft add Unpresented cheques: T Gunge (573) P Skate (574) less Cheque paid in, not credited: A Simes Balance per bank statement overdraft (796)
115 87
202 (594) 59 (653)
Note The addition is serving to reduce the overdraft and any deduction serving to increase it. Alternatively, the bank reconciliation statement might be shown as follows:
Bank reconciliation statement at 30 April Year 6 Balance per Cash Book overdraft add Cheque paid in, not yet credited: A Simes less Unpresented cheques: T Gunge (573) P Skate (574) Balance per bank statement overdraft 796 59 855 202 653
115 87
Step 6
Aim: to be able to draft a bank statement from the data provided 1 Display the following example of a bank statement on the overhead projector.
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Westshires Bank 12 High Street Crampton Shropshire CR3 5TU Mr Roger Dolby Account No. 75643 Date Year 4 1 3 5 8 12 14 17 20 22 May May May May May May May May May Particulars Balance b/f R Tenby: 200136 C/T R Beale L Scales D/D Selsby Services L Germaine: 200137 C/T F Renoir L Pinter S/O Loxby Publications A Croft: 200138 L Scales Interest Paid out 92.00 405.00 392.00 125.50 33.00 253.50 141.00 174.00 207.00 367.00 32.00 Paid in Balance 716.00 O/D 808.00 O/D 403.00 O/D 11.00 O/D 136.50 O/D 169.50 O/D 84.00 Cr 225.00 Cr 51.00 156.00 211.00 179.00 Cr O/D Cr Cr
24 May 27 May 31 May
Key: C/T credit transfer D/D direct debit O/D overdrawn S/O standing order
2 Point out that bank statements are prepared in running balance format, so that the balance column is automatically updated as each transaction is entered. 3 Explain that bank statements have become more user friendly in recent years.Thus the headings of Dr and Cr above the amount columns confusing for many bank customers have been replaced by some banks by paid out and paid in. 4 Make it clear that, in the particulars column, it is now common for cheques drawn on the bank to be entered on the bank statement by cheque number only. In examination questions, there will be sufficient information provided to link the items. In bank reconciliation statements, it is desirable to include names and cheque numbers (if applicable) wherever possible. 5 Copy and hand out or show exercise T/17.4* in the Appendix (page 265) on the overhead projector. Ask the students to work through the exercise.
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Lesson 18: Petty Cash Book imprest system

Topic summary

The purpose and uses of petty cash The principle and working of the imprest system Recording the opening imprest and individual payments in the Petty Cash Book Totalling and balancing the Petty Cash Book and recording the reimbursement of the float at the period end The purpose of the petty-cash analysis columns and making double-entry postings to the ledger Responding to questions involving (i) variations within the Petty Cash Book and (ii) the part played by the Petty Cash Book in the double-entry system Preparing a Cash Book with analysis of expenditure

8.16 The use of simple columnar analysis (of expenditure) within the Cash Book 10.1 The possible need for one (or more) Petty Cash Book(s) as subsidiary to the main Cash Book 10.2 Petty cash as a system for effecting minor disbursements 10.3 The use of sequentially numbered vouchers and their authorization for payment 10.4 The practice of setting a limit to the amount allowed in reimbursement per claim/voucher 10.5 The basis of the imprest system; periodic reimbursement of the (controlled) float 10.6 The recording of incidental receipts of money into petty cash, other than the periodic reimbursement of the float 10.7 The balancing of the Petty Cash Book and the book-keeping entries relating to the reimbursement of the float, as well as in respect of any adjustment of the float 10.8 The analysis of petty cash outlay, the totalling of the analysis columns, and the posting of these totals as required to appropriate ledger accounts 10.9 The dual role of the Petty Cash Book as a book of prime entry and an integral part of the double-entry record
The students should understand the function of the Petty Cash Book, its relationship to the Cash Book itself, its part in the double-entry system, and the practical way in which it is operated (including the imprest system).The means of analysing expenditure that is used in a Petty Cash Book can be applied also to the main Cash Book, which is covered in Step 7.
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Petty Cash Book imprest system
Step 1
Aim: to appreciate the purpose and uses of petty cash 1 The students will often have had experience of using petty cash, even if only as a user or beneficiary. Draw upon their experience when discussing the purpose and uses of petty cash. Emphasize that in numerous cases many of the disbursements will be to members of staff, ie reimbursing them for payments already made on behalf of their employer, such as travelling expenses. A limit, such as a maximum of 50, may be placed on the amount of any individual payment from petty cash. 2 Point out that the Petty Cash Book is a means of lessening the load on the main Cash Book.The Petty Cash Book is concerned with minor payments, while the Cash Book is for recording payments above a certain figure and for entering the receipt of money. 3 Explain that, by having analysis columns (where petty cash outlay is classified) beside the total payments column, expenditure can be recorded under different headings, such as postage or travelling. This analysis can provide useful information and can be used to save time and effort when making account entries. The role of analysis columns is explained in greater detail in Step 5 (page 146).
Step 2
Aim: to understand the principle and working of the imprest system 1 Explain the basis of the imprest system. The petty cashier starts each week or month with a certain amount of money, called the imprest amount or float. As payments are made during the week or month, the amount of money decreases. At the end of the period (or the beginning of the next one), the fund of cash is made up by the main cashier to the imprest amount. 2 Illustrate the principle and working of the imprest system by showing the example below on the overhead projector or board. Example
Amount of cash at first made available to the petty cashier Amount spent during the month Amount left in cash float at month-end Amount reimbursed from main Cash Book Float topped up ready for next month 100 79 21 79 100
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3 Point out that if at any time the size of the float proves to be insufficient for the demands placed upon it, the imprest amount may be increased, either temporarily or permanently. 4 Acquaint the students with the use of vouchers to control payments from petty cash. An employee must present a voucher with a request for petty cash. Each voucher must be signed by someone in authority to formally authorize the payment. The vouchers should be numbered and filed in numerical order.Vouchers help to make an imprest system of petty cash self-regulating:
the total of voucher amounts for the period + the balance of cash = the float
Step 3
Aim: to be able to record the opening imprest and individual payments in the petty cash book 1 Show that for first setting up the float (with reference to the figures in Step 2) the book-keeping entries would be:
Dr Petty cash Cr Cash/bank 100 100
Entries for reimbursing (or topping up) the float in the example in Step 2 would be:
Dr Petty cash Cr Cash/bank 79 79
2 Illustrate how to record individual petty-cash payments by displaying the information below and the analysed Petty Cash Book that follows it. Example
Year 4 1 Nov The cashier gives 200 in cash to the petty cashier as the starting imprest of petty cash Voucher no Postage 1 3.70 Cleaning expenses 2 14.60 Stationery 3 5.30 T Fallon travel expenses 4 11.80 Cleaning expenses 5 16.20 Payment of the amount owing to J Wilds in the Purchases Ledger 6 31.10 Postage 7 4.50 Stationery 8 9.40 Refund of overpayment by debtor, W Costain 9 40.30 R Ward travel expenses 10 13.90
4 6 9 11 14 18
Nov Nov Nov Nov Nov Nov
21 Nov 24 Nov 27 Nov 29 Nov
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The Petty Cash Book appears as follows:

PETTY CASH BOOK
Receipts Date Details Year 4 200.00 1 Nov Cash 4 Nov Postage 6 Nov Cleaning expenses 9 Nov Stationery 11 Nov T Fallon travel 14 Nov Cleaning expenses 18 Nov J Wilds (creditor) 21 Nov Postage 24 Nov Stationery 27 Nov W Costain (debtor) 29 Nov R Ward travel Voucher no Total 1 2 3 4 5 6 7 8 9 10 3.70 14.60 5.30 11.80 16.20 31.10 4.50 9.40 40.30 13.90 13.90 16.20 31.10 4.50 9.40 40.30 Travel Postage Stationery Cleaning expenses Ledger 3.70 14.60 5.30 11.80
3 Inform the students that columns headed from postage to ledger are the analysis columns. 4 Emphasize the following points about the Petty Cash Book: (a) the date and details columns are shared by both Dr and Cr sides; (b) the receipts column represents the debit side and the total column the credit side; (c) the voucher numbers are entered in sequence, in this instance starting with 1; from the beginning of December Year 4, the voucher numbers will start with 11; (d) each item is entered in the total column and in the appropriate analysis column; (e) the column headed ledger is used for other ledger postings not covered by the other analysis columns.
Step 4
Aim: to be able to total and balance the Petty Cash Book and record reimbursement of the float at the period end 1 Show that the columns are totalled at the end of the period. The total of the total column should agree with the total of all the analysis columns.
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In line with common practice, reimbursement of money paid out takes place on the first day of the next period. This time, the cashier hands a cheque to the petty cashier for the amount of the reimbursement. 2 Display the Petty Cash Book as it would now look on the overhead projector or board.
PETTY CASH BOOK
Receipts Date Details Year 4 200.00 1 Nov Cash 4 Nov Postage 6 Nov Cleaning expenses 9 Nov Stationery 11 Nov T Fallon travel 14 Nov Cleaning expenses 18 Nov J Wilds (creditor) 21 Nov Postage 24 Nov Stationery 27 Nov W Costain (debtor) 29 Nov R Ward travel Voucher no Total 1 2 3 4 5 6 7 8 9 10 Travel Postage Stationery Cleaning expenses Ledger
3.70 3.70 14.60 5.30 11.80 16.20 31.10 4.50 4.50 9.40 40.30 13.90 150.80 8.20 14.70 30.80 13.90 25.70 71.40 16.20 31.10 9.40 40.30 14.60 5.30 11.80
30 Nov Balance c/d 200.00 49.20 150.80 1 Dec Balance b/d 1 Dec Bank
49.20 200.00
3 Show the students that, if reimbursements were made on the last day of the period, the previous balancing would be laid out as follows:
Receipts Date Total 150.80 150.80 350.80 200.00 1 Dec Balance b/d 30 Nov Bank 30 Nov Balance c/d 200.00 350.80
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Note The total of all the analysis columns should equal the total of the total column. 4 Display the Cash Book entries relating to the period-end reimbursements of petty cash shown above.
CASH BOOK Year 4 1 Nov Petty cash 1 Dec Petty cash Cash Bank 200.00 150.80
Step 5
Aim: to appreciate the purpose of the petty-cash analysis columns and be able to make the double-entry postings to the ledger 1 Explain the existence of analysis columns in the Petty Cash Book means that the expenditure is grouped (classified) under different expenditure headings. If the classifications were not made, then each item would have to be posted individually to an expense account to ensure double entry. The credit entry in petty cash, remember, merely records a fall in the cash float. 2 Point out that the analysis columns serve as collection points, which are similar, in principle, to the discount columns in the Cash Book. At the end of each period, the total of each analysis column is posted to an appropriate expense account in the General Ledger.An exception to this procedure is the total of the ledger column: it is not posted anywhere. Instead, the individual entries are posted directly to the relevant personal accounts as soon as possible. The existence of that total, however, is useful for crosschecking the column totals. 3 Demonstrate that the analysis columns are posted to the ledger accounts as follows:
GENERAL LEDGER Postage Year 4 30 Nov Petty cash 8.20
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Stationery Year 4 30 Nov Petty cash 14.70 Cleaning Year 4 30 Nov Petty cash 30.80 Travel expenses Year 4 30 Nov Petty cash 25.70 PURCHASES LEDGER J Wilds Year 4 18 Nov Petty cash 31.10 Year 4 1 Nov Balance b/f 31.10
SALES LEDGER W Costain Year 4 27 Nov Petty cash 40.30 Year 4 1 Nov Balance b/f 40.30
Step 6
Aim: to be able to respond to questions involving (i) variations within the Petty Cash Book; and (ii) the part played by the Petty Cash Book in the double-entry system 1 Sometimes, employees of the firm or members of the public pay small sums of money to use the services of the firm, ie there is income from sources other than sales. An example of this type of transaction might be paying for the private use of the telephone. This money might be paid into petty cash, temporarily increasing the float. One way of recording this transaction is to enter it in the receipts column (debit) with suitable explanation in the details column.When totalling and balancing at the end of the period, an allowance must be made for this amount.The appropriate expense account must be credited with the amount (see exercise T/18.3* in the Appendix, page 269). 2 An increase in the float would usually take place at the time of reimbursement, ie at the beginning or end of a period.The amount received from cash or bank would then be the amount of the reimbursement, plus the increase in the float. Increase of the float also arises in exercise T/18.3*. Copy and hand out or show exercise T/18.3* on the overhead projector.Work through the exercise with the students.
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3 An examination question might require the preparation of the Petty Cash Book for 2 periods, and totalling and balancing at the end of each period. Preparation for 2 periods is required in exercise T/18.4 in the Appendix (page 271), a question from a past paper. The period covered in the situation given is 2 weeks. It should be noted that the exercise states that the Petty Cash Book is to be balanced and the analysis columns totalled at the end of each week. Some candidates balanced the account at the end of each week but then wrongly provided one total only for each analysis column. Part (b) of T/18.4 is a test of the students insight into a practical situation. It provides scope for some discussion with the students, which should take place before any solution is handed to them. 4 Copy and hand out or show exercise T/18.4 on the overhead projector. Ask the students to work through the exercise. 5 Common errors made by candidates concerning the Petty Cash Book Errors that are commonly made include:

faulty balancing at period-end and incorrect reimbursement of the float; poor balancing when there is more than one period to record, eg 2 separate weeks, and, especially, poor recording of separate (weekly) totals for the analysis columns; faulty recording of double entry in the Cash Book in respect of reimbursement; failing to keep to instructions regarding the headings of analysis columns; faulty posting of period totals to General Ledger accounts.
Step 7
Aim: to be able to prepare a Cash Book with analysis of expenditure 1 Advise the students that an alternative to using a Petty Cash Book and float is to record all disbursements, including minor ones, in the Cash Book itself.The practice of having columns for analysing expenditure can be applied to the Cash Book just as it can to the Petty Cash Book.The same principle of analysing items can be applied also to income, but the LCCIEB First Level syllabus is restricted to the analysis of expenditure. 2 Explain that there might be, eg, 5 regular classes of expenditure recorded in the analysis columns.Anything apart from these regular expenses could be entered in a ledger column. 3 Illustrate the preparation of a Cash Book with analysis columns by showing the example below on the overhead projector. Example J Kilbride, trader, maintains a 2-column Cash Book with additional columns for the analysis of expenditure. Expenditure is analysed under the following headings: Wages,
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Stationery, Cleaning, Postage,Travelling, Ledger. On 1 March Year 6, she had a balance of 65 in cash and a bank balance of 2,030 (Dr). The following transactions took place in March Year 6:
3 5 8 9 11 12 14 15 16 17 18 21 23 25 27 28 30 31 Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Withdrew 130 in cash from bank for office Purchased stationery for 43 in cash Received cheque for 250 from L Dunster Paid 67 for travelling expenses in cash Withdrew 350 in cash from bank for office Paid 230 in wages in cash Sales for cash 440 Paid 300 cash into bank Paid 95 by cheque for cleaning Paid 27 for postage in cash Sent cheque for 315 to T Smart Paid 52 for travelling expenses in cash Paid 195 in wages by cheque Purchased stationery for 17 in cash Paid 31 for postage in cash Cash sales 216 Paid 230 for machinery repairs by cheque Paid 180 in wages in cash
Required Prepare for J Kilbride the Cash Book for March Year 6. Balance the Cash Book at 31 March Year 6 and bring down the balances. (The answer is shown overleaf.) The transaction recorded in the ledger column would be posted directly, and as soon as possible, to the ledger accounts concerned.Thus, the account of T Smart would be debited at 18 March Year 6 with 315; the Machinery Repairs Account would be debited at 30 March Year 6 with 230.The column totals would be posted to the 5 expense accounts in the General Ledger at the end of each month. Note For checking purposes: The total of the analysis columns = total of cash and bank credit columns less the amounts of contra entries
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J Kilbride CASH BOOK

Year 6
Wages
Year 6 43
Cash 65 130 250 350 230 95 27 315 52 195 17 31 230 180 605 1,315 1,265 1,201 2,580 60 95 58 195 17 31 95 27 230 300 43 67
Bank 2,030
Cash
Stationery Cleaning Postage Travelling Ledger
Bank 130
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67
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350 440 300
1 3 8 11 14 15 28
Mar Mar Mar Mar Mar Mar Mar
Balance b/f Bank C L Dunster Bank C Sales Cash C Sales
216
315 52
3 5 9 11 12 15 16 17 18 21 23 25 27 30 31 31 Mar Balance c/d 180 947 254
Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar
Cash C Stationery Travelling expenses Cash C Wages Bank C Cleaning Postage T Smart Travelling expenses Wages Stationery Postage Machinery repairs Wages
230 119 545
1,201 1,265
2,580
1 Apr
Balance b/d
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Lesson 19: Capital and revenue expenditure

Topic summary

The nature of capital expenditure and revenue expenditure Classifying examples of expenditure as capital expenditure or revenue expenditure The significance of classifying capital and revenue expenditure for net profit and the balance sheet The basic accounting significance of the distinction between the two types of expenditure

12.1 The distinctive nature of capital expenditure and revenue expenditure 12.2 The definition, in brief, of capital expenditure and revenue expenditure 12.3 Classifying a list of items into capital expenditure and revenue expenditure respectively 12.4 The different ways in which capital expenditure and revenue expenditure items are dealt with in the accounts 12.5 The effect on final accounts of the incorrect treatment of capital expenditure and/or revenue expenditure
Examination answers from some LCCIEB Centres strongly suggest that the topic of capital and revenue expenditure has been given little attention or has been overlooked. Often, candidates are able to select between examples presented to them, either capital or revenue. However, they have much greater difficulty in applying their knowledge to a situation that requires correction, for example.
Step 1
Aim: to understand the nature of both capital expenditure and revenue expenditure 1 Explain that capital expenditure is the type of expenditure that is expected to provide benefit to the business over a period longer than the current accounting period. Capital expenditure usually involves the purchase of fixed assets or expenditure that adds to the value of existing fixed assets. For example, extending a factory, shop, or office premises, or adding a fitment to a machine or adapting a machine so that its productivity improves requires capital expenditure.
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Capital and revenue expenditure
2 Inform the students that, by contrast to capital expenditure, the benefit provided by revenue expenditure is expected to be obtained within the accounting year. This type of expenditure may include:

buying goods to sell; buying raw materials and/or parts to use in the course of manufacturing; running the business, the selling and distributing of goods; maintaining fixed assets, eg repairing or servicing machines, which does not add to the original value of the fixed assets.
3 Show that capital expenditure is sometimes treated as revenue expenditure.This treatment might occur when expenditure on developing new products might take several years to result in increased sales.This capital expenditure is charged against profits in the year in which it is spent as though it were revenue expenditure.1
Step 2
Aim: to be able to classify examples of expenditure as capital expenditure or revenue expenditure 1 Tell the students that treating an item of expenditure as capital expenditure, ie capitalizing it, means that the outlay is not included in the years Profit & Loss Account but is carried forward as an asset in the balance sheet. Of course, if a provision for depreciation were created on a newly purchased fixed asset, then there would be some charge for the year in the Profit & Loss Account. Expense items such as rent, insurance, and salaries are likely to be reviewed at the end of each financial year. Thus at the end of Year 1, if prepayments are identified, the prepayments will not be charged against the income of Year 1 but will be carried forward as a current asset into Year 2. Effectively, the prepayment is capitalized at the end of Year 1. 2 Illustrate the classification of expenditure by showing the example opposite on the overhead projector.
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Example
Capital expenditure 27,000 Revenue expenditure 760 28,400 45,000 1,520 3,200 980 1,750
Purchase of office equipment 27,000 Repairs to existing office equipment 760 Salaries and wages 28,400 Construction of new warehouse 45,000 Cleaning of offices 1,520 Painting of office premises 3,200 Purchase of goods for resale 980 Painting of newly constructed warehouse 1,750 Wages and salaries 63,800, of which 8,000 was paid to employees engaged on building an addition on to the office premises (10) Purchase of land for building new premises 30,000 (11) Payment of fee for legal services in connection with purchase of the land mentioned in (10) 2,500
(1) (2) (3) (4) (5) (6) (7) (8) (9)
8,000 30,000 2,500
55,800
3 Advise the students that, regarding item (6) in the example, it might be argued that if the paintwork is expected to last 4 years for example, then the cost of painting the warehouse should be capitalized and spread over the next 4 years.This, however, would be incorrect. If repairs, renovation, painting, etc merely restore an asset to its original condition, the outlay is regarded as revenue expenditure and should be fully charged in the year that the cost was incurred. Item (8) contrasts with item (6).The initial painting of the warehouse helps to complete the construction (item (4)) and is therefore treated as capital expenditure. The cost of painting the warehouse at a later time would then, of course, be treated as revenue expenditure. 4 Point out that in item (9) the expenditure is partly capital and partly revenue.The cost has been apportioned between the two categories of expenditure. Note also that item (11) is capitalized; the legal services are necessary to make the purchase of land possible. 5 Copy and hand out or show the following exercise on the overhead projector or board. Ask the students to work through the exercise. Exercise In the columns beside the items listed below, enter the amount of capital expenditure or revenue expenditure for each item.
Capital expenditure (1) (2) (3) (4) (5) (6) Paid heating and lighting bill 68 Purchased stationery 1,760 Fitting of new refrigerator in delivery vehicle 2,100 Repairs to motor vehicle 215 Paid insurance 470 Fitting of new tyres to motor vehicle 190 Revenue expenditure
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Solution
Capital expenditure (1) (2) (3) (4) (5) (6) Revenue expenditure 68 1,760 215 470 190
2,100
Note Item (2) is treated as a consumable purchase. Item (3) improves the usefulness of the vehicle and might well increase the vehicles resale value. Item (6) fitting new tyres merely helps to make good the wear on the vehicle and does not increase the value of the vehicle beyond the original value.Although the tyres may have a useful life of more than one accounting year, such a purchase would generally be treated as revenue expenditure. 6 Copy and hand out or show exercises T/19.1, T/19.2, and T/19.3 in the Appendix (pages 2723) on the overhead projector. Ask the students to work through them. Candidates should be ready to apply their knowledge by suggesting examples of capital and revenue expenditure for different types of business activity. 7 Copy and hand out or show on the overhead projector or board the exercise below. Ask the students to work through the exercise. Exercise Give one example of (a) capital expenditure, and (b) revenue expenditure for each of the following business organizations: (i) a manufacturer of washing machines (ii) a motor-vehicle distributor (iii) a retailer of books, newspapers, and magazines. Solution
(a) Capital expenditure (i) Purchase of machinery for production (ii) Purchase and improvement of showrooms (iii) Purchase of retail shop premises (b) Revenue expenditure Wages, advertising, etc Salespersons salaries and commission Purchase of newspapers, books, etc
Note These answers are only examples from a range of possible answers.The answers should be related to the type of business organization.
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Step 3
Aim: to appreciate the significance of classifying capital and revenue expenditure for net profit and the balance sheet
1 Make it clear to the students that capital expenditure relates to assets and revenue expenditure to running expenses. Capital expenditure is treated as affecting the balance sheet, and payment is expected to be used up over more than one financial period. Revenue expenditure, however, is treated as a profit & loss expense that is used up within a financial period. Therefore, incorrect classification of capital and revenue expenditure will have consequences for both net profit and the balance sheet. 2 Illustrate the consequences of incorrect classification by displaying the following table on the overhead projector or board.
Incorrect classification Purchase of fixed asset treated as revenue expenditure Revenue expense treated as capital item Effect on accounts Expense overstated Fixed asset account understated Expenses understated Fixed asset account overstated Overstated Effect on net profit Understated Effect on balance sheet Capital understated Fixed asset understated Capital overstated Fixed asset overstated
3 Explain that incorrect classification can also distort the gross profit, an effect that is shown in the next 2 exercises. 4 Copy and hand out or show exercise T/19.5* and T/19.6* in the Appendix (pages 2756) on the overhead projector. Ask the students to work through them.
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Step 4
Aim: to develop an understanding of the basic accounting significance of the distinction between the two types of expenditure 1 Tell the students that they should be able to apply their knowledge of expenditure classification to different situations. Exercises T/19.7* and T/19.8* in the Appendix (pages 277 and 279), taken from LCCIEB First Level Book-keeping past examination papers, will give them some practice at applying what they have learnt. 2 Copy and hand out or show exercises T/19.7* and T/19.8* on the overhead projector. Ask the students to work through the exercises and to explain the comments given. 3 The explanation of the comments in T/19.7* should be as follows: Item (1) these are all items of capital expenditure and should be deducted from the figure for purchases. Item (2) 1,600 should be deducted from the figure for sales. A common mistake made by candidates is to deduct the book value of the old delivery van, ie 3,400.That figure is completely internal to the business and would not enter into the transaction of selling the delivery van. Item (3) the figures for closing stock should be reduced by 300. Item (4) the 2,100 is capital expenditure and should be deducted from the wages figure. 4 The explanation of the comments in T/19.8* should be as follows: (a) John Bradford failed to make the distinction between capital and revenue. (b) Item (1) the total of recorded sales is the total value of sales transactions in the period, not the amount received in cash.Therefore, the amount of 1,082 should be added to the existing figure to give a true sales figure of 23,746. Item (2) the accrual of 286 increases the item Wages to 2,926. Item (3) 1,730 becomes the figure for closing stock. Item (4) the purchase price of the motor vehicle less expected trade in value of 700 = 1,500 cost to be carried over 3 years. 1,500 3 = 500 depreciation per annum. The item, Cash taken for own use in the profit statement really means drawings.This item is not an expense of the business and therefore should not be included in the Profit & Loss Account. It would, of course, appear in a balance sheet as a deduction from capital. 5 Common errors made by candidates in dealing with capital and revenue expenditure Draw the students attention to these comments.
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(a) Overlooking the significance of information in the question that explains the purpose of certain expenditure. The information provides the clue about whether the expenditure is to be classed as capital or revenue expenditure. (b) In considering the effect on net profit of certain capital expenditure, students sometimes disregard the effect of any provision for depreciation. For example, the purchase of a motor vehicle, as a capital item, has no direct effect on net profit; however, the need to provide for depreciation over the life of the motor vehicle would result in reduced net profit. (c) Students may provide an unnecessary explanation of the chosen classification when all that is required is a one-word answer.
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Lesson 20: The journal

Topic summary

The role and main uses of the journal and the advantages of having a journal The preparation of journal entries with the correct layout Making journal entries for certain transactions or purposes Making journal entries for non-regular transactions or adjustments The role and uses of the journal

4.1 16.1 16.2 16.3 The function of the ledger The main uses of the (General) Journal The advantages of having a journal, as a support to the double-entry system Journal entries, in standard format, covering: 16.3.1 the purchase and sale on credit of fixed assets 16.3.2 the correction of errors 16.3.3 opening entries 16.3.4 other non-regular transactions or adjustments 16.4 The books of original entry; their function
Questions requiring journal entries are quite common in the LCCIEB First Level Book-keeping examination and yet the answers are often disappointing.The quality of the answers indicates that not enough attention is given to this topic. The questions may test the use of the journal in its own right, eg as a record of the purchase or sale on credit of fixed assets. Alternatively, journal entries may be used as a convenient and direct way of testing the students understanding of a number of features of doubleentry book-keeping that would otherwise require the use of too much examination time.
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The journal
Step 1
Aim: to be aware of the role and main uses of the journal and the advantages of having a journal 1 Explain the origin of the journal and its present-day function. The day books exist to assist the ledger. Detail is recorded in the day books and more summarized postings are made to the ledger. Originally, the day books were part of the journal and the journal was like a notebook for recording the detail of transactions. In the course of time, specialized day books (eg the Purchases Day Book) or journals came into use and the journal was used to record less common transactions or adjustments. Today, the journal is sometimes termed the Main Journal, Journal Proper, or General Journal. 2 Point out that the Cash Book serves as both a book of prime entry effectively a day book and as part of the ledger.The ledger and the various day books cover the great majority of transactions.A general rule is that any transaction not included in any of the day books should be noted in the General Journal. 3 Tell the students that the main uses of the General Journal are to make notes on:

the purchase and sale on credit of fixed assets; opening entries, ie the opening of a new set of accounts; the correction of errors; other transfers.
4 Draw the students attention to the advantages of having and using a journal, that:

it is an easily accessible record of the purchase and sale of fixed assets; it helps to explain entries, eg various adjustments or the correction of errors; there is less chance of omitting a transaction altogether, or of making an entry on one side only of the accounts.
Regarding the first point above, some firms include the purchase and sale of fixed assets for cash or bank, even though these are recorded anyway in the Cash Book a book of prime entry. More details of the assets, authority to purchase, etc can be shown there than is possible in the Cash Book.1 5 Emphasize the role of the journal, that it is to support the ledger. The journal itself is not part of the double-entry system.
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The journal
Step 2
Aim: to be able to prepare journal entries with the correct layout 1 Demonstrate the standard layout for a journal on the board or overhead projector using the example below. Example
T Morley JOURNAL Dr X Cr X
Date
Name of account to be debited Name of account to be credited Narrative
2 Highlight the following points:

a date should always, if possible, be entered for each journal entry; the account to be debited should always appear first; followed by the account to be credited; a narrative is an explanation of the journal entry; narratives, if required, should be relevant, meaningful, and to the point.
Concerning the second point above, some candidates show the credit entries first or, even worse, mix the entries sometimes debit entries first, sometimes credit entries first. The students should avoid both these errors, which are confusing for the Examiner and which may lose them marks.
Step 3
Aim: to be able to make journal entries for certain transactions or purposes 1 Introduce the students to some uses of the journal with the aid of the examples given below. (a) The purchase and sale on credit of fixed assets Example (i) On 9 June Year 3, a computer is bought on credit from Datarite Limited for 23,600.
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The journal
Year 3 9 Jun
Computer equipment Datarite Ltd Purchase, on credit from Datarite Ltd, computer . . . .
Dr 23,600
Cr 23,600
(ii) On 21 June Year 3, a motor vehicle, used for delivery purposes within the firm, was sold on credit to Smithson Garages for 2,300. No provision for depreciation had been made.
Year 3 21 Jun Dr 2,300 Cr 2,300
Smithson Garages Motor-vehicle disposal Sale on credit of motor vehicle no . . . .
In practice, more detail concerning the fixed assets is likely to be included, but this is not required for examination purposes. (b) The correction of errors See Lessons 21 and 22 (pages 16877). (c) Opening entries Opening entries are to be used when a business is started or for opening a new set of accounts for an already established business. Example N Maxwell has been in business for some years. He now decides to set up and maintain a proper set of double-entry accounts. On 1 March Year 8, his assets and liabilities were as follows:
Assets Premises 42,000 Fixtures and fittings 5,200 Office equipment 4,800 Motor vehicle 7,500 Stock 4,360 Debtors 1,840 (C Brandon 720; R Sims 440; L Upton 680) Cash 130 Bank 1,100 Creditors 1,370 (M Denby 580; A Trott 790)
Liabilities
Solution The total of the assets 66,930 less liabilities 1,370 = 65,560 capital
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The journal
The opening journal entries appear as follows:

JOURNAL Year 8 1 Mar Premises Fixtures and fittings Office equipment Motor vehicle Stock Debtors: C Brandon R Sims L Upton Cash Bank Creditors: M Denby A Trott Capital 720 440 680 Dr 42,000 5,200 4,800 7,500 4,360 Cr
1,840 130 1,100
580 790 66,930
1,370 65,560 66,930
The journal is the basis for opening the set of accounts as follows:
GENERAL LEDGER Premises Year 8 1 Mar Balance 42,000 Fixtures and fittings Year 8 1 Mar Balance 5,200 Office equipment Year 8 1 Mar Balance 4,800 Motor vehicle Year 8 1 Mar Balance 7,500 Stock Year 8 1 Mar Balance 4,360 Capital* Year 8 1 Mar Balance 65,560
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The journal
SALES LEDGER C Brandon Year 8 1 Mar Balance 720 R Sims Year 8 1 Mar Balance 440 L Upton Year 8 1 Mar Balance 680 PURCHASES LEDGER M Denby Year 8 1 Mar Balance A Trott Year 8 1 Mar Balance CASH BOOK Year 8 1 Mar Balance Cash 130 Bank 1,100 790 580
* The Capital Account could, alternatively, be kept in a Private Ledger
2 Ask the students whether journal opening entries are prepared each year. The correct answer is that they are not. The opening entries are prepared only as required, eg as a new set of accounts is opened, which, in practice, is rare. 3 Copy and hand out or show exercise T/20.1 in the Appendix (page 280) on the overhead projector. Ask the students to work through the exercise.
Step 4
Aim: to be able to make journal entries for non-regular transactions or adjustments 1 Explain that non-regular transactions or adjustments that are not otherwise recorded in a book of prime entry, include:
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The journal
special transactions or adjustments arising during the course of the year; year-end adjustments.
Possible adjustments include:

transfers to the Trading and Profit & Loss Account; accruals and prepayments; provision for depreciation; writing off a fixed asset, ie transferring the remaining balance on the asset account to the Profit & Loss Account; writing off bad debts; creating or adjusting a provision for doubtful debts; adjusting for owners drawings.
2 Illustrate journal entries for non-regular transactions or adjustments by showing the examples below on the board or overhead projector. Example (a) At 31 December Year 5, the balance on the Advertising Account is 4,850 (Dr). Of this, 4,100 relates to Year 5, while 750 is a prepayment for Year 6.
Year 5 31 Dec Profit & loss Advertising Transfer of expenditure for advertising for the year ended 31 Dec Yr 5 Dr 4,100 Cr 4,100
Example (b) At 31 December Year 5, the balance on the Rent Receivable Account is 3,350. All of this relates to Year 5. In addition, 450 is accrued for Year 5.
Year 5 31 Dec Rent receivable Profit & loss Transfer of the amount of rent receivable for the year ended 31 Dec Year 5 Dr 3,800 Cr 3,800
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The journal
Example (c) At 31 December Year 5, bad debts written off for the year amount to 715.
Year 5 31 Dec Profit & loss Bad debts Total of bad debts written off for the year ended 31 Dec Year 5 Dr 715 Cr 715
Example (d) At 31 December Year 5, the existing provision for doubtful debts is to be increased by 370.
Year 5 31 Dec Profit & loss Provision for doubtful debts Increase in provision for doubtful debts Dr 370 Cr 370
Step 5
Aim: to develop and reinforce learning on the role and uses of the journal 1 Review the relationship between the various books of account. Figure 20.1 (overleaf ) structurally illustrates the various books of account. Note that the books of prime entry are not part of the double-entry system.The Cash Book and Petty Cash Book are both books of prime entry and part of the ledger in the wider sense. Also note that, apart from contra entries in the Cash Book, it is still necessary to post from these two books into the ledger itself to complete the double entry. 2 Remind the students that the Trading and Profit & Loss Account is part of the double-entry system but that the balance sheet is not. The General Journal, in its function as a diary, holds information on transactions that are not entered into any other book of prime entry. It should also contain adjustments changes made without a transaction arising. In addition, transactions of a special nature may be recorded there even though they are entered in another book of prime entry, eg the purchase or sale of fixed assets for cash or bank payment. 3 Advise the students to practise answering questions requiring journal entries as much as possible.These questions can be a compact way of testing the students knowledge of the rules of double entry; the importance of this topic cannot be overstated.
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The journal
Cash
Book Ledger General (Nominal) Ledger Purchases Ledger Sales Ledger (Private Ledger)
DOUBLEENTRY SYSTEM
Trading and Profit & Loss Account
Balance sheet Figure 20.1 The account system
4 Copy and hand out or show exercises T/20.2*, T/20.3, T/20.4*, and T/20.5* in the Appendix (pages 281, 2834, and 286). It is important that the students work through these exercises and that you review the answers with them. Overall they show the range of topics that can be covered in journal entries. 5 When the students work through T/20.4*, emphasize that they must provide sufficient information in journal entries that relate to year-end adjustments on expense or income accounts. Common errors below deals further with this feature. 6 Common errors made by candidates regarding journal entries Candidates sometimes:

provide ledger accounts instead of journal entries; provide insufficient information for year-end adjustments on expense/income accounts, eg:
Date Insurance Insurance Narration . . . . 90 90
166
Petty Cash Book
BOOKS OF PRIME ENTRY
Discount columns
Purchases Day Book
Returns Outwards Day Book
Sales Day Book
Returns Inwards Day Book
General Journal
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The journal
The correct entries appear as follows:

Date Insurance (year to 30 Jun Yr 9) Insurance (year to 30 Jun Yr 8) Narration . . . . 90 90
ie, the financial years must be stated for the entry to be valid.
lay out journal entries poorly; eg, the entries might be cramped together sometimes it is not clear which is debit and which is credit provide description and explanation instead of an account name either state no date (where it can or should be provided) or show an incorrect date; the date given should be the one on which (in the firm concerned) the journal entry is made.
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Lesson 21: Errors in the accounts 1

Topic summary
The basic classification of errors and errors that have no effect on agreement of the trial balance Errors that might affect agreement of the trial balance and how the trial balance might be affected

11.3 11.4 11.5 17.1 Errors in the accounts and their effect on the trial balance The revising of an incorrectly drafted trial balance The limitations of the trial balance as a means of check The difference between errors which affect agreement of the trial balance and those errors which do not affect such agreement 17.2 Those errors which do not affect agreement of the trial balance; types of such error 17.3 From data provided, the selection of the relevant type of error 17.4 The drafting of appropriate adjusting journal entries
Students often experience difficulty with this topic, and the terms used should be explained with care.
Step 1
Aim: to be aware of the basic classification of errors and, in particular, of the errors that have no effect on agreement of the trial balance 1 Explain that errors in accounts may be classified as:

those that have no effect on agreement of the trial balance; those that usually affect the trial balance.
2 Review the range of errors (below) that do not affect agreement of the trial balance.
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Errors in the accounts 1
(a) Errors of omission This type of error occurs when a transaction is completely omitted from the books. Use the example that follows to illustrate errors of omission. Example Credit note number 387 for 73 is issued to a customer. A Doyle, on the return of goods, has not been entered in the accounts. An adjusting journal entry should be made, as follows, before making the necessary correcting entries in the two ledger accounts concerned.
JOURNAL Dr 73 Cr 73
Returns inwards A Doyle Correction of omission of entry of credit note no 387
(b) Errors of commission These errors occur when a transaction is entered in a wrong account of the same class as the one in which it should have been recorded. Often, this error means that a transaction is entered in the wrong persons account (either debtor or creditor). Use the example below to illustrate this type of error of commission. Example Invoice number S/598 for goods bought on credit for 345 from Eastern Supplies had been entered in the account of Eastern Sundries. The adjusting entry would appear as:
JOURNAL Dr 345 Cr 345
Eastern Sundries Eastern Supplies Purchase invoice no S/598 entered in wrong supplier account, now corrected
In the Purchases Ledger, the 2 accounts would appear as:

Eastern Supplies Purchases (entered wrongly in Eastern Sundries Account) 345
(continued)
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Eastern Sundries Eastern Supplies (posting error corrected) Purchases 345 345
The correction of an error involving impersonal accounts is as follows:

JOURNAL Dr 19 Cr 19
Postage Telephone Payment in cash for postage was wrongly posted to Telephone Account, now corrected
Stress that both accounts are in the same class, ie they are both nominal accounts. A further example for impersonal accounts is as follows:
Office furniture Fixtures and fittings Purchase by cheque of office furniture, wrongly posted to Fixtures and Fittings Account, now corrected
In this case, both accounts are real accounts. (c) Reversal of entries Debit and credit entries for the correct amount have been made, but on the wrong side of the 2 accounts. Use the example that follows to illustrate the reversal of entries. Example The sale of goods for 420 cash has been entered as a debit to the Sales Account and a credit to the Cash Account.
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The correct entries should be:

Sales Cash Cash Sales 420 420
If the correct entries are adjusted by crediting the Sales Account and debiting the Cash Account with 420, it merely cancels the errors.To adjust fully, and to achieve what was first intended, it is necessary to double the amount.
Sales Cash 420 Cash Sales (correction of error) 840 Sales 420 Cash (correction of error) 840
Therefore, the journal entry would be:

Cash Sales Sales of goods for 420 cash and wrongly reversed in the accounts, now corrected
(d) Error of principle When a transaction is entered in the wrong class of account, an error of principle occurs. Use the example given below to illustrate this type of error. Example The purchase of office equipment for 1,264 has been wrongly debited to the Purchases Account. This purchase is an item of capital expenditure that, wrongly, has been treated as revenue expenditure and entered in a nominal account. As capital expenditure, it should have been recorded in a real account. It is therefore necessary to cancel the incorrect entry in the Purchases Account, ie using a credit entry, and to make a debit entry in the Office Equipment Account.
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JOURNAL Dr 1,264 Cr 1,264
Office equipment Purchases Purchase of office equipment wrongly debited in Purchases Account, now corrected
(e) Error of original entry When an error of original entry occurs, the correct accounts have been used and the entries are on the correct sides, but the amount has been entered incorrectly in both accounts. Often, although not necessarily, this error is the result of the source document being incorrect. Use the following example to illustrate error of original entry. Example Sale of goods 350 on credit to T Hogan has been entered in the accounts as 380. Both entries are 30 too much.
JOURNAL Dr 30 Cr 30
Sales T Hogan Sales overstated by 30, now corrected
(f) Compensating error A compensating error occurs when errors cancel each other out. Use the example that follows to illustrate this type of error. Example Purchases account (debit) is understated by 10 and rent receivable (credit) also is understated by 10. The trial balance is still in balance, provided there are no other errors in the accounts.
JOURNAL Dr 10 Cr 10
Purchases Rent receivable Purchases Account and Rent Receivable Account each undercast by 10, now corrected
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(g) Error of duplication In this instance, a transaction is entered correctly in the accounts and then, in error, is entered again.This error is not revealed by the trial balance. 3 Copy and hand out or show exercises T/21.1, T/21.2, and T/21.3 in the Appendix (pages 2889) on the overhead projector. Ask the students to work through them.
Step 2
Aim: to be aware of errors that might affect agreement of the trial balance and of how the trial balance might be affected 1 Outline the errors that would usually affect the trial balance, including:

an incorrect posting on one side of the transaction; an error in addition, eg of entries within an account; a balance wrongly brought forward to the trial balance; a balance omitted from the trial balance.
These errors affect agreement within the trial balance only if they do not compensate one another. 2 Ask the students when the errors are likely to become known.The answer is that some will become known during the course of the year, partly through checks in the system. They will then be corrected. Others will become known at the end of the year when the trial balance is prepared. Either way, the adjustments necessary to correct the errors should be journalized. 3 Discuss with the students how the various errors will affect the trial balance. 4 Explain that agreement between the 2 sides of a trial balance does not prove that all entries have been made correctly in the accounts.The trial balance is limited as a means of checking entries. The 2 sides of the trial balance could be in agreement even though any of the errors outlined in Step 1 could have been made, eg the complete omission of a transaction, a compensating error, or an error of commission. 5 Fully discuss the limitations of the trial balance with the students. 6 Copy and hand out or show exercises T/21.4 and T/21.5 in the Appendix (pages 2901) on the overhead projector. Ask the students to work through them. 7 Review and discuss the answers to the questions.
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Lesson 22: Errors in the accounts 2

Topic summary

Adjustments for errors through journal entries or in accounts The effect of errors or of correcting errors on gross and net profits, as well as upon the balance sheet

17.4 The drafting of appropriate adjusting journal entries 17.5 The effect of errors and/or the effect of the correction of errors both in principle as well as by calculation on: 17.5.1 the trial balance 17.5.2 gross profit 17.5.3 net profit 17.5.4 the balance sheet
A topic that frequently occurs in LCCIEB First Level Book-keeping examinations is correcting errors by means of journal entries or by entries in accounts. Answers to questions requiring the correction of journal entries strongly indicate that insufficient attention is paid to this topic. It is also evident that candidates experience some difficulty in answering questions on the effect of errors on profit and the balance sheet.The guidance in Step 2 and the supporting exercises should help to overcome this problem.
Step 1
Aim: to understand the effect of errors or of correcting errors on gross and net profits, as well as on the balance sheet 1 The problem for candidates in answering this type of question is often one of method. In preparing for the examination as well as in the examination itself, attention should be paid to the points listed below.
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(a) Have the students fully grasped the question? Often marks are lost because parts of the question have been misunderstood. Lack of understanding might be the result of unfamiliarity with the topic or with the particular form of question. (b) In preparing an answer requiring journal entries, candidates may find it helpful to draft T-type accounts. This exercise might help them to visualize debit and credit entries.The T-type accounts should not be in detail just miniature accounts are enough. If necessary, the account can be written in the answer book and then boldly crossed through. It is, of course, wrong to show accounts as part of an answer when only journal entries are required. (c) Does the question require narrations? Or does it state that narrations are not required? (d) Journal entries should always be in the correct format with the debit entry first and the credit entry following it.When an answer requires a multiple of account entries, eg in recording the sale of a depreciated fixed asset, there may be various ways of setting out the answer, but the same rule applies: debit comes before credit. 2 Copy and hand out or show exercises T/22.1 and T/22.2 in the Appendix (page 292) on the overhead projector. Ask the students to work through them. 3 Explain that, sometimes, an item in a question may require a one-sided journal entry only. For example, an error could be the result of a posting failure. Illustrate this point with the example below. Example Stationery purchased on 12 March Year 3 for 37 in cash is correctly entered in the Cash Book but is not posted to the Stationery Account in the General Ledger.The trial balance would therefore be short on the debit side by 37.The correcting journal entry made on 31 March Year 3 would be:
JOURNAL Year 3 31 Mar Stationery Dr 37 Cr Stationery purchased on 12 March Year 3: entered in cash book but not posted, now corrected.
Note The dash () in the credit column gives a positive indication to the Examiner that that candidate recognizes that no credit entry is required. 4 Copy and hand out or show exercise T/22.3* in the Appendix (page 293) on the overhead projector. Ask the students to work through the exercise. Note that this question requires some one-sided journal entries.
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Step 2
Aim: to understand the effect of errors or of correcting errors on gross and net profits, as well as on the balance sheet 1 Explain that the effect of errors in terms of reported profits and a prepared balance sheet is being discussed. 2 Stress the need to distinguish between the effect of the error itself and the effect of correcting the error.Thus, if purchases were undercast:
the effect of the error gross profit overstated the effect of correcting the error gross profit reduced
The amount is the same for both effects.The distinction is of fundamental importance: often questions relating to errors are answered from the wrong angle.When errors are made, there is a sequence of consequences. It will help the students considerably if they become used to working through the likely consequences of various types of error. For example, the understatement of purchases mentioned above will, by itself, lead to:
understatement of cost of goods sold
which results in
overstatement of gross profit
which results in
overstatement of net profit
which results in
overstatement of the addition to capital on the balance sheet
3 Copy and hand out or show the following exercise on the overhead projector. The errors should be put to students one-by-one. Review the consequences of each one before moving on to the next. Exercise Trace the sequence of consequences of the following errors through to the balance sheet: (1) overstatement of sales (2) overstatement of returns outwards (3) understatement of carriage outwards
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(4) overstatement of closing stock (5) overstatement of carriage inwards (6) understatement of returns inwards. 4 Use Table 22.1 to illustrate the differences between the effects of errors on reported profits, etc, before making any correction, and the effects resulting from correction.This table also appears on page 217 of the students book, How to Pass Book-keeping, First Level.
Table 22.1 Effects of the error and effects of correcting the error Effects of the error, ie before correction Gross profit Purchases undercast Overstated Net profit Overstated Balance sheet Capital overstated Capital overstated Stock overstated Capital understated Effects (upon already reported profits) of correcting the error Gross profit Reduced Net profit Reduced Balance sheet Capital reduced
Closing stock overvalued
Overstated
Overstated
Reduced
Reduced
Capital reduced Stock reduced
Expense item, eg rent overstated Income item, eg commission overstated
No effect
Understated
No effect
Increased
Capital increased
No effect
Overstated
Capital overstated
No effect
Reduced
Capital reduced
Note Any overstatement or understatement of either an asset or a liability affects only the balance sheet. 5 Exercise T/22.4* in the Appendix (page 294) shows the effects of errors and of their correction. Copy and hand out, or show the exercise on the overhead projector, and work through it with the students. Pay special attention to the note at the end of T/22.4A.
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Lesson 23: Final accounts and adjustments further considered Stock valuation
Topic summary

Adjustments for drawings other than cash drawings End-of-period adjustments for outstanding purchase invoices Year-end adjustments in the preparation of final accounts Trading and Profit & Loss Accounts in a vertical format The basic rule for stock valuation

13.6 Adjustments in the Trading Account and balance sheet for end-of-period outstanding purchases, ie goods received but invoices still awaited 13.11 Adjustments for end-of-period income accrual and income prepayment in the Profit & Loss Account and balance sheet 18.2 The meaning of the term drawings; the various forms of drawings 18.3 The book-keeping entries for drawings 18.4 The possible effect of drawings upon the amount of capital 18.5 How drawings are stated in the balance sheet and, where necessary, in the Trading Account (where goods are withdrawn for private benefit) 19.4 The valuation of closing stock: the lower of cost or net realizable value 19.13 Showing income and expenses within the final accounts, with related items being suitably brought together
This lesson considers the further adjustments that might have to be made to the final accounts. The adjustments include different forms of drawings and the valuation of stock. Stock valuation could also be the main subject of a question or a part of a question. The vertical layout of the Trading and Profit & Loss Account is also discussed. By this stage of their studies, the students should have gained a fair knowledge of the various topics that have been discussed. Final accounts brings together many facets of book-keeping.The working and review of final accounts affords an opportunity to clarify points, sort out difficulties, and if necessary to reinforce key study points.
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Final accounts and adjustments further considered
Stress that the overriding aim of the final accounts is to present a true picture of a business by showing that:
the net profit is a true result after taking into account all relevant costs and income for the given period the balance sheet is a true statement of assets and liabilities at the balance sheet date
Correctly classifying expenditure between capital and revenue, and making period-end adjustments for accruals and prepayments, all contribute towards presenting a true picture of a business.
Step 1
Aim: to be able to make adjustments for drawings other than cash drawings 1 Remind the students of the entries for drawings by the proprietor (ie owner of the business), that they are:
Dr Cr Drawings Account Cash/bank account
In the balance sheet, the total of the drawings for the year is deducted from the owners capital balance at the start of the year. If the drawings take the form of goods being withdrawn from the business for private use, the necessary adjustment would be:
Dr Cr Drawings Account Purchases Account
2 Point out that if the adjustment for drawings is made before the preparation of the trial balance, then the purchases balance will already be reduced by the amount of the drawings, while the Drawings Account will show both cash and goods drawings. However, the candidates may be required to prepare final accounts that incorporate an adjustment for goods withdrawn by the proprietor, using an already prepared trial balance that is not adjusted for the withdrawal. It will then be necessary to:

show a deduction from purchases in the Trading Account; increase the amount deducted as drawings in the balance sheet.
Sometimes, examination candidates merge these figures, eg drawings of cash and drawings of goods are added together and entered as one figure.Advise the students to show each adjustment to make sure they obtain the mark(s).
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3 Explain that there are other alternative forms of drawings (ie besides cash) that usually involve the private use of business facilities. For example, the owner may use a motor vehicle or the business telephone, or live in part of the business premises for which rent would otherwise be payable to the business. Use of these facilities may mean that the cost of a facility is shared (or apportioned) between the business and the owner personally. 4 Illustrate how to show shared cost by displaying the following example on the overhead projector or board. Example The business telephone is also used by the owner for private purposes.The yearly cost of the telephone is apportioned as follows:
business owners private use
4 1
/5 /5
At the year end, an adjustment would be made to allow for the owners private use.The amount paid from the business bank account for the telephone during the year ended 30 June Year 7 was 380, of which 30 was prepaid at the year end. Solution
Amount paid during year ended 30 Jun Yr 7 less Prepayment at 30 Jun Yr 7 Annual charge To be apportioned: business use private use
4
380 30 350
/5 1 /5
280 70 350
The period-end adjustments in the ledger would be:

Dr Cr Drawings Telephone 70 70
In the final accounts:

the figure for the telephone in the Profit & Loss Account would be shown as 280; drawings in the balance sheet should be increased by 70. (= capital reduced) (= capital increased)
The increased figure for drawings is offset by the increased figure of net profit
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Step 2
Aim: to be able to make end-of-period adjustments for outstanding purchase invoices Explain that, at the end of a financial period, purchased goods might already have been received but the invoice may still have to come from the seller.The Purchases Account will therefore be understated, while the period-end stock check will include the goods in the value of the closing stock. In addition, creditors will be understated in the Purchases Ledger. The effects will be that:
the cost of goods sold will be understated, resulting in an overstated gross profit and overstated net profit; in the balance sheet, creditors will be understated, while capital (through the addition of net profit) will be overstated.
The adjustment for this at the period-end would therefore be to debit the Purchases Account and credit the creditors account with the amount of the anticipated invoice.The account entries should be supported by a journal entry. If, for some reason the amount in the invoice (when it is received) is different from the amount shown in the adjustment, then a further adjustment for the difference in amount has to be made. For examination purposes, if Trading Account and balance sheet adjustments are required, the candidates should make it clear that they are including the amount in their figures, ie it should not be lost in the total figure.
Step 3
Aim: to reinforce understanding and practice in making year-end adjustments in the preparation of final accounts 1 Explain that, at the stage of preparing final accounts from a trial balance, the students should keep in mind that, with the trial balance in agreement, a position of balance exists at the start of drafting the final accounts. Therefore, if any adjustment has to be made, the student should always look for 2 effects: a debit adjustment and a credit adjustment. An adjustment for an expense prepayment of 100 will reduce total expenditure in the Profit & Loss Account and will also create an asset balance for the expense prepaid (debit effect). The matching effect will be an increase of 100 in net profit and consequently in the amount of capital (credit effect). 2 Copy and hand out or show exercise T/23.1* in the Appendix (page 299) on the overhead projector. Ask the students to work through the exercise and give them guidance on method and the particular items.
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Remind the students that the techniques recommended in Lesson 7 for marking each item with its position in the final accounts should be followed here. After the students have had time to scan the question, review the adjustments one by one, pointing out the two-fold aspect of each adjustment: (1)(a) The increase in each depreciation provision is charged to the Profit & Loss Account, which reduces the net profit; (b) this decrease is matched by a reduction in the figure for fixed assets. (2)(a) Closing stock, as a deduction, reduces the cost of goods sold; (b) therefore the gross profit is increased and, as a result, net profit is increased. (3)(a) The revised provision for doubtful debts at 2% of debtors, ie 2% of 35,000 = 700 less the existing provision of 600 = an increase of 100 which is charged to the Profit & Loss Account which reduces net profit by 100; (b) in the balance sheet, the smaller net assets figure (ie from a reduced figure for net debtors) is matched by a reduced addition of net profit to capital. (4)(a) 520 is added to motor-vehicle running expenses and 420 is added to heating and lighting in the Profit & Loss Account, so reducing the net profit; (b) this reduction is matched in the balance sheet by 2 accrual items included under liabilities. (5)(a) Rates and insurances in the Profit & Loss Account is reduced by 120, making the net profit 120 more; (b) in the balance sheet, the increased net profit addition to capital is matched by an item, rates and insurances prepaid, among the current assets. Note The adjusted entries are highlighted in the solution given in T/23.1A. 3 Copy and hand out or show exercises T/23.2 and T/23.3 in the Appendix (pages 3023) on the overhead projector.Ask the students to work through them. Note that in T/23.3, item (6), the Sales Ledger figure of 370 is set off against the Purchases Ledger figure of 4,096, resulting in a net figure of 3,726.
Step 4
Aim: to be able to prepare Trading and Profit & Loss Accounts in vertical format 1 Explain that the practice is now well established of preparing Trading and Profit & Loss Accounts in vertical format. Stress that the double entry is maintained; only the presentation is different.
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2 Illustrate vertical format on the board or overhead projector with the Trading and Profit & Loss Account for J Salmon for the year ended 30 June Year 6 (see exercise T/23.1*, page 299), shown below.
J Salmon Trading and Profit & Loss Account for the year ended 30 June Year 6 Sales less Sales returns less Cost of goods sold: Stock, 1 Jul Yr 5 Purchases less Purchases returns less Stock, 30 Jun Yr 6 Gross profit add Discount received Depreciation: Motor vehicles Fixtures and fittings 20,000 8,200 370,000 3,400 15,700 263,500 7,300 256,200 271,900 17,400 366,600
254,500 112,100 1,600 113,700
Discount allowed Bad debts Provision for doubtful debts Rent Motor-vehicle running expenses Rates and insurances Salaries Lighting and heating Net profit
28,200 2,300 650 100 12,000 3,870 3,300 12,300 4,350
67,070 46,630
3 Ask the students to rewrite the Trading and Profit & Loss Account for exercise T/23.3 in vertical format.
Step 5
Aim: to appreciate and be able to apply the basic rule for stock valuation 1 Remind students of the significance of the value placed on closing stock. Show that:
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the value of closing stock
affects cost of goods sold
which in turn affects
gross profit
which then affects
net profit
with balance sheet consequences
asset value and amount of capital
2 Point out that (closing) stock is usually valued at the end of a trading period (generally a year). Valuation involves: (a) a check on and count of the items in stock, to allow for items lost, stolen, that have physically deteriorated, or that are otherwise unsaleable; (b) placing a value per item on the stock. Then
total stock value = number of items held stock value per item
Each item of stock is valued according to the rule of valuing at the lower of:
cost price
or
net realizable value.
3 Tell the students that profit should not be anticipated, ie it should not be included in the accounts until the goods concerned have actually been sold. Net realizable value is defined as the selling price less the costs of getting the goods into a saleable condition. This means, for example, that costs incurred for repairing damaged goods before they can be sold must first be deducted. 4 Emphasize that the result of applying the rule of valuing at the lower cost price or net realizable value is that stock is cautiously valued. A lower figure for closing stock means a higher cost of goods sold and therefore a lower gross profit. This is known as being prudent. 5 Illustrate how to apply the basic rule of stock valuation by showing the example opposite on the board or overhead projector.
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Example Andy Struddles has valued his stock at 31 December Year 3 at cost 6,340. Included in this figure are items for which the stock value is under review.

Item 1 cost 410.The likely selling price has fallen from 590 to 530. Item 2 cost 290. Its normal selling price is 350 but it is now expected to sell for only 270. Item 3 cost 330.The item now has no sale or scrap value.The normal selling price is 450. Item 4, which cost 215, has been damaged and cannot be repaired. Its normal selling price is 280 but it is now expected to sell for only 220. Item 5 cost 170. Its normal selling price was 250 but this had been reduced in November Year 3 to 190. Item 6, which cost 520, has been damaged and is to be repaired at a cost of 110. Once repaired it is expected to sell for 570.
Andy Struddles Revised stock valuation at 31 December Year 3
Pre-revised stock valuation Item 1
6,340
Valued at cost. The stock value is unchanged. The likely selling price is well above this figure. Item 2 Valued at net realizable value. The expected selling price has fallen below the cost price, so that 270 becomes the stock valuation figure. (20) Item 3 Valued at net realizable value. The stock value has fallen to zero. This will be written off. (330) Item 4 Valued at cost. Although the selling price has fallen it is still above cost. The stock value is unchanged. Item 5 Valued at cost. The stock value is unchanged. The reduced selling price remains above cost. Item 6 Valued at net realizable value. The expected selling price has fallen below the cost price, so that 460 (ie 570 - 110) becomes the stock valuation figure. (60) Revised stock valuation 5,930
Note A detailed explanation is given here for each item. Usually a question would not require such detail to be provided. 6 Explain that the type of question similar to the example above requires adjustment for the difference in valuation. In examination answers, some candidates add the total net realizable value to the existing stock figure, which results in a much higher figure than they started with. 7 Show the significance of the stock valuation rule by displaying the example overleaf on the board or overhead projector.
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Example In Year 1 a trader purchases 8 machines at a cost of 1,000 each. During the course of the year, 6 machines are sold at 1,500 each. The remaining 2 machines are valued at the year end at cost price, ie at 1,000 each.The profit is calculated as follows:
Sales (6 1,500) less Cost of goods sold: Purchases (8 1,000) less Stock (2 1,000) Profit 9,000
8,000 2,000
6,000 3,000
The profit in Year 1 consists of 500 on each of the 6 machines sold. If the unsold machines had been valued at the selling price, ie at 1,500, the profit for Year 1 would have been calculated as follows:
Sales (6 1,500) less Purchases (8 1,000) less Stock (2 1,500) Profit 8,000 3,000 9,000 5,000 4,000
The profit is therefore equal to 500 on each of the 8 machines when, in fact, only 6 have been sold. The profit on the 2 unsold machines has been anticipated. If the machines are sold in Year 2 then no profit on their sale is recorded for that year even though plenty of effort, time, and expense might have gone into selling them in that year. The stock at the end of Year 1 becomes the opening stock for Year 2. By valuing the stock in Year 1 at selling price (ie the higher figure), the opening stock for Year 2 is increased. The cost of goods sold is also increased and gross profit is reduced. The recorded position between the 2 years is incorrect and misleading. 8 Copy and hand out or show exercises T/23.4 and T/23.5 in the Appendix (pages 3045) on the overhead projector. Ask the students to work through them. 9 Explain the term mark-up. It is a term used in questions relating to stock valuation, and it often causes students problems in the examination. Mark-up can be defined as: cost of goods sold + some running cost + profit
= mark-up
= selling price
10 Display Figure 23.1 (opposite) on the board or overhead projector to illustrate how mark-up is obtained. 11 With reference to Figure 23.1, explain that goods may be marked up from the cost price to ensure that an amount is received towards running costs and, if possible, to make some net profit. For example, if the cost price of a product is 300 and the mark-up to
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selling price is 331/3 %, the selling price will be 400.The original cost portion can be viewed as thirds.The extra 1/3 at the end means that there are now 4 thirds (4/3 ) instead of 3 thirds ( 3/3 ).The mark-up or 1/3 on the cost price = 1/4 (25%) of the selling price.
Selling Price Cost of goods sold Running cost + profit
4 Mark-up 331/3 % = 1/3
Figure 23.1 Mark-up
12 Point out that the cost portion may also be viewed as quarters, fifths, and so on. By adding the numerator to the denominator in the fraction of the cost price, the denominator of the fraction in the selling price (the mark-up) can be obtained.Thus:
1
/3 on cost price = 1 + 3 = 1/4 of selling price or 1 /3 on cost price = 1 + 4 = 1/5 of selling price or 1 /5 on cost price = 1 + 5 = 1/6 of selling price
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Lesson 24: Club and society accounts

Topic summary

The deficiencies of a Receipts & Payments Account The presentation of an Income & Expenditure Account with regard to the distinctive features of club or society accounts The suitable and effective presentation of subsidiary income and expense information The calculation of the accumulated fund of a club or society The presentation of a balance sheet of a club or society The correct recording of amounts received through donations

21.1 The differences between a Receipts & Payments Account and an Income & Expenditure Account 21.2 The preparation of an Income & Expenditure Account from a list of balances or from a Receipts & Payments Account (both with supporting data) 21.3 The suitable grouping of associated items of income and expenditure within an Income & Expenditure Account 21.4 The preparation, if required, of an ancillary account for trading activities, eg Refreshments Account, and the carrying of the surplus/deficit into the Income & Expenditure Account 21.5 The preparation of the balance sheet of a club or society 21.6 The calculation, if necessary, of the amount of the Accumulated Fund
Many candidates will have personal experience of club or society accounts, whether as club member recipients of the accounts or whether in helping to prepare the accounts. This experience can be drawn upon when teaching this topic. Unfortunately, though, club accounts are often not prepared according to good accounting principles. Questions on this topic can be set with various kinds of starting information.The questions usually start from either a trial balance or a Receipts & Payments Account. Plenty of care is needed to answer the questions and some distinctive terms should be learned. Club accounts, nevertheless, are based on the same accounting principles as those for a business.
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Club and society accounts
Step 1
Aim: to recognize the deficiencies of a Receipts & Payments Account 1 Explain the nature of a Receipts & Payments Account, ie that it represents a summary (in debit and credit form) of cash/bank transactions for a given period. 2 Display the example of a Receipts & Payments Account that follows on the board or overhead projector. Example
Linkwell Social Club Receipts & Payments Account for the year ended 31 December Year 9 Receipts Balance at bank, 1 Jan Yr 9 Subscriptions received: Year ended 31 Dec Yr 8 420 31 Dec Yr 9 4,100 31 Dec Yr 10 240 870 Payments Hire of rooms Printing and stationery Purchase of video equipment Hire of films Annual social Visit to Bruges Balance at bank, 31 Dec Yr 9 1,860 570 1,160 320 490 380 850 5,630
4,760 5,630
3 Point out that the 2 sides of the account relate to the debit and credit of a cash or bank account.The amounts, however, are item totals for the year and not individual transaction entries. Ask the students to identify the weaknesses of a Receipts & Payments Account. The weaknesses are that:
there is no allowance for accruals and/or prepayments, eg subscriptions are included for Years 8 and 10; no account is taken of capital expenditure as distinct from revenue expenditure, eg the video equipment is fully charged to Year 9 even though it may well be in use for several years; by itself the Receipts & Payments Account is incomplete: there is no mention of assets owned other than those mentioned in the account; there is no mention of liabilities and, unfortunately, the Receipts & Payments Account is sometimes the only account statement issued to members.
Regarding the third and fourth points, assets and liabilities should be dealt with separately, ie in a balance sheet. The club or society members also need to know by means of the balance sheet whether the capital has increased or decreased over the period and why this is so.
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Step 2
Aim: to be able to present an Income & Expenditure Account with regard to the distinctive features of club or society accounts 1 Explain that the Income & Expenditure Account is used by clubs and societies, ie non-profit-making organizations, as a replacement for the Profit & Loss Account. The account has certain distinctive features, but it is constructed on similar principles to the Profit & Loss Account. It incorporates adjustments for:

accruals prepayments provision for depreciation of fixed assets.
Thus, the reason for using an Income & Expenditure Account is to include only true income & expenditure for a period, in order to obtain a result that correctly reflects the activities of the club or society for the period. 2 Tell the students that, like the Profit & Loss Account, the Income & Expenditure Account is part of the double-entry system: the period totals for income and the various expenses are transferred to it from the General Ledger. 3 Emphasize that the final accounts issued to members of clubs or societies should be:

meaningful relevant easily understood.
Many club members may have little if any knowledge of accounting. They should be supplied with statements that are informative and yet easily read.The members should not have to search for separate pieces of information and then have to put them together to form a complete financial picture.Therefore, matters relating to a particular topic should be brought together, ie items should be appropriately grouped. 4 Illustrate how to present an Income & Expenditure Account by showing the example opposite on the board or overhead projector.
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Example
Tattenham Sports Club Trial balance at 31 December Year 4 Dr 6,300 2,200 Cr
Sports equipment at cost Video equipment at cost Provision for depreciation: Sports equipment Video equipment Balance at bank Subscriptions received Rent payable Insurance Telephone and postage General expenses Surplus on annual dance Accumulated fund
2,400 800 1,860 7,150 3,400 530 410 260 180 4,430 14,960
14,960
Additional information that applies at 31 December Year 4: (1) subscriptions: 280 has been received in advance of Year 5; 360 is accrued due for Year 4; (2) rent payable accrued due amounted to 400; (3) prepaid insurance 80; (4) depreciation to be provided: sports equipment 20% on cost video equipment 121/2% on cost. Required An Income & Expenditure Account for Tattenham Sports Club for the year ended 31 December Year 4. Note Remind the students that capital expenditure items and liabilities are not included in this account.They are shown in the balance sheet, which is dealt with on page 196.
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Solution
Tattenham Sports Club Income & Expenditure Account for the year ended 31 December Year 4 Expenditure Rent payable (+400) Insurance (-80) Telephone and postage General expenses Depreciation: Sports equipment Video equipment Surplus of income over expenditure 3,800 450 410 260 Income Subscriptions less received in advance add accrued due for Year 4 7,150 280 6,870 360 7,230 180
1,260 275
Annual dance surplus 1,535 955 7,410
7,410
5 Point out that a common mistake made by candidates is that they confuse this account with the Receipts & Payments Account. Stress that income is entered on the credit side of Income & Expenditure Account and expenditure on the debit side, as they are in the Profit & Loss Account. 6 Subscriptions Highlight the fact that in the above account, it is acceptable merely to state 7,230 against subscriptions without any detail of adjustments. However, the students should be warned that this method is unwise. Examiners like to award marks for correct workings, if possible. If only the adjusted figure is given with no indication of the adjustments made and that figure is incorrect, then no marks for workings can be awarded. An alternative to showing adjustments within the Income & Expenditure Account is to key the adjusted figures to workings shown clearly after the account.This practice can, of course, be applied to other workings and is discussed further in Lesson 25. 7 Events Clubs or societies may hold events or have special occasions, eg a dance, a social, a day out, or a trip abroad.These events may be aimed at raising funds.The outcome may be a surplus, which can boost club funds, or it may be a deficit where expenditure exceeds income.These events might involve 2 or even 3 items that are classified as partly income and partly expenditure. The members would be interested in the result of any particular event, ie whether a surplus or a deficit. It is therefore essential that these items are brought together, ie grouped. If the outcome is a deficit, the group should be positioned on the debit side; if a surplus, the group should be on the credit side. Candidates often fail to position groups correctly and consequently lose marks.
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In the example on page 192, surplus on the annual dance is recorded as one entry only in the trial balance, ie it is shown as the outcome.This entry could have been shown as 2 or more items. The best practice is for the students to develop the habit of looking for appropriate groupings when presented with a question concerning Income & Expenditure Accounts.The exercises in this lesson provide the opportunity for practice. 8 With reference to the Income & Expenditure Account above, draw attention to use of the phrase surplus of income over expenditure. For Income & Expenditure Accounts, this phrase replaces the term net profit found in Profit & Loss Accounts. If expenditure exceeds income, the phrase to use is deficit, excess of expenditure over income, not net loss. 9 Copy and hand out or show exercise T/24.1 in the Appendix (page 307) on the overhead projector. Ask the students to work through the exercise.
Step 3
Aim: to be able to present subsidiary income and expense information suitably and effectively 1 The presentation of subsidiary income and expense information has been referred to in Step 2. Explain that this can be taken a stage further by using a separate account to deal specifically with a club or societys trading activities. The examination might require a separate Trading Account to carry the trading activities. The Trading Account should reach a profit or loss on trading which is then transferred to the Income & Expenditure Account.A common and major mistake made by candidates is to fail to carry the trading profit or loss into the Income & Expenditure Account or else to repeat the items already included in the Trading Account in the Income & Expenditure Account. Set out the correct sequence of the effect of trading and other activities:
Trading Account Trading expenditure Profit on trading c/d Trading income X1 Income & Expenditure Account Various expenditure items Surplus of income over expenditure Profit on trading b/d X3 X2
2 Copy and hand out or show exercise T/24.2* in the Appendix (page 308) on the overhead projector.Work through the exercise with the students. Stress that with T/24.2 capital expenditure items are not included in the account.
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The item subscriptions might involve making a number of adjustments.This situation occurs in exercise T/24.3* in the Appendix (page 310), which also involves the preparation of a separate Trading Account.Ask the students to work through the exercise. Note Advise the students to follow the requirements of the question closely. A separate Trading Account should be provided in an examination answer only if it is specifically required. Some candidates prepare one when it is not required and forfeit marks by preparing it incorrectly.
Step 4
Aim: to be able to calculate the accumulated fund of a club or society 1 Explain that instead of a Capital Account, a non-profit-making organization has an accumulated fund. Like a Capital Account, the fund represents the difference between assets and liabilities.Therefore,
assets = capital + liabilities
is replaced by
assets = accumulated fund + liabilities
2 Illustrate how to calculate an accumulated fund by showing the following example on the board or overhead projector. Example The following receipts and payments account has been prepared for the Bloxmore Travel Group for the year ended 31 December Year 5:
Receipts Balance at bank Cash in hand Subscriptions for Year 5 Interest on bank account Subscriptions for Year 6 1,020 48 2,760 32 75 Payments Refreshments 182 Rent of room 1,680 Travelling expenses 64 Postage, printing and stationery 53 Expenses for guest speakers 810 Hire of films 78 Cash in hand 82 Balance at bank 986 3,935
3,935
Additional information:
31 December Year 4 40 18 31 December Year 5 60 50 15
Subscriptions in arrears Rent accrued due Stock of stationery
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The calculation of the accumulated fund at 1 January Year 5 is as follows:

Balance at bank Cash in hand Stock of stationery less Rent accrued 1,020 48 18 1,086 40 1,046
3 Ask the students to prepare the Income & Expenditure Account for Bloxmore Travel Group in vertical format for the year ended 31 December Year 5. This Income & Expenditure Account is shown below.
Bloxmore Travel Group Income & Expenditure Account for the year ended 31 December Year 5 Income Subscriptions add accrued due Year 5 Interest on bank account 2,760 60 2,820 32 2,852
less Expenditure Refreshments 182 Rent of room (1,680 - 40 + 50) 1,690 Travelling expenses 64 Postage, printing and stationery (53 + 18 - 15) 56 Expenses for guest speakers 810 Hire of films 78 Excess of expenditure over income (deficit)
2,880 (28)
Step 5
Aim: to be able to present a balance sheet of a club or society 1 As a straightforward example, work through the balance sheet for Bloxmore Travel Group (overleaf) with the students. Carefully explain each item.
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Bloxmore Travel Group Balance sheet at 31 December Year 5 Current assets Stock of stationery Subscriptions accrued due Bank balance Cash in hand less Amounts due within 1 year Rent accrued due Subscriptions received for Year 6 15 60 986 82
1,143
50 75
125 1,018
Accumulated fund Balance at 1 Jan Yr 5 less Deficit for Yr 5
1,046 28 1,018
2 Refer the students to the example in Step 2 (pages 1912). The items not yet marked off should be brought into the balance sheet for Tattenham Sports Club at 31 December Year 4.The balance sheet is presented below in vertical format.
Tattenham Sports Club Balance sheet at 31 December Year 4 Cost 6,300 2,200 8,500 Accumulated depreciation 3,660 1,075 4,735 360 80 1,860 2,300 400 280 Net book value 2,640 1,125 3,765
Fixed Assets Sports equipment Video equipment Current Assets Subscriptions accrued due Prepaid insurance Bank less Amounts due within 1 year Rent Subscriptions in advance
680 1,620 5,385
Financed by: Accumulated fund add Surplus of income over expenditure
4,430 955 5,385
3 Refer the students back to exercise T/24.1 and ask them to prepare the balance sheet of the Southern Jazz Club.
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Step 6
Aim: to be able to record correctly amounts received by a club or society through donations Explain that a donation is a gift of money to an organization.There are two ways in which a donation can be recorded in the books of account: (a) as income in the Income & Expenditure Account; (b) by adding the amount to the accumulated fund in the balance sheet, ie capitalizing it. If the amount is small it is more likely, that method (a) will be used. Note In any examination question involving a donation, the candidates will be told if it is to be capitalized. If there is no specific instruction, the amount should be placed to the credit of Income & Expenditure Account.
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Lesson 25: The presentation of answers

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

Year 1 A B C Year 2 Year 3
A question might specify this layout. If so, an answer should keep to the instructions and not show something totally different, as may sometimes be the case. 5 Workings Workings should be clearly shown. They should not be unnecessarily complicated. Thus, if an adjustment is made to the figure of rent payable in the Profit & Loss Account, it is sufficient to show the adjustment as follows:
Rent payable (16,000 - 2,400) 13,600
The examiner can spot the working straightaway instead of having to search it out at a more distant point. If, however, the adjustment of an item has to be more complicated, workings (W1 W2 and so on) should be shown underneath the main account but keyed to it, eg:
Profit & Loss Account W1 Rent & rates Various other entries 12,130 X X X X Net profit X X W1 X X X X X Gross profit b/d X
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The presentation of answers
6 Spacing The spacing of examination answers often leaves much to be desired. Sometimes work is crammed together within the first 3 or so pages of the answer book and becomes difficult to read. Sensible spacing comes with practice and some guidance. Where work is cancelled, it should be struck through with a bold diagonal line. If part of the answer is shown later on in the answer book, the earlier stage of the answer should clearly signal the fact. Work often lacks legibility because candidates use too light a shade of ink. Dark blue or black inks are strongly recommended. Pencil should never be used to write answers to questions in this examination.
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Appendix 1: Exercises, some worked solutions, and support material

T/1.1
State the effect on a balance sheet of each of the following transactions, in each case stating which assets and/or liabilities are affected. (1) Purchase of goods by cheque 350. (2) Sale of goods for cash 290. (3) Purchase of office furniture from D Jackson on credit 318. (4) Repayment by cheque of 1,500, previously borrowed from T Walls. (5) The receipt of a cheque for 965 from a debtor, F Wiles. (6) Purchase of postage stamps for 11 in cash. (7) Payment by cheque of 617, due to T Gates, creditor.
T/1.2
State the effect on a balance sheet of selling a computer for 3,600: (i) if the purchaser paid by cheque; (ii) if it were sold on credit; (iii) if 2,000 were paid by cheque on account and if the remainder were on credit.
T/1.3
Draw up A Grants complete balance sheet from the following incomplete data at 31 March Year 4, including any missing items:
Creditors Goods Debtors Cash at bank Loan from J Tesco Motor vehicle Office equipment Fixtures and fittings 3,970 5,160 4,250 2,380 3,500 5,600 3,400 2,870
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Appendix 1: Exercises
T/1.4
Enter the following transactions into the accounts of K Morgan:
Year 8 1 Aug 3 Aug 7 Aug 12 Aug 16 Aug 19 Aug 25 Aug 28 Aug 30 Aug Started business with 15,000 in cash Transferred 14,200 of the cash into a newly opened business bank account Bought goods on credit from B Fury for 760 Bought office furniture, for 390, paid by cheque Sold for cash 125-worth of goods that had cost the same amount Purchased a lease on premises, for 8,200 paid by cheque Bought stationery for 27 in cash Paid B Fury the amount owing Received from N Lawson a cheque for 2,000, as a loan to the business
T/1.5
R Lines has the following items in his balance sheet on 31 October Year 3:
Cash at bank Debtors Goods Creditors Motor vehicle Office equipment Fixtures and fittings Loan from T Clasp 1,615 3,740 4,850 2,860 6,400 4,100 2,200 4,000
During November Year 3, R Lines:

banked cheques received from debtors, amounting to 2,900; paid creditors 2,060 by cheque; bought goods on credit for 1,300; sold on credit goods that had cost 1,450 for the same amount.
Required Prepare the balance sheet of R Lines at: (i) 31 October Year 3 (ii) 30 November Year 3.
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T/2.1
Beside each of the details in the table, state: (i) the name of the account to be debited; (ii) the name of the account to be credited.
Account debited (1) Bought goods on credit from T Ball (2) Sold goods for cash (3) Weighing equipment for use in the business bought by cheque (4) Returned some of the goods previously bought from T Ball (5) Sold goods on credit to D Trill (6) Some furniture for use in the business bought on credit from T Doyle Account credited
T/2.2
Beside each of the details in the table, state: (i) the name of the account to be debited; (ii) the name of the account to be credited.
Account debited (1) (2) (3) (4) (5) (6) Sold goods on credit to A Darby A Brittle, debtor, returns goods A Darby pays his account by cheque Goods are returned to T Zuck, creditor The account of F Lane, a creditor, is paid by cheque A Darby returns some of the goods previously sold to him Account credited
T/2.3
You are required to enter the transactions of B Lancaster in the appropriate accounts.
Year 9 2 Jan 5 Jan 9 Jan 13 Jan 16 Jan 22 Jan 25 Jan 27 Jan 30 Jan Commenced business with 15,000 in the bank Bought goods from T Minott on credit for 620 Bought office equipment by cheque for 940 Sold goods to R Lake on credit for 370 R Lake returned goods worth 80 Sent cheque for 350 to T Minott on account Returned goods worth 120, to T Minott Sold goods for 90 in cash Purchased goods from T Marner on credit for 430
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T/2.4
You are required to enter the transactions of R Quarnby in the appropriate accounts.
Year 5 3 Sep 6 Sep 8 Sep 11 Sep 13 Sep 17 Sep 20 Sep 24 Sep 27 Sep 29 Sep Bought goods from A Little on credit for 846 Sold goods for 73 in cash Bought motor vehicle by cheque for 4,300 Sold goods to H Keen on credit for 380 H Keen returned goods worth 83 Returned goods to A Little worth 143 Received cheque for 60 from H Keen on account Bought office furniture by cheque for 365 Sent cheque to A Little in settlement of account Sold goods to J Strong on credit for 412
T/3.1
In the column beside each of the details in the table, state which account is to be debited and which account is to be credited.
Account debited (1) (2) (3) (4) (5) (6) Bought goods for cash Paid creditor the amount owing by cheque Bought office equipment on credit from Office Services Ltd Paid rent in cash Sold goods for cash F Tracey, debtor, paid her account by cheque Account credited
T/3.2
In the column beside each of the details in the table, state which account is to be debited and which account is to be credited.
Account debited (1) (2) (3) (4) (5) (6) (7) Received cheque from T Ward as a loan Sold goods on credit to J King Paid telephone account by cheque Sold office furniture for cash Paid insurance by cheque Bought goods on credit from R Veal A customer, B Trent, returned goods Account credited
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T/3.3
Record the following in accounts:
Year 5 1 Jul 3 Jul 7 Jul 9 Jul 11 Jul 12 Jul 14 Jul 16 Jul 19 Jul 20 Jul 22 Jul 25 26 28 30 31 Jul Jul Jul Jul Jul Jen Ling started in business with 17,000 in a new bank account Purchased goods from K Merrit on credit for 620 Returned goods to K Merrit worth 45 Paid rent by cheque for 310 Drew 130 from bank for office cash Bought office furniture by cheque for 420 Sold goods to T Larkspur on credit for 560 T Larkspur returned goods worth 65 Purchased stationery for 34 in cash Sold goods for 370, paid by cheque Bought a computer for use in the business for 3,500 from Comtec Ltd, 1,000 of which was paid by cheque, with the remainder on credit. Drew from bank 360 in cash for office Paid wages in cash, 330 Sold goods to T Larkspur for 850 on credit Received cheque from T Larkspur for the amount owing on 17 July Year 5 Paid insurance by cheque for 270
T/3.4
Record the following in accounts:
Year 3 1 Oct 2 Oct 4 Oct 7 Oct 9 Oct Choi Wing started in business with 21,000 in cash Paid 19,000 cash into a newly opened business bank account Purchased goods from N Tucker on credit for 850 Bought office furniture by cheque for 930 Bought a fax machine for use in the business for 2,500 from Oftech Ltd, 1,000 of which was paid by cheque with the remainder of the account on credit Returned goods worth 70 to N Tucker Paid wages in cash, 150 Sold goods to K Francis on credit for 590 Paid insurance by cheque for 280 Choi Wing drew 350 from bank for private use Purchased stationery for 210 in cash K Francis returned goods worth 80 Bought goods from B Minott on credit for 380 Sold to A Jenkins some office furniture bought for 200 on 7 October: received a cheque for 30, with the balance of 170 on credit Sent cheque to N Tucker to settle the account Paid wages in cash, 180 Received cheque from K Francis in settlement of the amount owing Choi Wing drew 430 from bank for private use Sold goods on credit to R Flinn for 360
10 12 13 14 16 18 20 21 22 24 26 28 30 31
Oct Oct Oct Oct Oct Oct Oct Oct Oct Oct Oct Oct Oct Oct
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T/4.1
(a) Balance the following account:
Ching Wong Year 4 6 May Returns outwards 80 Year 4 2 May Purchases 9 May Purchases 17 May Purchases 730 315 250
(b) How would you describe the balance you have just entered?
T/4.2
Enter the following into debtor and creditor accounts only. Balance each account at 31 October Year 3 and bring down the balances.
Year 3 2 Oct 6 Oct 9 Oct 12 Oct 15 Oct 18 Oct 20 Oct 21 Oct 23 Oct 26 Oct 27 Oct 29 Oct Bought goods from F Swain on credit for 480 Sold goods to N Knight on credit for 215 Returned goods to F Swain that had cost 62 Bought goods from A Hinter on credit for 390 N Knight returned goods which she had bought on 6 October for 45 Returned goods to A Minter that had cost 65 Received cheque for 80 from N Knight in part payment Sold goods to W Mull on credit for 535 Sent cheque for 418 to F Swain W Mull returned goods that he had bought on 21 October for 90 Sold goods to N Knight on credit for 383 Received cheque for 70 on account from W Mull
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T/4.3
This bank account is an example of running balance format.
Bank account Year 7 1 Mar 4 Mar 7 Mar 11 Mar 14 Mar 18 Mar 20 Mar 23 Mar 25 Mar 26 Mar 28 Mar 30 Mar 31 Mar Debit Balance Insurance Sales Drawings Purchases Wages Sales Machine repairs L Logan Wages Sales Rent Balance Credit 300 740 200 450 300 860 700 570 380 920 450 Balance 1,316 1,016 1,756 1,556 1,106 806 1,666 966 1,536 1,156 2,076 1,626 1,626
Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr
Note The above is not a representation of statements issued by banks to their customers. It is of an account drawn up and maintained by the customer.
T/4.4
The following transactions are to be entered in (two-sided) accounts:
Year 5 1 Apr 2 Apr 5 Apr 9 Apr 12 Apr 14 Apr 16 Apr 18 Apr 21 Apr 24 Apr 25 Apr 28 Apr 30 Apr Chan Lee commenced business with 12,000 in cash Transferred 11,000 in cash into a bank account Purchased goods from D Styles on credit for 830 Bought office furniture for 250 in cash Sold goods to S Wick on credit for 570 Returned goods worth 75 to D Styles Paid rent by cheque for 350 Purchased office stationery for 30 in cash Chan Lee made drawings in cash for 140 Paid insurance by cheque for 170 Sold goods to S Wick on credit for 490 Purchased goods from D Styles on credit for 560 Sent cheque to D Styles for 755
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T/4.5
Against each of the listed items, tick ( ) either the debit column or the credit column according to which side of the trial balance you would expect the item to appear.
Debit Office equipment Creditors Insurance Cash Rent payable Debtors Sales Rent receivable Drawings Motor vehicle Loan from F Lang Capital Wages Premises Credit
T/4.6
On 30 June Year 4, D Lamb had the following account balances:
Debtors Creditors Rent Motor vehicle Loan from A Green General expenses Purchases Sales Cash at bank Wages Drawings Fixtures and fittings Capital 2,530 3,670 1,400 5,300 2,500 1,040 3,650 5,980 7,900 2,740 420 6,800 19,630
Required Prepare the trial balance of D Lamb at 30 June Year 4.
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T/5.1*
(a) The following details relate to K Fox for the year ended 30 September Year 3:
Sales Cost of goods sold Running expenses 15,800 8,500 4,300
Required A statement relating to K Fox showing the following for the year ended 30 September Year 3: (i) gross profit (ii) total net profit. (b) The following information is available relating to R Lott in respect of the year ended 31 December Year 2:
Sales Income from other than trading Cost of goods sold Running expenses 26,900 1,200 9,300 12,400
Required Prepare a statement relating to R Lott showing the following for the year ended 31 December Year 2: (i) gross profit (ii) total net profit.
T/5.1/A
(a)
K Fox Income and profit for the year ended 30 September Year 3 Sales less Cost of goods sold Gross profit less Running expenses Net profit 15,800 8,500
7,300 4,300 3,000
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(b)
R Lott Income and profit for the year ended 31 December Year 2 Sales less Cost of goods sold Gross profit add Non-trading income less Running expenses (Total) Net profit 26,900 9,300
17,600 1,200 18,800 12,400 6,400
Note The above are statements not accounts.
T/5.2
T Avis Trial balance at 31 December Year 5 Dr 5,160 750 910 700 360 420 450 800 1,600 1,040 50 800 11,680 4,000 11,680 Cr 6,320
Purchases Sales Debtors Creditors Rent payable Office expenses Lighting and heating Rent receivable Fixtures and fittings Motor vehicle Cash at bank Cash in office Drawings Capital
Note It is assumed that T Avis started in business on 1 January Year 5 by placing 4,000 in a business bank account.Therefore, there is no opening stock. Stock at 31 December Year 5 was valued at cost at 2,100.This figure is due to be brought into the accounts of TAvis after the agreement of the trial balance.
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T/5.3
At the end of her first years trading, Shui Ling drafted the following trial balance.You are required to draw up a Trading and Profit & Loss Account for the year ended 31 December Year 4.
Shui Ling Trial balance at 31 December Year 4 Dr 19,800 3,960 7,510 3,680 2,100 3,700 12,400 390 5,400 520 3,800 4,300 65,460 31,000 65,460 Cr 32,360
Purchases Sales Cash at bank Wages Debtors Creditors Rent Motor vehicles Insurance Office equipment General expenses Fixtures and fittings Drawings Capital
Shui Ling valued her stock at 31 December Year 4 at cost at 4,650. Note A balance sheet is not required.
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T/5.4
The following is the trial balance of Fred Trotter after his first years trading. You are required to draw up a Trading and Profit & Loss Account for the year ended 30 June Year 8.
Fred Trotter Trial balance at 30 June Year 8 Dr 2,080 2,600 9,200 3,100 36,440 15,100 59,400 3,600 1,620 38,500 4,300 570 390 117,500 53,000 117,500 Cr
Cash at bank and in office Rent Motor vehicles Debtors Creditors Purchases Wages Sales Fixtures and fittings Sundry expenses Premises Drawings Lighting and heating Insurance Capital
5,100
Stock at 30 June Year 8 was valued at 4,220. Note A balance sheet is not required.
T/6.1*
From the following details you are required to draw up a complete balance sheet for Sai Yoon at 31 October Year 7, including any item that you believe to be missing.The balance sheet should be in the correct format.
Loan from T Gaul, repayable 31 December Year 9, 4,000 Stock 3,980 Premises 42,000 Bank 3,130 Motor vehicle 7,100 Cash 110 Creditors 7,120 Debtors 7,800 Fixtures and fittings 2,750
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T/6.1/A
Sai Yoon Balance sheet at 31 October Year 7 Fixed Assets Premises Fixtures and fittings Motor vehicle Capital 42,000 2,750 7,100 51,850 Amount due in more than 1 year Loan: T Gaul, repayable 31 Dec Yr 9 Amount due within 1 year Creditors 55,750
4,000 7,120
Current Assets Stock Debtors Bank Cash
3,980 7,800 3,130 110
15,020 66,870
66,870
T/6.2*
With reference to the data in T/5.3 and the answer to it, draw up a balance sheet for Shui Ling at 31 December Year 4.
T/6.2/A
Shui Ling Balance sheet at 31 December Year 4 Fixed Assets Fixtures and fittings Office equipment Motor vehicles 3,800 5,400 12,400 21,600 Capital Commencing balance add Net profit 5,090 less Drawings 4,300 31,000 790 31,790
Current Assets Stock Debtors Bank 4,650 3,680 3,960 Amount due within 1 year Creditors
12,290 33,890
2,100 33,890
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T/6.3*
By reference to the data of T/5.4 and the answer to it, draw up a balance sheet for Fred Trotter at 30 June Year 8.
T/6.3/A
Fred Trotter Balance sheet at 30 June Year 8 Fixed Assets Premises Fixtures and fittings Motor vehicles 38,500 3,600 9,200 51,300 Capital Balance at 1 Jul Yr 7 add Net profit less Drawings 53,000 6,900 4,300 2,600 55,600
Current Assets Stock Debtors Bank 4,220 3,100 2,080 Amount due within 1 year Creditors
9,400 60,700
5,100 60,700
T/6.4*
(a) The ledger of Alison Sharpe includes the following balances at 30 September Year 4:
Debtors Motor vehicle Stock Cash at bank Cash in office Creditors Loan from T Wylie, repayable 30 Jun Yr 7 Fixtures and fittings 3,640 2,100 4,080 1,970 60 2,940 2,000 980
Required Prepare a balance sheet for Alison Sharpe at 30 September Year 4, complete with the balance of capital, which has not been shown above. (b) On 1 October Year 4, Alison Sharpe purchased another motor vehicle for business use for 2,600. She paid T Rolt 400 by cheque and the remainder of the amount was on credit.
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Page 215
Required (i) In ledger accounts, record the entries for the transaction. (ii) State which one of the following effects this transaction will have: (1) (2) (3) (4) (5) an increase of current assets by 2,600 a decrease of current assets by 2,600 a decrease of current assets by 400 no effect on current assets an increase of current assets by 2,200.
T/6.4/A
(a)
Alison Sharpe Balance sheet at 30 September Year 4 Fixed Assets Fixtures and fittings Motor vehicle Capital 980 2,100 Amount due in more than 1 year Loan T Wylie (repayable 30 Jun Yr 7) 7,890
2,000
3,080 Current Assets Stock 4,080 Debtors 3,640 Bank 1,970 Cash 60
Amount due within 1 year Creditors 9,750 12,830 Motor Vehicle
2,940
12,830
(b) (i)
Year 4 1 Oct 1 Oct Balance Bank and T Rolt
2,100 2,600 Bank
Year 4 1 Oct
Balance
1,970 T Rolt
Year 4 1 Oct
Motor vehicle 400
Year 4 1 Oct
Motor vehicle
2,200
(ii) Answer = (3) a decrease of current assets by 400
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T/7.1
Prepare a Trading and Profit & Loss Account for Lui Man for the year ended 31 December Year 6 from the following details:
Purchases Sales Returns outwards Returns inwards Carriage inwards Carriage outwards Wages General expenses Stock at 31 Dec Yr 6 15,460 31,970 840 1,250 860 1,030 8,460 1,270 2,790
Note Year 6 was Lui Mans first year of trading.
T/7.2
T Avis Trial balance at 31 December Year 6 Dr 9,260 430 1,170 1,750 1,100 590 610 450 480 340 380 900 1,600 1,230 70 2,100 1,100 21,020 5,430 21,020 Cr 13,050
Purchases Sales Carriage inwards Debtors Creditors Rent payable Office expenses Lighting and heating Rent receivable Returns inwards Returns outwards Carriage outwards Fixtures and fittings Motor vehicle Cash at bank Cash in office Stock at 1 Jan Yr 6 Drawings Capital
Stock at 31 December Year 6 was valued at 2,450.
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T/7.3
Using the following information, draw up a Trading and Profit & Loss Account for Chea Yee for the year ended 31 May Year 4:
Stock at 31 May Yr 3 Purchases Sales Returns outwards Returns inwards Carriage outwards Wages Sundry expenses Stock at 31 May Year 4 27,380 143,700 231,600 980 1,540 4,950 53,200 3,860 25,300
T/7.4
From the following information, draw up a Trading and Profit & Loss Account for G Crumb for the year ended 31 October Year 7:
Sales Returns outwards Stock at 31 Oct Yr 6 Rent payable Carriage outwards Purchases Returns inwards Rent receivable Wages Lighting and heating Carriage inwards Office expenses Stock at 31 Oct Yr 7 68,890 570 7,640 2,800 760 49,620 980 1,200 8,030 540 1,010 390 7,960
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T/7.5: The end-of-year procedure

Purchases Sales Returns outwards Returns inwards Opening stock Closing stock
Trading Account
Gross profit to Profit & Loss Account
Expense accounts Other income accounts
Profit & Loss Account
Net profit to Capital Account
Drawings Account
Capital Account
Cash/bank account(s) Debtor/creditor accounts Asset accounts
Balanced, ie balances c/d on each account
Balance sheet
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T/7.6
From the following trial balance of T Brackwell, prepare a Trading and Profit & Loss Account for the year ended 31 July Year 8, together with a balance sheet at that date.
T Brackwell Trial balance at 31 July Year 8 Dr 177,500 13,200 3,900 5,750 4,500 53,650 4,300 5,100 24,960 29,500 1,340 194 110,000 16,394 26,000 23,000 11,200 462,344 157,400 462,344 Cr 256,800
Purchases Sales Stock at 1 Aug Yr 7 Returns inwards Returns outwards Rent payable Wages Lighting and heating Sundry expenses Debtors Equipment Bank Cash Premises Creditors Loan from T Royal, repayable 31 Jul Yr 13 Motor vehicles Drawings Capital
Stock at 31 July Year 8 was valued at 14,400.
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T/8.1*
Philip Wilshaw, a sole trader, uses the following accounts in his books: Fixtures and fittings Rent Motor vans Light and heat J Symes, a creditor Purchases Sales Stock T P Stanley, a debtor Bank Capital Drawings Required Set out the following headings:
Account Type of account To be found in the following ledger
List under the heading Account each of the accounts given above, fill in the column Type of account and, in the last column, state the ledger in which you would find the account.
T/8.1/A
Account Fixtures and fittings Rent Motor vans Light and heat J Symes, a creditor Purchases Sales Stock T P Stanley, a debtor Bank Capital Drawings Type of account Real Nominal Real Nominal Personal Nominal Nominal Real Personal Real Personal Personal To be found in the following ledger General (or Nominal) General (or Nominal) General (or Nominal) General (or Nominal) Purchases (or Bought) General (or Nominal) General (or Nominal) General (or Nominal) Sales (or Debtors) Cash Book Private or General Private or General
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T/8.2*
Division of the ledger Sales Ledger Purchases Ledger General Ledger Private Ledger (A) Type of account (B) Name of account
Required (a) In column (A), state the type of accounts you would expect to find in each division of the ledger. (b) In column (B), against the General Ledger and Private Ledger, name 3 accounts that might be included.
T/8.2/A
Division of the ledger Sales Ledger Purchases Ledger General Ledger Private Ledger (A) Type of account Personal/customers (or debtors) Personal/suppliers (or creditors) Impersonal: nominal or real Personal (private) (B) Name of account
Wages, sales, rent receivable, etc Capital Drawings Trading and Profit & Loss
T/8.3*
(a) Set out the following table. In the right-hand column, enter the name of the ledger in which each of the accounts is recorded.
Name of account (1) (2) (3) (4) (5) (6) (7) Drawings T Lucan, creditor Trading Rent receivable Fixtures and fittings Wages Capital Name of ledger
(b) Suggest 3 ways in which the Sales Ledger might be subdivided.
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T/8.3/A
(a)
Name of account (1) (2) (3) (4) (5) (6) (7) Drawings T Lucan, creditor Trading Rent receivable Fixtures and fittings Wages Capital Name of ledger Private or General Purchases (or Bought) Private or General General (or Nominal) General (or Nominal) General (or Nominal) Private or General
(b) Answers to ways of subdividing the Sales Ledger might include:

alphabetically, eg by customer names; numerically, in which customers are numbered individually, then grouped; geographically, ie by sales areas; on a product basis, ie according to product categories; by type of customer, eg trade as opposed to private customers.
T/8.4
T Avis Balance sheet at 31 December Year 6 Fixed Assets Fixtures and fittings Motor vehicle Current Assets Stock Debtors Bank Cash less Amounts due within 1 year Creditors Net current assets Financed by: Capital balance at 1 Jan Yr 6 add Net profit less Drawings 5,430 1,340 1,100 240 5,670 900 1,600 2,500 2,450 1,170 1,230 70 4,920 1,750 3,170 5,670
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T/8.5*
From the following trial balance of J Penarth, prepare: (i) a Trading and Profit & Loss Account for the year ended 30 April Year 8; (ii) a balance sheet, in vertical format, at 30 April Year 8.
J Penarth Trial balance at 30 April Year 8 Dr 154,300 48,000 39,650 7,200 615 20,000 32,290 18,160 22,400 915 6,670 265 1,430 475 6,400 3,510 16,500 339,190 87,000 339,190 Cr 212,600
Purchases Sales Premises Stock at 1 May Yr 7 Rent Returns inwards Loan from R Jenks, repayable Yr 12 Debtors Creditors Wages and salaries Carriage inwards Cash at bank Cash in office Returns outwards Insurance Fixtures and fittings Carriage outwards Drawings Capital
Stock at 30 April Year 8 was valued at 41,080.
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T/8.5/A
(i)
J Penarth Trading and Profit & Loss Account For the year ended 30 April Year 8 Stock at 1 May Yr 7 Purchases add Carriage inwards 154,300 915 155,215 1,430 153,785 193,435 41,080 152,355 59,630 211,985 7,200 22,400 475 3,510 26,045 59,630 Gross profit b/d 39,650 Sales less Returns inwards 212,600 615 211,985
less Returns outwards less Stock at 30 Apr Yr 8 Cost of goods sold Gross profit c/d
211,985 59,630
Rent Wages and salaries Insurance Carriage outwards Net profit
59,630
(ii)
Balance sheet at 30 April Year 8 Fixed Assets Premises Fixtures and fittings Current Assets Stock Debtors Bank Cash less Amounts due within 1 year Creditors Net current assets less Amount due in more than 1 year Loan from R Jenks, repayable Yr 12 Financed by: Capital at 1 May Yr 7 add Net profit less Drawings 87,000 26,045 16,500 9,545 96,545 48,000 6,400 54,400 41,080 32,290 6,670 265 80,305 18,160 62,145 116,545 20,000 96,545
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Page 225
T/9.1: The journey of a drawn cheque

Year 4 7 May T Royle (drawer) cheque sent to P Sempster (payee) receives cheque T Royle credits bank account
P Sempster debits bank account pays cheque into account with
8 May
Derbyshire Bank Chester branch 9 May cheque sent to Derbyshire Bank clearance centre sent (with other cheques) to 10 May Albion Bank clearance centre Albion Bank York East branch charged against account of T Royle
10 May
11 May
The journey of a drawn cheque:

the cheque is drawn by T Royle (an account holder at Albion Bank,York East branch); the cheque is made payable to P Sempster (an account holder at Derbyshire Bank, Chester branch).
Note The delay in clearance will increase if P Sempster (the payee) were to delay paying the cheque into his account.
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T/9.2
Multiple choice questions (1) Which of the following are true of bank current accounts? (a) (b) (c) (d) The account must not be overdrawn. They provide the facilities for regular banking. The transfer of funds requires the use of a cheque. It may be shown in the books of the account holder as having a credit balance.
Choose the answer from the following: (a) and (b) (a) and (c) (b) and (c) (b) and (d) (2) Which of the following are true of the standing-order method of payment? (a) (b) (c) (d) It It It It is suited to payment of fixed amounts. requires the use of a cheque. can be cancelled by the payer. gives the payee freedom to draw upon the bank account of the debtor.
Choose the answer from the following: (a) and (b) (b) and (d) (a) and (c) (b) and (c) (3) Which of the following are not true of the direct-debit method of payment? (a) (b) (c) (d) It is unsuited to the payment of wages and salaries. Payments are always at pre-stated intervals. It is suited to the payment of gas bills. It is not intended for variable amounts.
Choose the answer from the following: (a) and (b) (a) and (c) (b) and (c) (b) and (d)
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Page 227
T/9.3*
Chandran Yin had the following balances on 1 October Year 9:
Cash 96 Bank 387 (Dr)
During October Year 9, she had the following transactions:

Year 9 3 Oct 5 Oct 8 Oct 13 Oct 20 Oct 23 Oct 27 Oct Purchased stationery for 27 in cash Received cheque from L Tarne for 312 Paid T Womble 95 by cheque Sales for 117 in cash Paid wages in cash, 87 Carriage outwards paid in cash, 32 Received cheque from T Lyle, 134
Required Enter the balances and transactions in the 2-column Cash Book of Chandran Yin and balance it at 31 October Year 9.
T/9.3/A
Chandran Yin CASH BOOK Year 9 1 Oct 5 Oct 13 Oct 27 Oct Cash 96 117 134 213 1 Nov Balances b/d 67 833 738 Bank 387 312 Year 9 3 Oct 8 Oct 20 Oct 27 Oct 31 Oct Cash 27 87 32 67 213 Bank 95
Balances b/d L Tarne Sales T Lyle
Stationery T Womble Wages Carriage outwards Balances c/d
738 833
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T/9.4*
Record the following in the 2-column Cash Book of W Towcester and balance the accounts at the end of the month:
Year 6 1 Apr 4 6 8 9 13 16 20 23 24 26 28 Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Balances brought forward: Cash Bank (Dr) 162 930 240 470 58 400 190 80 235 360 340 45 283
Paid rent by cheque Cash sales Purchased stationery for cash Banked some office cash Paid wages in cash Drew from bank for office cash Received cheque from N Vine Sales for cash Banked some office cash Paid for cleaning in cash Sent cheque to B Lines
T/9.4/A
W Towcester CASH BOOK Year 6 1 Apr 6 Apr 9 Apr 16 Apr 20 Apr 23 Apr 24 Apr Cash 162 470 80 235 360 340 Bank 930 400 Year 6 4 Apr 8 Apr 9 Apr 13 Apr 16 Apr 24 Apr 26 Apr 28 Apr 30 Apr Cash Rent Stationery Bank C Wages Cash C Bank C Cleaning B Lines Balances c/d 58 400 190 80 340 45 39 1,072 283 1,302 1,905 Bank 240
Balances b/d Sales Cash C Bank C N Vine Sales Cash C
1,072 1 May Balances b/d 39
1,905 1,302
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T/9.5*
Prepare a 2-column Cash Book from the following transactions. Balance the Cash Book at the end of the month.
Year 5 1 Nov 2 Nov 5 Nov 8 Nov 10 Nov 13 Nov 15 Nov 17 Nov 18 Nov 20 Nov 23 Nov 28 Nov 29 Nov F Swaine started in business with 12,000 in cash Placed 11,500 of cash in a newly opened business bank account Bought motor vehicle for 4,200, paid by cheque Sales for 860 in cash, which was banked the same day Paid wages in cash, 270 Bought goods by cheque for 1,040 Paid carriage in cash, 43 Withdrew 130 from bank for office cash Paid wages in cash, 290 Received cheque from T Dart for 315 Sales for 910 in cash, of which 700 was banked the same day F Swaine withdrew 150 in cash for private use Paid F Glubb 460 by cheque
T/9.5/A
F Swaine CASH BOOK Year 5 1 Nov 3 Nov 8 Nov 17 Nov 20 Nov 23 Nov Cash 12,000 Bank 11,500 860 130 210 315 700 Year 5 3 Nov 5 Nov 10 Nov 13 Nov 15 Nov 17 Nov 18 Nov 28 Nov 29 Nov 30 Nov Cash Bank 11,500 4,200 270 1,040 43 130 290 150 460 87 7,545 12,340 13,375
Capital Cash C Sales Bank C T Dart Sales
Bank C Motor vehicle Wages Purchases Carriage Cash C Wages Drawings F Glubb Balances c/d
12,340 1 Dec Balances b/d 87
13,375 7,545
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T/10.1
The following information relates to the business of J Mander:
Year 5 1 May Balances brought forward: Cash Bank (Dr) Debtors Creditors 93 1,040 440 350 280 300
A Croft R Vine T Dole W Kone
11 May R Vine settled his account by cheque after deducting a 2% cash discount 13 May Purchased stationery for 56 in cash 18 May Settled the account of T Dole by cheque number 136214, after deducting a 21/2% cash discount 21 May Paid insurance by cheque number 136215 for 190 24 May A Croft settled his account by cheque, after deducting a 21/2% cash discount 28 May Withdrew 80 from bank (cheque number 136216) for office cash 30 May Settled the account of W Kone by cheque number 136217, after deducting a 3% cash discount
Required Record these balances and transactions in the books of J Mander. Use a 3-column Cash Book, ie which includes discount columns. Balance the Cash Book at 31 May Year 5 and post the totals of the discount columns to the General Ledger.
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T/10.2
Thelma Cook keeps a 3-column Cash Book for her business. The following information refers to the month of March Year 6:
Year 6 1 Mar 2 Mar 3 Mar 5 Mar 8 Mar 9 Mar 11 Mar 13 Mar 16 Mar 18 Mar 20 Mar 22 Mar 25 Mar 26 Mar 27 Mar 29 Mar 30 Mar 31 Mar 31 Mar 31 Mar 31 Mar Balances of cash and bank were 106 and 3,214 (Dr) respectively Drew cheque number 10674, for rent of 250 Sales totalled 1,050, of which 950 was banked on the same day Paid cleaning expenses of 35 from cash Sales banked 1,680 Drew cheque number 10675, for purchases costing 1,200 Drew cheque number 10676 for 150, to replenish office cash Cash from sales totalling 1,800 was banked Paid postage of 50 from cash Drew cheque number 10677 for 168, to pay a telephone bill Paid 128 for stationery from cash Drew cheque number 10678 for 150, to replenish office cash Cash from sales totalling 2,108 was banked Paid office expenses of 70 from cash Drew cheque number 10679 for 2,000, to pay wages Income from sales totalled 2,200, of which 2,000 was banked on the same day Drew cheque number 10680 for 106, to pay a gas bill Drew cheque number 10681 for 855 payable to D Coyne, in settlement of a debt of 900 Drew cheque number 10682 for 494 payable to F Cox, in settlement of a debt of 520 Received cheque for 720 from S Britton, in settlement of an amount of 750 Received cheque for 1,160 from D F Pratt, in settlement of an amount of 1,210
Required Write up the 3-column Cash Book, bringing down the balances at 1 April Year 6.
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Page 232
T/10.3
On 1 November Year 4, the Cash Book of T Jackson, a sole trader, showed a debit balance of cash in hand of 34 and a credit balance on bank account of 287. Jackson prepared the Cash Book by entering the cheque-book counterfoils directly from the bank paying-in book and by entering from a record of movements of cash in the office. For the month of November Year 4, these showed respectively: (1) Bank paying-in book
7 12 19 24 29 Nov Nov Nov Nov Nov Cheque K Lawton Cash banked Cheque N West Cash banked Cash banked 153 425 373 420 360
(2) Cheque-book counterfoils

8 14 18 22 26 Nov Nov Nov Nov Nov B Thwaites Electricity account T Smith Telephone account C Lord 423 46 327 68 197
(3) Record of movements of cash

11 23 29 30 Nov Nov Nov Nov Cash sales Cash sales Cash sales Taken for personal use 460 440 510 140
All these transactions were entered by Jackson. He then received the bank statement, which showed the following additional items for November Year 4:
11 Nov 15 Nov 21 Nov 29 Nov Standing order payment: subscription to local trade association 25 T Drummond, a debtor of Jackson, settled his account by credit transfer 236 The account for servicing the heating system in Jacksons office was settled by direct debit 54 Jackson instructed the bank to pay monthly salary direct into an employees bank account 340
Required Prepare the cash and bank columns of Jacksons Cash Book for November Year 4, entering the information given in (1) to (3) above and balancing the cash and bank columns.Then record the additional items obtained from the bank statement, showing the final balance at the end of November. (LCCIEB)
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Page 233
T/10.4
Ket Rampalla owns a small catering business. On 1 May Year 11, there was a credit balance of 345 in the bank column of his Cash Book. During May Year 11, he paid the following cheques into his bank account:
Amount of cheque 242 83 156 95 Cash discount allowed 18 7
3 12 19 26
May May May May
Keston Services F Savage Quantell Ltd L Wright
He also paid the following amounts from cash sales into his bank account:
6 13 20 27 May May May May 585 614 603 526
He received the following remittances, which were paid directly into his bank account:
14 May 22 May From Westerns Ltd From Dugard & Wells 180 76
During the month, he drew the following cheques:

In favour of 5 11 15 21 28 May May May May May Malata Foods Kentish Supplies Ambrostic Dairies Kenton Electricals Malata Foods Amount of cheque 507 335 261 68 283 Cash discount received 25 8 14
In addition, the following took place:

(1) (2) (3) (4) 18 May 19 May 23 May 29 May Payment by direct debit to Wombles Linen Services Bank charges Payment by standing order of annual subscription to Caterers Association Bank interest charged 63 36 40 24
Required (a) Prepare the bank and discount columns of the Cash Book of Ket Rampalla for May Year 11, in date order, and balance the Cash Book at 31 May. (b) Open the ledger accounts and post the totals of the discount columns of the Cash Book. Include in your answer the name of the ledger in which the posting would be made.
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Page 234
T/11.1
From the following details, you are to: (a) enter the transactions in the Sales Day Book; (b) post the items to relevant accounts in the Sales Ledger; (c) record the transfer to the Sales Account in the General Ledger at the end of the month.
Year 6 2 5 12 18 23 29 Aug Aug Aug Aug Aug Aug Credit sales to F Dene T Marchant P Drummond T Marchant F Dene S Field Invoice no 3,516 3,517 3,518 3,519 3,520 3,521 258 312 406 194 425 538
T/11.2
From the following details, you are to: (a) enter the items in the Sales Day Book; (b) post the items to the relevant accounts in the Sales Ledger; (c) record the transfer to the Sales Account in the General Ledger at the end of the month.
Year 6 4 9 15 22 26 Sep Sep Sep Sep Sep Credit sales to J Burton W Thorne A Glenn J Burton W Thorne Invoice no 5,839 5,840 5,841 5,842 5,843 List price 320 460 240 580 360 Trade discount % 121/2 15 71/2 20 121/2
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Page 235
T/11.3
From the following details, you are required to: (a) enter the items in the Purchases Day Book; (b) post the items to the relevant accounts in the Purchases Ledger; (c) record the transfer to the Purchases Account in the General Ledger at the end of the month.
Year 8 3 8 12 17 24 29 Oct Oct Oct Oct Oct Oct Credit purchases from T Slocombe J Barnaby K Linden R Tredgarth J Barnaby T Slocombe Invoice no* B361 1634 958 A179 2583 B398 List price 190 370 240 420 860 320 Trade discount % 10 20 121/2 20 25 15
* The invoice numbers are those provided by each supplier.
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Page 236
T/11.4
The Cash Book balances of Rachel McLeod at 30 June Year 2 were:
Cash 100 Bank 850 (Dr)
In July Year 2, she had the following transactions:

Date Year 2 2 Jul 4 Jul 6 Jul 7 Jul 10 Jul 11 Jul 13 Jul 15 Jul 18 Jul 20 Jul 21 Jul 23 24 28 29 30 Jul Jul Jul Jul Jul Details Drew cheque number 554 for telephone expenses of 224 Paid sundry expenses in cash, 45 Cash sales of 750, 650 of which was paid into the bank Drew cheque number 555 for electricity, 145 Drew cheque number 556 for purchases, 650 Received cheque from J Royle for 880, in settlement of a debt of 900 Cash sales totalled 80 Drew cheque number 557, payable to N Henry for 480 to settle an account of 500 Cash sales totalled 440, 400 of which was paid into the bank Paid travelling expenses in cash, 12 Drew cheque number 558, payable to D Beckford for 240 to settle an account of 250 Drew cheque number 559 for insurance, 442 Received and banked cheque from G Halle for 360 in settlement of a debt of 370 Drew cheque number 560 for drawings of 400 Received and banked cheque from R Holden for 620 in settlement of a debt of 650 Cash sales totalling 950 were banked the same day
Required In Rachel McLeods Cash Book, enter the balances at 1 July Year 2 and the transactions for the month of July, bringing down the balances at 1 August Year 2. (LCCIEB)
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Page 237
T/12.1
From the following details, you are required to: (a) enter the transactions in: (i) the Sales Day Book (ii) the Returns Inwards Day Book; (b) post to the relevant accounts in the Sales Ledger; (c) show the transfers to the General Ledger.
Year 3 5 Dec 8 Dec 11 Dec 18 Dec 21 Dec 23 Dec 30 Dec Credit sales of 196 to S Preen Credit sales of 430 to M Quant Goods worth 38 returned by S Preen Credit sales of 287 to M Quant Goods worth 53 returned by M Quant Credit sales of 392 to R Robson Goods worth 61 returned by M Quant
T/12.2
From the following details, you are required to: (a) enter the transactions in: (i) the Purchases Day Book (ii) the Returns Outwards Day book; (b) post to the relevant accounts in the Purchases Ledger; (c) show the transfers to the General Ledger.
Year 6 3 May 7 May 12 May 19 May 24 May 28 May Credit purchases of 254 from L Squires Credit purchases of 385 from N Neale Goods worth 37 returned to L Squires Credit purchases of 138 from N Neale Goods worth 72 returned to N Neale Credit purchases of 364 from T Roberts
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Page 238
T/12.3
From the following details, you are required to: (a) enter the transactions in the Purchases, Sales, Returns Outwards and Returns Inwards Day Books; (b) post the items to the personal accounts in the Purchases and Sales Ledgers; and (c) record the transfer to appropriate accounts in the General Ledger at the end of October Year 6.
Year 6 3 Oct 5 8 11 15 17 19 21 24 Oct Oct Oct Oct Oct Oct Oct Oct Credit purchase from R Varney, at a list price of 480, subject to a trade discount of 121/2% Credit sale to K Petts at a list price of 420, subject to a trade discount of 15% Returned goods to R Varney with a list price of 64 Credit sale to J Beaver at a list price of 560, subject to a trade discount of 20% K Petts returned goods with a list price of 120 Credit purchase of 296 from T Langton J Beaver returned goods with a list price of 90 Credit sale to K Petts at a list price of 680, subject to a trade discount of 20% Credit purchase from R Varney at a list price of 320, subject to a trade discount of 15% Returned goods worth 37 to T Langton Returned to R Varney, goods bought on 24 October Year 6 at a list price of 40
27 Oct 30 Oct
Note The entry about the returns to R Varney on 8 October refers back to the purchase of 3 October, ie a discount rate of 12 1/2% must be applied to the returns. The entry concerning returns to R Varney on 30 October is related to the purchase on 24 October; therefore, a trade discount of 15% must be applied to the returns.
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Page 239
T/12.4
During the month of January Year 4, Lung Kwok had the following transactions:
5 Jan 7 Jan 12 Jan 17 Jan 18 Jan 22 Jan 22 Jan 23 Jan 25 Jan 30 Jan Bought goods on credit from T Brown with a list price of 720, subject to a trade discount of 25% Sold goods on credit to B Stevens for 340, subject to a cash discount of 5%, if paid within 10 days Bought goods from F Robins with a list price of 420, subject to a trade discount of 20% and a cash discount of 5%, if paid within 14 days Sold goods to J New for 580, subject to a trade discount of 25% and a cash discount of 3%, if paid within 10 days Paid cheque to F Robins, in full settlement, for goods bought on 12 January Received cheque from J New, in full settlement, for goods sold on 17 January Bought goods from P Harper with a list price of 840, subject to a 331/3% trade discount and a cash discount of 2 1/2%, if paid within 14 days Sold goods to K Burton for 660 less a trade discount of 15% and a cash discount of 5%, if paid within 10 days Paid cheque to T Brown, in full settlement, for goods bought on 5 January Received cheque from B Stevens, in full settlement, for goods bought on 7 January
Required (a) Enter the above transactions in Lung Kwoks Purchases Day Book, Sales Day Book and Purchases Returns Day Book and show the Cash Book entries. (b) Why do traders allow cash discount?
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Page 240
T/12.5
T Riggan is a sole trader and has a sports goods shop. She regularly purchases goods on credit. Each of her suppliers grants a trade discount of 5% if the value of a transaction exceeds 2,000. She made the following credit purchases in May Year 8:
Date 8 12 15 22 23 26 May May May May May May Supplier M Boyce B Jones C Smith S Morris M Boyce C Smith Gross purchases value 3,000 1,800 4,200 3,700 1,800 1,200
During May, Riggan had to return some of the goods to her suppliers.The returns were as follows:
Date 14 May 22 May 27 May * Supplier B Jones S Morris M Boyce* Gross purchases value 300 500 200
relating to goods purchased on 23 May
M Boyce also offers a 2% cash discount if Riggan pays the account by the end of the month. Riggan pays this account monthly to take advantage of the cash discount. Required (a) Prepare the Purchases Day Book for May. (b) Prepare the Purchases Account and the Purchases Returns Account for May, showing the transfer to the Trading Account. (c) Prepare the personal account of M Boyce for the month of May. Assume that there was a nil balance at the beginning of the month. (LCCIEB)
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Page 241
T/13.1*
On 1 January Year 4, the following were 3 of the account balances in E Parkers ledger:
Rent Insurance Advertising 230 Dr 65 Dr 110 Cr
During the year ended 31 December Year 4, he paid the following amounts by cheque:
31 28 31 31 31 30 Jan Feb May Aug Aug Sep Advertising Rent Rent Rent Insurance Rent 110 460 690 690 180 250
Additional information: (1) The monthly rent was increased to 250 from 1 October Year 4. (2) An advertising bill amounting to 85 had not been paid by 31 December Year 4. (3) The insurance premium paid on 31 August Year 4 covered the year ended 31 August Year 5. Required Prepare accounts in the ledger of E Parker for the year ended 31 December Year 4, for: (i) rent (ii) insurance (iii) advertising. Give particular attention to dates, and show, in each account, the transfer to the Profit & Loss Account for the year ended 31 December Year 4. (LCCIEB)
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Page 242
T/13.1/A
Rent Year 4 1 Jan 28 Feb 31 May 31 Aug 30 Sep 31 Dec Balance b/d Bank Bank Bank Bank Balance c/d 230 460 690 690 250 500 2,820 Year 4 31 Dec Profit & loss 2,820
2,820 Year 5 1 Jan Insurance Balance b/d 500
Year 4 1 Jan Balance b/d 31 Aug Bank Year 5 1 Jan
65 180 245 120
125 120 245
Balance b/d
Advertising Year 4 31 Jan Bank 31 Dec Balance c/d 110 85 195 Year 4 1 Jan Balance b/d 31 Dec Profit & loss Year 5 1 Jan 110 85 195 85
Balance b/d
242
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Page 243
T/13.2*
The following details are from the books of Melville & Co for the year ended 30 September Year 9:
Sales Purchases Stock at 1 Oct Yr 8 Stock at 30 Sep Yr 9 Wages and salaries Heating and lighting Rent and rates Motor-vehicle expenses Office expenses 279,300 118,650 20,470 17,320 83,540 2,530 9,860 11,940 3,970
In addition, at 30 September Year 9:

wages and salaries owing amount to 620 rent payable accrued due, 250 rates prepaid amount to 180 heating and lighting accrued due, 60 office stationery is in stock amounting to 380.
Required Prepare for Melville & Co a Trading and Profit & Loss Account for the year ended 30 September Year 9.
T/13.2/A
Melville & Co Trading and Profit & Loss Account for the year ended 30 September Year 9 Stock at 1 Oct Yr 8 Purchases less Stock at 30 Sep Yr 9 Cost of goods sold Gross profit Wages and salaries (+620) Heating and lighting (+60) Rent and rates (+250-180) Motor-vehicle expenses Office expenses (-380) Net profit 20,470 118,650 139,120 17,320 121,800 147,500 269,300 84,160 2,590 9,930 11,940 3,590 35,290 147,500 Sales 269,300
269,300 Gross profit b/d 147,500
147,500
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Page 244
T/13.3*
The following are details relating to N Tullochs Rent Payable Account:
Year 5 30 Jun 8 Sep 27 Nov Year 6 9 Apr Balance on the account of 300, representing 2 months rent paid in advance Paid 450 by cheque, being rent for the 3 months ended 30 November Year 5 Paid 720 by cheque, being rent for the 4 months ended 31 March Year 6
Paid 360 by cheque, being rent for the 2 months ended 31 May Year 6
Required Prepare for N Tulloch the Rent Payable Account for the year ended 30 June Year 6. Balance the account at the year end and show the transfer to the Profit & Loss Account.
T/13.3/A
N Tulloch Rent Payable Year 5 1 Jul Balance b/f 8 Sep Bank 27 Nov Bank Year 6 9 Apr 30 Jun 300 450 720 Year 6 30 Jun Profit & loss 2,010
Bank Balance c/d
360 180 2,010 1 Jul Balance b/d
2,010 180
The transfer to the Profit & Loss Account is calculated as:

5 months at 7 months at 150 = 750 180 = 1,260 2,010
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Page 245
T/13.4*
Tan Lian, a sole trader, had the following account balances on 1 January Year 5:
Insurance Office expenses Rent payable 70 Dr 160 Dr 240 Cr
During Year 5, the following payments were made by cheque:

Year 5 26 Jan 9 Feb 25 Feb 12 Apr 8 Jun 25 Aug 6 Nov 11 Dec Office expenses: purchase of stationery, 63 Rent for 4 months ended 31 March Year 5, 960 Insurance for 6 months ended 31 August Year 5, 210 Office expenses, 92 Rent for 4 months ended 31 July Year 5, 1,040 Insurance for 6 months ended 28 February Year 6, 240 Rent for 4 months ended 30 November Year 5, 1,040 Office expenses, 280
At 31 December Year 5, there was a stock of stationery valued at a cost of 90.There was no further increase in the monthly charge for rent in December Year 5. Required Open the 3 accounts listed above and enter the transactions that occurred in Year 5. Balance the accounts and make the appropriate transfers to the Profit & Loss Account for the year ended 31 December Year 5.
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Page 246
T/13.4/A
Tan Lian Insurance Year 5 1 Jan Balance b/d 25 Feb Bank 25 Aug Bank Year 6 1 Jan 70 210 240 520 80 Year 5 31 Dec Profit & loss 31 Dec Balance c/d 440 80 520 Check profit & loss transfer: JanFeb 2 months 70 35 per MarAug 6 months 210 month SepDec 4 months 160* 440

Balance b/d
* 40 per month
Office Expenses Year 5 1 Jan 26 Jan 12 Apr 11 Dec Year 6 1 Jan Balance b/d Bank Bank Bank 160 63 92 280 595 90 Rent Payable Year 5 9 Feb 8 Jun 6 Nov 31 Dec Bank Bank Bank Balance c/d 960 1,040 1,040 260 3,300 Year 5 1 Jan Balance b/d 31 Dec Profit & loss 240 3,060 Year 5 31 Dec Profit & loss 31 Dec Balance c/d 505 90
595
Balance b/d
3,300 Year 6 1 Jan
Balance b/d
260
3,060
246
Check profit & loss transfer: JanMar (960 3/4) 720 AprJuly 1,040 AugNov 1,040 Dec (1,040 1/4) 260
240 per month 260 per month
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Page 247
T/14.1
M Paine, a sole trader, is about to prepare his final accounts. As book-keeper, you need to adjust the figures shown in certain accounts. M Paines financial year ends on 31 December Year 5. At that date, certain accounts carry the following balances:
Rates Telephone Insurance Rent receivable Wages 1,960 215 760 3,840 45,630 (Dr) (Dr) (Dr) (Cr) (Dr)
You ascertain the following information relating to the accounts above. (1) Rates included in the Rates Account is a payment of 900 for the half-year to 31 March Year 6. (2) Telephone the amount accrued due, not yet paid to 31 December Year 5, is 47. (3) Insurance a premium of 720 paid for the year to 31 January Year 6 is included in the Insurance Account. (4) Rent receivable the tenant owes 160 for rent outstanding at 31 December Year 5. (5) Wages the amount accrued due at 31 December Year 5 was 840. Required (a) Open these accounts, enter the balances given, deal with the accrual or prepayment as necessary, and show the transfers to the Profit & Loss Account. (b) Show how any remaining balances on the above accounts would appear in the balance sheet of M Paine at 31 December Year 5. (LCCIEB)
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T/14.2
L Reinholdt is a theatrical agent whose accounting year ends on 31 December. He provides the following details for the year ended 31 December Year 10: (1) On 1 January, 3 months rent had been paid in advance 1,200. On 1 April, he paid 6 months rent in advance 2,400. On 1 October, he paid rent for the 6 months ending 31 March Year 11 2,700. (2) On 1 January, commission due to Reinholdt, and not yet received, amounted to 3,200. JanuaryDecember: commission received 64,300. At 31 December, commission due and not yet received in respect of Year 10 amounted to 4,700. (3) On 1 January, the estimated amount outstanding on the Telephone Account was 320. On 31 March, he paid the telephone bill in respect of the previous 6 months, 510. On 30 September, he paid the telephone bill in respect of the previous 6 months, 520. On 31 December, the estimated amount outstanding on the Telephone Account was 300. Required (a) Prepare the following accounts for Reinholdt for the year ended 31 December Year 10: (i) Rent Account (ii) Commission Receivable Account (iii) Telephone Account. (b) Prepare a balance sheet extract for Reinholdt at 31 December Year 10, showing how the 3 balances would appear. (LCCIEB)
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T/14.3*
At 1 January Year 8, L Johnston, a trader, owed 320 for rent, but her rates were prepaid by 110. During Year 8, she made the following payments by cheque:
Rent 2 Apr 28 Sep Rates 7 Apr 5 Oct 600 630
160 180
At 31 December Year 8 there was accrued rent of 350 and rates were prepaid by 120. Required Prepare L Johnstons combined Rent & Rates Account for Year 8, showing the transfer to the Profit & Loss Account and the account fully balanced.
T/14.3/A
In the books of L Johnston:
Rent & Rates Year 8 1 Jan 2 Apr 7 Apr 28 Sep 5 Oct 31 Dec Year 9 1 Jan Balance b/d (rates) Bank (rent) Bank (rates) Bank (rent) Bank (rates) Balance c/d (rent) 110 600 160 630 180 350 2,030 Year 8 1 Jan Balance b/d (rent) 31 Dec Profit & loss 320 1,590*
31 Dec Balance c/d (rates) Year 9 1 Jan
120 2,030 350
Balance b/d (rates)
Balance b/d (rent)
120
* rent 1,260 rates 330
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Page 250
T/14.4
The following information relates to some of the expense and income accounts of Jan Goldsmith for the year ended 31 December Year 5:
Insurance Paid by cheque Prepaid Prepaid Stationery Paid by cheque Stock Stock Owing to stationery suppliers Telephone Paid by cheque Paid by cheque Owing Owing Rent payable Paid by cheque Paid by cheque Owing Prepaid Rent receivable Received by cheque Received by cheque Owing Owing 23 Feb Yr 5 31 Dec Yr 4 31 Dec Yr 5 630 85 95
19 31 31 31
Mar Yr 5 Dec Yr 4 Dec Yr 5 Dec Yr 5
765 130 160 45
11 4 31 31
Jun Yr 5 Dec Yr 5 Dec Yr 4 Dec Yr 5
295 285 64 56
16 12 31 31
Feb Yr 5 Aug Yr 5 Dec Yr 4 Dec Yr 5
2,160 2,510 360 740
31 30 31 31
Mar Yr 5 Sep Yr 5 Dec Yr 4 Dec Yr 5
450 375 75 150
Required (a) Prepare the 5 ledger accounts, incorporating the information given above, for the year ended 31 December Year 5. In each account, show the transfer to the Profit & Loss Account and bring down the balance(s) at 1 January Year 6. (b) Show how the balances on the accounts would be displayed in Jan Goldsmiths balance sheet at 31 December Year 5.
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T/14.5
In the books of Frank Napier, a sole trader, the following account balances were brought forward on 1 July Year 4:
Advertising Insurance Office cleaning Rent receivable 260 40 260 350 (Cr) (Dr) (Cr) (Dr)
During the year ended 30 June Year 5, the following amounts were paid by cheque:
Year 4 25 Jul 1 Aug 5 Sep 24 Oct Year 5 26 Jan 1 Feb 8 Mar 21 Apr Office cleaning (3 months to 31 Jul Yr 4) Insurance premium (6 months to 31 Jan Yr 5) Advertising Office cleaning (3 months to 31 Oct Yr 4) 390 270 260 390
Office cleaning (3 months to 31 Jan Yr 5) Insurance premium (6 months to 31 Jul Yr 5) Advertising Office cleaning (3 months to 30 Apr Yr 5)
420 300 210 420
The following amounts were received by cheque during the year ended 30 June Year 5:
Year 4 17 Aug 3 Oct 15 Dec Year 5 12 Jan 3 Mar 19 May 700 350 380
Rent (1 May 31 Aug Yr 4) Rent (1 Sep 31 Oct Yr 4) Rent (1 Nov 31 Dec Yr 4)
Advertising (part refund) Rent (1 Jan 31 Mar Yr 5) Rent (1 Apr 31 Jul Yr 5)
40 570 760
Frank Napier was aware that, at the end of his financial year, 30 June Year 5, there was an outstanding advertising bill for 190 and 2 months payment outstanding on the office cleaning account, at 140 per month. Required (a) Open the following accounts: (i) (ii) (iii) (iv) Advertising Insurance Office Cleaning Rent Receivable.
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(b) Post the various items to the accounts. (c) Show the transfer entries to the Profit & Loss Account for the year ended 30 June Year 5. (d) Balance the accounts at 30 June Year 5. Note You are not required to show the Profit & Loss Account.
T/14.6
The following information is from the books of Enterprise Services in respect of the year ended 30 June Year 9:
Rent Receivable Year 8 1 Jul 1 Oct Year 9 1 Apr 3 months rent prepaid 8 months rent received by cheque 6 months rent received by cheque at revised rate of 2,960 per annum Rates Year 8 1 Jul 1 Oct Year 9 1 Apr 3 months rates prepaid Paid 6 months rates by cheque Paid 6 months rates by cheque Advertising Year 8 1 Jul 28 Aug Year 9 15 May Accrued due Paid by cheque Paid by cheque Printing and Stationery Year 8 1 Jul 14 Sep Year 9 12 Feb Stock of stationery Purchased stationery by cheque Paid printing account by cheque 3,400 850 420 370 1,250 2,100 780 1,680 1,680 630 1,260
1,480
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At 30 June Year 9: (1) Payments for advertising during the year included 580 for poster advertising that was due to be carried out in August Year 9. (2) The stock of stationery was valued at 3,100. There was also an unpaid invoice for 615 for printing. Required (a) Prepare the following accounts for the year ended 30 June Year 9, including transfers to the Profit & Loss Account and year-end balances. (i) (ii) (iii) (iv) Rent Receivable Rates Advertising Printing and Stationery
(b) Show, in the form of a balance sheet extract, how the balances on these accounts would appear at 30 June Year 9.
T/15.1
Jack Millard commenced business on 1 January Year 3 and on that date purchased a motor vehicle for 10,400. On 31 December Year 3, he wished to determine the depreciation expense for the year just completed. He is unsure whether to use the: (a) straight line method the vehicle would have a 3-year life with an estimated resale value of 4,100; (b) reducing balance method using a rate of 40% on cost. Required To help Jack Millard decide between the 2 methods, draw up and complete the following table:
Depreciation charge in Profit & Loss Account for the year ended 31 Dec Year 3 Method (a) (b)
Net book value at 31 Dec Year 3
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T/15.2
Charles Day started a business on 1 January Year 4. On that date, he purchased by cheque a motor van costing 9,600 from Greenaway Motors Ltd. He decided to depreciate this asset, using the rate of 40% per annum on the reducing balance method. He also purchased, on the same day, on credit, fixtures and fittings costing 15,000 from P J Shop Fitters Ltd. He decided to depreciate these fixtures and fittings using the straight line method. He estimated that they would have a useful life of 15 years, and would have a scrap value of 2,100. He kept the asset accounts at cost, and used a provision for depreciation account for each asset. Required Prepare for Charles Day the following accounts for each of Years 4, 5, 6, and 7: (i) (ii) (iii) (iv) Motor Van Provision for Depreciation of Motor Van (showing calculations to the nearest ) Fixtures and Fittings Provision for Depreciation of Fixtures and Fittings. (LCCIEB)
T/15.3
Required With reference to T/15.2, prepare an extract to show how both assets would appear in Charles Days balance sheet at 31 December Year 7. (LCCIEB)
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T/15.4
On 8 February Year 5, Southern Stores bought a computer for use in the office, paying 8,600 by cheque. It was decided to provide for depreciation by use of the straight line method. It was estimated that, at the end of 5 years, the residual (scrap) value would be 600. On 12 September Year 5, Southern Stores purchased a motor vehicle for use in the business, paying 10,000 by cheque. The vehicle was to be depreciated at the rate of 40% per annum, using the reducing balance method. The business retained the asset accounts at cost and dealt with depreciation using a separate Provision for Depreciation Account for each asset.The financial year ends on 31 December. Any asset purchased in the first 6 months of a year has a whole years depreciation provided, while any asset purchased in the second half of the year has only half a years depreciation written off. Required (a) Prepare the following accounts for the years ended 31 December Years 5, 6, and 7: (i) (ii) (iii) (iv) Computer Equipment Provision for Depreciation of Computer Equipment Motor Vehicle Provision for Depreciation of Motor Vehicle.
(b) Show a balance sheet extract at 31 December Year 7 for both the Computer Equipment and Motor Vehicle Accounts. (LCCIEB)
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Page 256
T/15.5
D Amos purchased fixtures and fittings for 6,000 by cheque on 1 January Year 3. On 1 July of the same year, he purchased by cheque a motor vehicle for 18,000. He decided to depreciate his fixed assets as follows: (1) Fixtures and fittings using the straight line method. He estimated that they would have a working life of 8 years, with a residual (scrap) value of 1,000. (2) Motor vehicle using the reducing balance method. He set the rate at 40% on reducing balance each full year. He kept the asset accounts at cost and kept accumulated depreciation of each type of asset in a separate Provision for Depreciation Account. Assets acquired during the year were depreciated from the date of purchase. Required In the books of D Amos, prepare the following accounts for the 3 financial years ended 31 December Year 3, Year 4, and Year 5, balancing the accounts at the end of each year: (i) (ii) (iii) (iv) Fixtures and Fittings Provision for Depreciation of Fixtures and Fittings Motor Vehicle Provision for Depreciation of Motor Vehicle. (LCCIEB)
T/15.6
On 1 January Year 4, Frank Saunders purchased furniture and equipment by cheque for 11,000. He decided to provide for depreciation on this asset using the straight line method over 8 years. He estimated that the scrap value at the end of that time would be 600. On 14 February Year 4, he purchased a motor van by cheque for 8,400, for use in the business. He decided to provide for depreciation on this asset at the rate of 40% per annum, using the reducing balance method. He allowed a full years depreciation in the year of purchase and calculated the depreciation to the nearest . On 31 December Year 6, he sold the motor van for 3,200 and was paid by cheque. His practice is to record and leave the asset accounts at cost and to accumulate the depreciation in a Provision for Depreciation Account for each asset. His financial year ends on 31 December.
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Required In the books of Frank Saunders, open the following accounts and enter the transactions for the years ended 31 December Years 4, 5, and 6: (i) (ii) (iii) (iv) (v) Furniture and Equipment Provision for Depreciation of Furniture and Equipment Motor Van Provision for Depreciation of Motor Van Disposal of Motor Van. (LCCIEB)
T/16.1
F Openshaw submitted the following information at 31 March for Years 4, 5, and 6:
Total debtors before writing off bad debts 18,640 Bad debts to be written off F Dale T Wylie 117 163
Date 31 Mar Yr 4
31 Mar Yr 5 31 Mar Yr 6
20,835
G Block
315
17,694
A Dolt E Fox
78 216
Openshaw provides for doubtful debts at the rate of 2 1/2% of the remaining debtors at the end of each financial year. At 31 March Year 3, the provision for doubtful debts was 380. Required (a) In the books of F Openshaw, prepare the following accounts for the years ended 31 March Years 4, 5, and 6, including the transfers to the Profit & Loss Account at the end of each financial year: (i) Bad Debts (ii) Provision for Doubtful Debts. (b) Show extracts from the balance sheets of F Openshaw at 31 March Years 4, 5, and 6, placing debtors under current assets. (LCCIEB)
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T/16.2
(a) It is the practice of Coniston & Son to write off bad debts as they occur and to provide for doubtful debts. For the 3 years from the commencement of business to 31 December Year 3, the following information is available: At year ended 31 December:
Year 1 Balance of debtors before writing off bad debts Bad debts to be written off Provision for doubtful debts, as a percentage of debtors 47,800 800 Year 2 76,300 1,100 Year 3 91,400 1,500
3%
4%
2%
Required (i) Prepare the following accounts for Years 1, 2, and 3, showing the transfers to the Profit & Loss Account at the end of each year:

Bad Debts Provision for Doubtful Debts.
(ii) Show the balance sheet extract in respect of debtors at 31 December each year. (b) On 7 June Year 4, Coniston & Son received a payment of 129 from S Atkins for an outstanding debt of 320. Coniston wrote off the balance as a bad debt. Required Show the account of S Atkins in Conistons ledger.
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T/16.3*
At 31 December Year 8, AB & Co has debtors totalling 42,560. Debts amounting to 760 have yet to be written off as bad. A specific provision is to be created covering in full the following debts:
D 620 E 570 F 710
A general doubtful debts provision of 4% of remaining debts is also to be created. No provision exists as yet. Required (a) Show in a statement: (i) how the 2 provisions are calculated (ii) the amount of net debtors. (b) Show as an extract how the item debtors would appear in the balance sheet of AB & Co at 31 December Year 8.
T/16.3/A
(a)
Calculation of debt provisions Gross debtors less Bad debts written off 42,560 760 41,800 D 620 E 570 F 710
less Specific provision:
less General provision at 4% Net debtors
1,900 39,900 1,596 38,304
(b)
AB & Co Balance sheet (extract) at 31 December Year 8 Current assets Debtors less Provision for bad and doubtful debts 41,800 3,496 38,304
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Page 260
T/16.4
Donald Lisher, a sole trader, maintains a provision for doubtful debts that he adjusts at the end of each financial year. At 1 January Year 8, the balance on the account was 860. The following additional information is available:
Bad debts written off during year 1,235 1,640 1,320 Debtor year-end balances 25,300 29,600 28,800 Provision for doubtful debts % 4 6 5
Year ended 31 Dec Yr 8 31 Dec Yr 9 31 Dec Yr 10
On 12 October Year 10, Donald Lisher received a cheque for 240 in respect of a debt which had been written off in Year 9. Required (a) From the above information, prepare for the years ended 31 December Years 8, 9, and 10: (i) the Bad Debts Account, including the closing entries; (ii) the Provision for Doubtful Debts Account, showing the balance carried forward each year. (b) Show, in a brief statement, the entries which would be made in the books of Donald Lisher to record the recovery of 240 for the debt written off in Year 9. Note Bad debts written off should not be taken to the Provision for Doubtful Debts Account.
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T/16.5
The accounting year of R Cleaver, a trader, ends on 31 December.At 31 December Year 3, his trade debtors amounted to 37,500 and he had a provision for doubtful debts amounting to 2% of debtors. During Year 4, Cleaver wrote off debts as follows: (1) The whole of the debt of 460, due from L Paul, was written off as irrecoverable on 15 August Year 4. (2) Another debtor, K Sang, who owed 220, paid a contribution of 25%; the balance was immediately written off as irrecoverable on 26 November Year 4. At 31 December Year 4, debtors amounted to 41,000 and the provision for doubtful debts was adjusted to 2.5% of this figure. In Year 5, bad debts written off amounted to 560. In addition, on 20 October, K Sang paid the balance of his debt, which had been written off in Year 4. It was the practice of Cleaver to keep a Bad Debts Recovered Account for recording debts recovered in a year following the one in which they were written off. At 31 December Year 5, debtors amounted to 39,000 and the Provision for Doubtful Debts was adjusted to 2% of this figure. Required Prepare the following accounts to include the above information relating to the years ended 31 December Year 4 and 31 December Year 5: (i) (ii) (iii) (iv) (v) L Paul K Sang Bad Debts Provision for Doubtful Debts Bad Debts Recovered.
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Page 262
T/17.1
The following information is available in respect of A Wolfson, a trader:
CASH BOOK (bank only) Year 5 1 Sep 5 Sep 10 Sep 15 Sep 23 Sep 25 Sep 28 Sep Balance b/f Sales T Swithin Sales K Smart T Hunt Sales 2,806 1,020 857 1,370 524 413 1,245 Year 5 4 Sep 9 Sep 16 Sep 24 Sep 26 Sep 27 Sep 29 Sep 30 Sep 30 Sep Purchases (915) Wages (916) N Victor (917) Rent (918) Wages (919) N Hills (920) S Twitchin (921) Purchases (922) Balance 234 635 526 370 680 416 285 540 ?
Bank statement Year 5 1 Sep 7 Sep 9 Sep 12 Sep 15 Sep 17 Sep 19 Sep 21 Sep 23 26 28 30 Sep Sep Sep Sep Paid out Balance Cash: 915 Credit Cash: 916 Credit Credit transfer P Mott Credit Standing order Minster Publications Credit transfer T Lennox Direct debit Insurance Cash: 919 Bank interest 234 1,020 635 857 271 1,370 96 870 230 680 8 Paid in Balance 2,806 Cr 2,572 Cr 3,592 Cr 2,957 Cr 3,814 Cr 4,085 Cr 5,455 Cr 5,359 Cr 4,489 4,259 3,579 3,587 Cr Cr Cr Cr
Required (a) Calculate the missing balance in the Cash Book and enter it in your answer book as the balance brought down at 30 September Year 5. (b) Bring the Cash Book up to date by entering in it the items you consider appropriate from the bank statement. Balance the Cash Book and bring down the new balance at 1 October Year 5. (c) Prepare the bank reconciliation statement at 30 September Year 5.
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Page 263
T/17.2
The following is a copy of F Holmes Cash Book for April Year 5:
CASH BOOK Bank 3,240 1,250 2,610 1,925 1,368 1,701 450 1,116 Cheque no Year 5 3 Apr 6 Apr 9 Apr 12 Apr 15 Apr 18 Apr 20 Apr 25 Apr 27 Apr 29 Apr 29 Apr 30 Apr Purchases Rates Electricity Purchases Telephone Stationery Travelling Salary G Stewart D Usher Fixtures Balance c/d 10648 10649 10650 10651 10652 10653 10654 10655 10656 10657 10658 Bank 1,060 650 196 1,400 245 98 72 1,057 746 2,360 2,200 3,576 13,660
Year 5 1 Apr 4 Apr 10 Apr 16 Apr 24 Apr 28 Apr 30 Apr 30 Apr
Balance b/d Sales Sales Sales Sales Sales F Tait Sales
13,660 1 May Balance b/d 3,576
He received the following bank statement for April Year 5:

Bank statement Date Year 5 1 Apr 3 Apr 4 Apr 5 9 11 12 13 16 17 19 22 23 25 27 29 30 30 Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Details Balance Cash: 10648 Standing order Insurance Co Credit 10649 Credit 10651 10650 Direct debit Water Credit 10652 Credit transfer John Bates 10654 Credit Dividends 10655 Credit Charges Paid out 1,060 260 1,250 650 2,610 1,400 196 50 1,925 245 360 72 1,368 400 1,057 1,701 60 Paid in Balance 3,240 Cr 2,180 Cr 1,920 3,170 2,520 5,130 3,730 3,534 3,484 5,409 5,164 5,524 5,452 6,820 7,220 6,163 7,864 7,804 Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr
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Required (a) Starting with the balance of 3,576, bring F Holmes Cash Book up to date by posting to it the items you consider appropriate from the bank statement. Balance the Cash Book and bring down the new balance on 1 May Year 5. (b) Prepare a bank reconciliation statement at 30 April Year 5, commencing with the bank statement balance of 7,804. (LCCIEB)
T/17.3
The following information relates to the business of M Rhodes:
Bank statement at 30 June Year 5 Date 1 5 5 8 11 13 15 15 19 24 26 29 30 Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Details Balance 10659 10658 Counter credits Standing order Ajax Insurance 10660 Counter credits 10661 Standing order L White Direct debit Town Council 10663 10665 Charges Debits 230 176 813 242 459 1,121 150 462 517 324 138 74 Credits Balance 4,619 Cr 4,389 Cr 4,213 Cr 5,026 Cr 4,784 4,325 5,446 5,296 5,758 5,241 4,917 4,779 4,705 Cr Cr Cr Cr Cr Cr Cr Cr Cr
Cheque book counterfoils 1 1 7 11 22 23 23 25 29 Jun Jun Jun Jun Jun Jun Jun Jun Jun 10658 10659 10660 10661 10662 10663 10664 10665 10666 A Parry C Harris L Goddard A Parry D Fletcher Lines Ltd Star & Co A Parry C Thorpe 176 230 459 150 376 324 289 138 247
(continued)
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T/17.3 (continued)
Paying-in book counterfoils 8 Jun 15 Jun S Moon G Race Rayne & Co C Mills T Orchard 611 202 129 325 667 813
1,121
Note Cheques are paid into the bank on the day they are received. Required (a) Write up the bank account in the books of M Rhodes starting with a debit balance of 4,619 on 1 June Year 5. Entries should be in date order. (b) Prepare a bank reconciliation statement at 30 June Year 5, commencing with the bank statement balance of 4,705. (LCCIEB)
T/17.4*
You are required to prepare a bank statement from the details below. Thomas Snodden banks at Wilmster Bank, 46 High Street, Ledbury, Eastshire LE2 5SR account number 96015. On 1 September Year 2, he had a balance at the bank of 126.00 (Dr).The following were his transactions with the bank during Setpember Year 2:
4 Sep 6 Sep 9 Sep 12 Sep 14 Sep 17 Sep 20 22 25 27 30 Sep Sep Sep Sep Sep Received cheque from R Grafton for 57.00 Drew cheque no 100567 payable to T Lucas for 95.50 This was debited to Snoddens account on 11 September The bank made a standing order payment to Moody Publishers for 162.00 Drew cheque no 100568 payable to N Swift for 73.00 This was debited to Snoddens account on 16 September Received by credit transfer from K Hanson 214.00 Drew cheque no 100569 payable to T Cavendish for 106.50 This was debited to Snoddens account on 21 September Received cheque from N Speedy for 165.00 The bank made direct debit payment to Eastwise Electricity for 89.00 The bank made credit transfer payment to Spacewell Ltd for 105.00 Received cheque from L Morsewell for 235.00 The bank charged interest of 17.00
Note Any cheques received by Thomas Snodden are paid into the bank on the day of receipt. In each instance above, the bank credited Snoddens account on the same day.
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T/17.4/A
Wilmster Bank 46 High Street Ledbury Eastshire LE2 55R Mr Thomas Snodden Account No 96015 Date Year 2 1 Sep 4 Sep 9 Sep 11 14 16 20 21 22 Sep Sep Sep Sep Sep Sep Particulars Paid out Paid in 57.00 Balance 126.00 Cr 183.00 Cr 21.00 74.50 139.50 66.50 231.00 125.00 Cr O/D Cr O/D Cr Cr
25 Sep 27 Sep 30 Sep
Balance b/f R Grafton Standing order Moody Publishers 162.00 T Lucas: 100567 95.50 Credit transfer K Hanson N Swift: 100568 73.00 N Speedy T Cavendish: 100569 106.50 Direct debit Eastwise Electricity 89.00 Credit transfer Spacewell Ltd 105.00 L Morsewell Interest 17.00
214.00 165.00
36.00 Cr 69.00 O/D 166.00 Cr 149.00 Cr
235.00
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Page 267
T/18.1
Lynn Parton owns a small business. She keeps a Petty Cash Book and uses the imprest system. The imprest is set at 100. On 1 June Year 7 the petty cash balance was 70.30 and on that date the imprest was restored with cash drawn from the business bank account. During June Year 7, the following amounts were paid from petty cash:
Details Year 7 2 Jun 4 Jun 5 Jun 6 Jun 10 Jun 14 Jun 18 Jun 22 Jun 25 Jun 29 Jun Travelling expenses Stationery Postage Cash purchases Postage Cleaning expenses Stationery Cash purchases Postage Travelling expenses Voucher no 76 77 78 79 80 81 82 82 83 84 Amount 12.30 4.23 1.75 32.30 1.82 7.37 9.34 21.17 2.38 4.54
The imprest amount was restored on 1 July Year 7. Required Write up the Petty Cash Book from 1 June to 1 July Year 7. You should use the following analysis columns:
Travelling expenses Stationery Postage Purchases Cleaning expenses
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Page 268
T/18.2
Peter Sharsby uses the petty cash imprest system.The amount of the float is 300. At 1 March Year 6, the balance of petty cash in hand was 83.20. The petty cashier dealt with the following transactions during March Year 6:
Voucher no Year 6 1 Mar 3 Mar 6 Mar 9 Mar 11 Mar 14 Mar 16 Mar 19 Mar 21 Mar 24 Mar 27 Mar 29 Mar Drew cash from bank to restore the float Stationery Petrol J Lane travel expenses Motor-vehicle repairs Refund to debtor, A Lucan Postage Stationery Petrol F Coster train fare Postage Paid to L Vine, creditor Amount 15.30 23.40 27.50 51.80 32.60 4.30 15.70 22.40 19.10 13.90 27.80
83 84 85 86 87 88 89 90 91 92 93
Required (a) Enter the above transactions in the Petty Cash Book of Peter Sharsby for March Year 6, and show the balance at the end of the month. Bring down the balance and show the entry to make up the float (from the bank) on 1 April Year 6. Peter Sharsby uses the following analysis columns:
Motor-vehicle expenses Postage Stationery Travelling expenses Ledger
(b) In relation to the posting of the total of the motor-vehicle expenses analysis column: (i) show the entry that will be made in the relevant expense account; (ii) in which ledger is that account kept?
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Page 269
T/18.3*
Ellen Franks keeps her Petty Cash Book on the imprest system. The imprest amount was set at 250. On 1 July Year 3, the balance of petty cash brought forward was 83.00. The following transactions took place during July Year 3:
Voucher no Year 3 1 Jul 5 Jul 7 Jul 10 Jul 12 Jul 14 17 19 22 24 Jul Jul Jul Jul Jul Drew cash from bank to restore the imprest Stationery Train fare reimbursed Postage Received by petty cashier from L Ward, in payment for a private telephone call Motor-vehicle expenses Postage T Tarrant travel expenses Petrol Payment of amount owing to K Tutt in the purchases ledger Stationery Postage Amount 17.50 23.70 12.30 1.90 35.60 7.20 28.40 11.00 31.00 14.30 7.00
69 70 71
72 73 74 75 76 77 78
27 Jul 30 Jul
On 1 August Year 3 the float was increased to 300. Required (a) Draw up Ellen Franks Petty Cash Book using the following analysis columns:
Travel expenses Postage Motor-vehicle expenses Stationery Ledger
(b) Balance the account at 31 July Year 3, bring down the balance of cash at that date, and show the amount of cash drawn from the bank for the revised imprest on 1 August Year 3. (c) Show the Telephone Account in the General Ledger for July Year 3, assuming that the Telephone Account had been paid by direct debit 97.60 on 6 July Year 3.
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T/18.3/A
(a) and (b)
Receipts 83.00 167.00 Date Year 3 1 Jul 1 Jul 5 Jul 7 Jul 10 Jul 12 Jul 14 Jul 17 Jul 19 Jul 22 Jul 24 Jul 27 Jul 30 Jul 31 Jul 251.90 63.90 236.10 1 Aug Balance b/d 1 Aug Bank Details Balance b/f Bank Stationery Train fare Postage Telephone L Ward Motor-vehicle expenses Postage T Tarrant travel Petrol K Tutt, creditor Stationery Postage Balance c/d
PETTY CASH BOOK

Voucher no Total Travel expenses Postage Motor-v expenses Stationery Ledger
69 70 71
17.50 23.70 23.70 12.30
17.50 12.30
1.90
72 73 74 75 76 77 78
35.60 7.20 28.40 28.40 11.00 31.00 14.30 7.00 188.00 52.10 63.90 251.90
35.60 7.20
11.00 31.00 14.30 7.00 26.50 46.60 31.80 31.00
(c)
Year 3 6 Jul
GENERAL LEDGER Telephone Bank 97.60 Year 3 12 Jul Petty cash 1.90
Note The question does not require the Telephone Account to be balanced.
270
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Page 271
T/18.4
Carol Garner maintains an analysed Petty Cash Book on the imprest system. She restores the imprest amount to 85 on the first day of each week. The analysis columns in the Petty Cash Book are headed:
Wages Postage Travelling Sundries Ledger
At the close of business on Friday, 31 July Year 6, Carol balanced the Petty Cash Book and carried down the balance of 23.15.The cash held in the petty cash box agreed with this balance. The following transactions took place during the 2 weeks that followed:
Monday, 3 Aug Tuesday, 4 Aug Wednesday, 5 Aug Imprest restored Postage Window cleaning Creditor R Jackson Postage Tea and coffee Travelling expenses Wages Postage Travelling expenses Imprest restored Travelling expenses Advertising Postage Travelling expenses Wages Postage Stationery Postage 3.80 4.70 9.75 4.26 1.88 2.93 45.00 1.94 3.22
Thursday, 6 Aug Friday, 7 Aug Monday, 10 Aug Tuesday, 11 Aug
Thursday, 13 Aug Friday, 14 Aug
1.41 12.00 3.22 1.94 48.00 4.21 2.48 1.30
Required (a) Write up Carol Garners analysed Petty Cash Book for the 2-week period. Balance the Petty Cash Book and total the analysis columns at the end of each week. (b) Give 2 reasons why the cash in the petty cash box on Friday, 7 August might not have agreed with the Petty Cash Book balance. (LCCIEB)
271
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Page 272
T/19.1
State whether each of the following is capital expenditure or revenue expenditure. You only have to write one word, either capital or revenue in each case. (1) Purchase of a motor van for use within the business. (2) Purchase of goods intended for resale in the normal course of business. (3) Purchase of petrol for the motor van. (4) Purchase of materials to be used in building an extension to the firms business premises. (5) Payment of insurance on the business premises.
T/19.2
Matthew Dawalla owns a restaurant and the following were some of his transactions during the year ended 31 October Year 7: (1) Purchase of flour for immediate use in the kitchen. (2) Purchase, in September Year 7, of a motor van for delivery of prepared foods to customers. (3) Payment for advertising. (4) Payment for carriage inwards in respect of foodstuffs for the kitchen. (5) Payment of 6,400 for work done on the restaurant premises. 5,100 was for an extension to the restaurant seating area, while the remainder was for painting and decorating the restaurant. (6) Payment for heating and lighting. (7) Purchase, in July Year 7, of new ovens for the kitchen. (8) Payment for expenses of running the motor van. Required State whether each of the 8 transactions is revenue expenditure, capital expenditure, or both. If an item is both capital and revenue expenditure, you should state the respective amounts.
272
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Page 273
T/19.3
JK Distributors Ltd purchases motor vehicles from manufacturers and sells them to other companies and to the general public. Jameson Partners is a firm of accountants. Required Classify the following transactions into either capital expenditure or revenue expenditure. Transactions by JK Distributors Ltd: (1) Purchase of motor vehicles for resale. (2) Purchase of a transporter lorry for moving vehicles. (3) Payments for the building of a showroom extension. (4) Salaries and commission paid to showroom sales staff. (5) Purchase of a computer for stock control purposes. Transactions by Jameson Partners: (1) Purchase of motor vehicles for use in the business. (2) Purchase of an office safe. (3) Rent paid for use of office premises. (4) Payment of course fees for staff training. (5) Payment of staff salaries and travelling expenses.
273
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Page 274
T/19.4
P Arkan is a builder. He designs and builds superior houses to meet individual customer specification. The following invoices were received from suppliers in October Year 4:
Invoice 1 From Mellow Brick Company: 40,000 high quality bricks Delivery charge 24,800 375 25,175
Invoice 2
From Premier Equipment Company: One earth moving machine 4 replacement tyres for existing machine
42,700 890 43,590
Invoice 3
From Excel Office Supplies: One photocopier for use within the firm 10 reams of copier paper
1,460 62 1,522
Invoice 4
From Arbor Construction Company: Building an extension to the cement storage area Repairs to fencing as instructed: Fencing panels and other materials Labour charges
12,400 1,475 1,060 14,935
Required Analyse the amount of each invoice and apportion it to capital expenditure and revenue expenditure. Present your answer in a table as follows:
Capital expenditure Invoice 1 Invoice 2 Invoice 3 Invoice 4 Revenue expenditure Total expenditure
(LCCIEB)
274
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Page 275
T/19.5*
Show the effect of the way each of the following transactions was recorded in the accounts of a retailer of electrical equipment. If there was no effect, state no effect.
Gross profit Effect on Net profit Balance sheet
Transaction (1) Purchase of motor vehicle for deliveries to customers entered in Purchases Account (2) Invoice for electricity wrongly entered in Water Supply Account (3) Payment for repairs to premises entered in Premises Account (4) Bill for petrol for delivery vehicle entered in Motor Vehicle Account (5) Invoice for legal services in respect of the purchase of premises entered in Office Expenses Account (6) The cost of installing new shop fittings was charged to Wages Account
T/19.5/A
Transaction (1) Effect on Gross profit Net profit Understated Understated Balance sheet Fixed assets understated Capital understated No effect Fixed assets overstated Capital overstated Fixed assets overstated Capital overstated Fixed assets understated Capital understated Fixed assets understated Capital understated
(2) (3)
No effect No effect
No effect Overstated
(4)
No effect
Overstated
(5)
No effect
Understated
(6)
No effect
Understated
275
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Page 276
T/19.6*
This question has reference to the information given in T/19.2 (Matthew Dawalla). Matthew Dawalla makes no provision for depreciation in respect of fixed assets purchased in the last 6 months of any financial year. Using the format shown below, indicate by means of a tick ( ) which of the Trading Account, Profit & Loss Account, or balance sheet prepared at 31 October Year 7 would be affected by each of the transactions. In the case of item (5), also state the amount.
Items (1) (2) (3) (4) (5) (6) (7) (8) Trading Account Profit & Loss Account Balance sheet
T/19.6/A
Items (1) (2) (3) (4) (5) (6) (7) (8) 1,300 5,100 Trading Account Profit & Loss Account Balance sheet
276
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Page 277
T/19.7*
Andrew Smithers has recently prepared the following Trading and Profit & Loss Account:
Andrew Smithers Trading and Profit & Loss Account for the year ended 30 September Year 3 Sales less Cost of goods sold: Opening stock Purchases less Closing stock Gross profit less Expenses: Rent Wages General expenses Net loss 73,200
3,860 49,750 53,610 4,200
49,410 23,790
4,400 18,900 860
24,160 (370)
On reviewing his books of account you find that: (1) The item Purchases includes:

a desktop computer bought for use in the office for 2,200; a new delivery van bought for use in the business for 7,600; the purchase of materials for extending the shop premises 2,350.
(2) The sales figure includes the sale of the old delivery van for 1,600. This figure had been shown in the books at 3,400. (3) The closing stock includes 300 of materials in hand for work on extending the shop premises. (4) Rent accrued 400. (5) The figure for wages includes 2,100 for building work on extending the shop premises. Andrew Smithers tells you that he wishes to allow 1,500 first-year depreciation on the new delivery van. Required Prepare a revised Trading and Profit & Loss Account for Andrew Smithers for the year ended 30 September Year 3.
277
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Page 278
T/19.7/A
Andrew Smithers (Revised) Trading and Profit & Loss Account for the year ended 30 September Year 3 Sales (-1,600) less Cost of goods sold: Opening stock Purchases (-2,200 -7,600 -2,350) less Closing stock (-300) Gross profit less Expenses: Rent (+400) Wages (-2,100) General expenses Depreciation: Old van 1,800 New van 1,500 Net profit 71,600 3,860
37,600 41,460 3,900
37,560 34,040
4,800 16,800 860
3,300
25,760 8,280
278
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Page 279
T/19.8*
John Bradford ended his first year of trading on 31 December Year 4. He has no knowledge of book-keeping and accounts but has prepared what he calls his profit statement for the year:
John Bradford Profit statement at 31 December Year 4 Cash takings from customers Purchases Goods for resale Motor vehicle, bought 1 Jan Yr 4 Advertising Vehicle running costs Wages paid Insurances Heat and light Cash taken for own use Profit 22,664
14,173 2,200 16,373 838 1,092 2,640 310 429 394
22,076 588
Other information at 31 December Year 4: (1) (2) (3) (4) Customers invoiced for 1,082 had not yet paid their accounts. Wages accrued due 286. Purchases that had cost 1,730 were still unsold (stock). John Bradford expects the motor vehicle to last 3 years and to have a trade-in value then of 700.
Required (a) State what important distinction John Bradford has failed to make in his treatment of the motor-vehicle purchase. (b) Prepare a revised Trading and Profit & Loss Account for John Bradford for the year ended 31 December Year 4.
279
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Page 280
T/19.8/A
(a) John Bradford has not made the distinction between capital and revenue expenditure. (b)
John Bradford Trading and Profit & Loss Account for the year ended 31 December Year 4 Sales less Cost of goods sold: Purchases less Closing stock Gross profit Advertising Vehicle running costs Wages Insurance Heat and light Depreciation van Net profit
** Cash takings add accrued due
23,746**
14,173 1,730 12,443 11,303 838 1,092 2,926 310 429 500
6,095 5,208
23,746
22,664 1,082
T/20.1
After trading for some years, Lorna Freele decides to keep a double-entry set of books. At 1 May Year 7, records show her financial position to be as follows:
Assets Premises 47,000 Office equipment 11,200 Fixtures and fittings 3,800 Motor vehicle 9,700 Stock 8,650 D Crawle 570 F Munster 312 J Tester 423 Office cash 107 Creditors: A Farmer 318 T North 165 Bank overdraft 1,730
Debtors Liabilities
Required (a) In the journal, show the opening entries to record the assets and liabilities of Lorna Freele at 1 May Year 7. (b) Post the figures for assets and liabilities as balances in appropriate ledger accounts. Name the division of the ledger in which each account appears.
280
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Page 281
T/20.2*
The following details are available concerning the business of Walter Masson for the year ended 30 June Year 4:
Stock at 1 Jul Yr 3 Purchases Returns outwards Sales Returns inwards Stock, 30 Jun Yr 4 Office expenses Wages Rent, rates, and insurance 4,600 15,120 140 29,360 410 5,300 1,740 7,300 3,200
Required Prepare closing entries for Walter Masson at 30 June Year 4, showing transfers to the Trading Account, Profit & Loss Account, and Capital Account relating to the year ended 30 June Year 4.
T/20.2/A
Walter Masson Journal Year 4 30 Jun Dr 4,600 Cr 4,600
Trading Stock Book value of stock at 1 Jul Yr 3 Trading Purchases Purchases for year ended 30 Jun Yr 4 Trading Returns inwards Returns inwards for year ended 30 Jun Yr 4 Sales Trading Sales for year ended 30 Jun Yr 4
30 Jun
15,120 15,120
30 Jun
410 410
30 Jun
29,360 29,360
(continued)
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T/20.2/A (continued)
30 Jun Returns outwards Trading Returns outwards for year ended 30 Jun Yr 4 Stock Trading Value of stock at 30 Jun Yr 4 Trading Profit & loss Gross profit for the year Profit & loss Office expenses Office expenses for year ended 30 Jun Yr 4 Profit & loss Wages Wages for year ended 30 Jun Yr 4 Profit & loss Rent, rates, and insurance Rent, rates, and insurance for year ended 30 Jun Yr 4 Profit & loss Capital Net profit for year transferred 140 140
30 Jun
5,300 5,300
30 Jun
14,670 14,670
30 Jun
1,740 1,740
30 Jun
7,300 7,300
30 Jun
3,200 3,200
30 Jun
2,430 2,430
Comment The sides the individual items (eg purchases) appear on in these journal entries correspond to the transfer entries appearing in the individual accounts concerned.
282
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Page 283
T/20.3
At 31 August Year 5, the end of his financial year, B C Holts books included the following balances:
Stock at 1 Sep Yr 4 Purchases Sales Purchases returns Sales returns Carriage inwards 9,580 58,960 90,440 1,030 2,105 1,760
B C Holt valued his stock at cost, 10,380, at 31 August Year 5. Required In the books of B C Holt: (a) Prepare journal entries, without narrations, to transfer the above balances to the Trading Account for the year ended 31 August Year 5. The closing stock valuation should also be journalized. (b) Prepare the Trading Account for the year ended 31 August Year 5. (LCCIEB)
283
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Page 284
T/20.4*
C Stantons financial year ends on 30 June; the following transactions took place during June Year 7: (1) On 1 June, Stanton purchased a new car, for use in the business, for 9,600 from the Smart Vehicle Company. He was allowed 2,200 for his old car and paid the balance by cheque. (2) On 1 June, Stanton paid 360 by cheque for car insurance to 31 May Year 8. (3) On 11 June, he purchased a new computer for 2,685 on credit from E Byte & Son. (4) On 19 June,T Wilson paid 65 by cheque as the only payment on his debt of 260. Stanton decided to write off the balance as a bad debt. (5) During the month of June, Stanton had taken goods costing 419 for his own use. On 30 June Year 7, Stanton decided to make adjustments for the following matters, before preparing the final accounts: (a) Car insurance premium is prepaid. (b) Bank charges amounting to 71 had not been entered in the books. (c) Telephone charges of 124 for the month of June had not been paid. Required Prepare the journal entries to record the above transactions and adjustments, including bank, in the books of C Stanton. Note Narrations are not required. (LCCIEB)
284
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Page 285
T/20.4/A
C Stanton Journal Year 7 1 Jun Dr 9,600 Cr 2,200 7,400 360 360 2,685 2,685 65 195 260 419 419 330 330 71 71 124 124
Motor car Motor-car disposal Bank Insurance Bank Office machinery E Byte & Son Bank Bad debts T Wilson Drawings Purchases Car insurance (Year 7/8) Car insurance (Year 6/7) Bank charges Bank Telephone (Year 6/7) Telephone (Year 7/8)
1 Jun 11 Jun 19 Jun
30 Jun 30 Jun 30 Jun 30 Jun
285
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Page 286
T/20.5*
The following information relates to James Grant, a trader, in respect of the financial year ended 31 December Year 5: (1) On 8 January, Grant purchased motor van number 5, for 10,800 from Roundstar Garages, according to invoice number K/6807. He paid a deposit of 2,000 by cheque, the balance of the purchase being on credit. (2) On 12 March, T Hardwicke, a debtor, paid 350 as a first and final instalment on a debt of 1,400.The balance of the debt was written off as irrecoverable. (3) On 20 June, Grant took from stock, for his own private use, goods which had been purchased within the current trading year for 135. (4) On 15 October, Grant sold motor van number 3 for 4,000, which was paid by cheque. It had been purchased in Year 2 for 8,800. The Provision for Depreciation on the motor van Number 3 Account showed a balance of 5,200. (5) On 31 December, Grants debtors totalled 18,600. He decided to adjust the provision for doubtful debts of 650 to 4% of total debtors. Required Prepare journal entries to record the above items, including narrations. (LCCIEB)
286
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Page 287
T/20.5/A
James Grant Journal Year 5 8 Jan Motor vehicles Bank Roundstar Garages Purchase of motor van no 5, ref invoice no K/7807. Payment by cheque 2,000 with balance on credit Dr 10,800 Cr 2,000 8,800
(1)
(2)
12 Mar Bank Bad debts T Hardwicke Payment of 25% of amount due; balance of debt written off
350 1,050 1,400
(3)
20 Jun Drawings Purchases Goods taken for private use
135 135
(4)
15 Oct Disposal **Motor van Provision for depreciation on motor van Disposal Bank Disposal Disposal Profit & loss Sale of motor van no 3, previously purchased in Year 2 for 8,800. Cheque received 4,000
8,800 8,800 5,200 5,200 4,000 4,000 400 400
(5)
31 Dec Pofit & loss Provision for doubtful debts Increase in provision to 4% of total debtors of 18,600
94 94
**This journal entry has been set out in this way to show the different elements in the disposal. Other forms of layout may be acceptable.
287
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Page 288
T/21.1
In the year ended 31 December Year 9, the following errors occurred in the books of Ching Wong: (1) Both the Office Expenses Account and Sales Account were overcast by 100. (2) The purchase of equipment, for use in the business, was debited to the Purchases Account. (3) A sale of goods to B Winlock for 346 was entered in the Sales Day Book as 316. (4) A purchase of goods from T Lister was posted to T Misters Account. (5) A bill for cleaning had not been entered in the books. (6) A bill for travelling expenses had been entered in the Telephone Account. Required Prepare a statement as follows and, against each item, state the type of error, eg error of omission:
Type of error (1) (2) (3) (4) (5) (6)
288
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Page 289
T/21.2
The following accounts appeared in the books of a trader:
Purchases Account Year 5 31 Dec Balance b/d 31 Dec Bank (new fixed assets) Year 6 1 Jan 16,220 2,140 18,360 18,360 Fixed Assets (at cost) Year 5 31 Dec Balance b/d 31 Dec Bank (goods for resale) Year 6 1 Jan 19,450 1,050 20,500 20,500 Year 5 31 Dec Balance c/d 20,500 Year 5 31 Dec Balance c/d 18,360
18,360
Balance b/d
20,500
Balance b/d
Required (a) What type or types of error have been made in these accounts? (b) Would the correction of these errors increase or decrease the gross profit and, if so, by how much?
T/21.3
Required Name each of the following errors: (1) The proceeds from the sale of some office furniture had been posted from the Cash Book to the credit of the Sales Account. (2) The proprietor of a business had taken for his own use goods purchased for resale.This had not been recorded in the books. (3) An invoice for 271 for goods sold on credit to N Pinter had been entered in the books as 217. (4) A payment for electricity had been posted from the Cash Book to the debit of the Rent Payable Account.
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Page 290
T/21.4
The following trial balance was prepared incorrectly for K Masters at 31 December Year 8, with some balances entered in the wrong column:
Dr 28,500 19,084 22,315 4,600 137,918 183,217 11,584 14,600 560 687 6,150 765 930 580 4,800 18,886 754 1,566 130,000 369,054 176,391 395,150 Cr
Motor vehicles Debtors Carriage inwards Cash at bank and in the office Rent receivable Purchases Sales Creditors Drawings Bad debts written off Carriage outwards Motor-vehicle running expenses Discount allowed Provision for doubtful debts Discount received Provision for depreciation on motor vehicles Salaries and wages Sundry expenses Lighting and heating Premises Capital
317
Required Prepare a correct trial balance for K Masters at 31 December Year 8. (LCCIEB)
290
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Page 291
T/21.5
Laurence Grant failed to agree his trial balance at 30 June Year 5.The following errors were later discovered: (1) The Purchases Day Book total of 5,960 had been posted to the Purchases Account in the General Ledger as 5,690. (2) The withdrawal by Laurence Grant of 95 in cash for private use had been posted to the debit of the Office Expenses Account. (3) The purchase on credit of computer stationery for 135 had been debited to the Office Equipment Account. (4) Discount allowed of 157 had been credited to the Discount Received Account. (5) A cheque for 430 had been correctly debited in the Cash Book but the double entry had not been completed. Required Prepare a statement showing the effect of these errors upon the trial balance of Laurence Grant.You should set out your answer as follows:
Cause debit total to exceed credit total by (1) (2) (3) (4) (5) Cause credit total to exceed debit total by
Note If there is no effect on the trial balance, you should state no effect. (LCCIEB)
291
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Page 292
T/22.1
Lynn Webster is a sole trader whose financial year ends on 30 September. At 30 September Year 5, she failed to agree her trial balance and found the following errors and omission: (1) The payment by cheque of an invoice for 515 for repairs to the office computer had been recorded in the Cash Book and posted to the Office Equipment Account. (2) A payment of 390 for advertising had been posted to the Travelling Expenses Account. (3) Lynn Webster had taken goods, bought during the year ended 30 September Year 5 for 186, for her personal use, but no entry had yet been made in the books. (4) The sale of goods for cash 730 had been entered as a credit to the Cash Account and a debit to the Sales Account. (5) The payment of wages, 1,560 in cash, to Websters employees for building an extension to the firms offices, had been entered in the Cash Book and posted to the Wages Account. Required Prepare journal entries, including narrations, necessary to deal with the errors in (1), (2), (4), (5) and the omission in (3).
T/22.2
The following errors occurred in the books of Eric Sawyer, a sole trader, in one accounting period: (1) The cost for petrol of 26 was wrongly debited to the Motor Vehicles Account. (2) The purchase of goods on credit for 86 from T Lawton was recorded in both the Purchases Day Book and the personal account as 68. (3) The payment of a subscription to a trade association, 60, was wrongly debited to the Purchases Account. (4) The total of one months discount-received column in the Cash Book, which was 54, was posted to the credit side of the Discount Allowed Account. (5) The total of the stationery analysis column of the Petty Cash Book for February Year 8, 13.50, was posted to the Postages Account. (6) A purchase of a new motor van for 10,500 had been debited to Fixtures and Fittings. Required Show the correction of each of the above errors by means of a journal entry. Your entries should include narrations.
292
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Page 293
T/22.3*
Henry James, a sole trader, extracted a trial balance at 30 September Year 6. It did not agree. On checking the entries in his books, he discovered the following: (1) A payment of 380 from a debtor, C Bates, had been posted to another debtors account in the name of C Yates. (2) The total of credit sales for March appeared in the Sales Day Book as 5,680 but this had been posted in the Sales Account as 6,680. (3) A credit purchase of 100 had been correctly entered in the Purchases Day Book for the month of September; it had also, however, been wrongly posted as a cash purchase. (4) Rent of 500 for the month of May had been paid by cheque but no double entry had been completed in the Rent Account. (5) A telephone bill paid by cheque, amounting to 230, had been posted in error to the Electricity Account. (6) A cash sale of 300 had been completely omitted from the books. (7) The purchase of a motor van costing 7,000 had been posted in error to the Purchases Account. Required Prepare the necessary journal entries on 30 September Year 6 to correct the above errors and omission. Narrations are not required.
T/22.3/A
Henry James Journal Year 6 (1) 30 Sep (2) 30 Sep (3) 30 Sep (4) 30 Sep (5) 30 Sep (6) 30 Sep (7) 30 Sep Dr 380 1,000 100 100 500 230 230 300 300 7,000 7,000 Cr 380
C Yates C Bates Sales No entry Cash/bank Purchases Rent No entry Telephone Electricity Cash/bank Sales Motor van Purchases
293
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Page 294
T/22.4*
The following relates to the business of W Lennon:
Trading and Profit & Loss Account for the year ended 31 December Year 5 Stock at 1 Jan Yr 5 Purchase add Carriage inwards less Returns outwards 76,300 1,150 77,450 980 76,470 89,070 13,200 75,870 61,860 137,730 640 8,200 24,300 1,850 2,370 Gross profit b/d Discount received 12,600 Sales less Returns inwards 138,400 670 137,730
less Stock at 31 Dec Yr 5 Gross profit c/d Discount allowed Motor-vehicle expenses Wages Insurance Office expenses Provision for depreciation: Office equipment 1,120 Motor vehicles 8,500 Net profit
137,730 61,860 720
9,620 15,600 62,580
62,580
294
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Page 295
Balance sheet at 31 December Year 5 Cost 45,000 5,600 34,800 85,400 Accumulated depreciation 1,680 12,850 14,530 13,200 6,300 1,050 20,550 4,100 16,450 87,320 Net book value 45,000 3,920 21,950 70,870
Fixed Assets Premises Office equipment Motor vehicles
Current Assets Stock Debtors Cash and bank
less Amounts due within 1 year Creditors
Financed by: Capital balance at 1 Jan Yr 5 add Net profit less Drawings 83,920 15,600 12,200 3,400 87,320
It was later found that the following errors/omissions had been made during the year ended 31 December Year 5: (1) Stock at 31 December Year 5 had been wrongly valued. It should have been valued at 12,900. (2) A bill, not yet paid, for carriage inwards, 100, for Year 6, had wrongly been charged to Year 5. (3) No adjustment had been made for prepayment of insurance, 350, at 31 December Year 5. (4) 300 paid in wages had been posted wrongly to the Office Expenses Account. (5) The provision for depreciation of motor vehicles had been wrongly calculated. It should have been 8,700. Required (a) In a statement, show for each of the 5 errors/omissions the effect upon gross profit, net profit and the balance sheet of: (i) the error/omission (ii) correcting the error/omission. (b) Show, for W Lennon, the revised Trading and Profit & Loss Account and balance sheet after the necessary adjustments have been made.
295
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Page 296
T/22.4/A: part (a) only

Effect of error/omission Gross profit overstated by 300 Net profit overstated by 300 Balance sheet: Stock overstated by Capital overstated 300 Gross profit and net profit understated by 100 Balance sheet: Sundry creditors by overstated 100 Capital understated Net profit understated by 350 Balance sheet: Current assets by understated 350 Capital understated

Effect of correcting for the error/omission Gross profit reduced by 300 Net profit reduced by 300 Balance sheet: Stock reduced by Capital reduced 300 Gross profit and net profit both increased by 100 Balance sheet: Sundry creditors by reduced 100 Capital increased Net profit increased by 350 Balance sheet: Current assets by increased 350 Capital increased

(1)
(2)
(3)
(5)
by 200
Note It will be clear that the effect of correcting for the error/omission is the reverse of the effect of the error/omission. Both effects would not be included in any examination question. They are both included in this instance to emphasize the difference in the wording of the two parts of the answer to (a). Incorrect or unsuitable wording of answers in this topic can result in a significant loss of marks.
296
Net profit overstated by 200 Balance sheet: Fixed assets overstated Capital overstated
(4)
Office expenses overstated Wages understated No further effects
by 350
Reduced office expenses Increased wages No further effects
Net profit reduced by 200 Balance sheet: Fixed assets reduced Capital reduced
by 300
by 200
pages 267-326
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Page 297
T/22.5
Helen Sagan, a sole trader, prepared a trial balance at 30 September Year 5, which did not agree.You have found the following errors: (1) A cash payment for material purchases for 726 had been entered in the Cash Book as 762.The correct entry had been made in the Purchases Account. (2) A receipt of 2,320 from a debtor, J Wilson, had been posted to the account of S Williamson. (3) A purchase, on credit, of a new machine for 5,300 had been debited to the Machine Repair Account. Depreciation is not charged on assets in the year they are purchased. (4) A cheque payment of 856 to a creditor had been entered in the creditors account but had been omitted from the Cash Book. (5) A cheque payment of 2,000 for rent had been entered in the Cash Book as 200. This incorrect amount had also been entered into the expense account. (6) An invoice from P Rees for purchases of 240 had been omitted from the ledger. Required (a) Prepare journal entries to correct the errors. Narrations are not required. (b) Prepare a statement, as shown below, and enter the effect on profit of each of the errors, including the amount. If there is no effect enter a tick ( ) in the right hand column.
Effect on profit Error number (1) (2) (3) (4) (5) (6) Overstated Understated No effect
297
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T/22.6
This exercise refers to the errors set out in T/22.2. Required State the effect of the correction of each of these errors on the draft net profit of Sawyer. You should set out your answer as follows:
Increase of net profit (1) (2) (3) (4) (5) (6) Reduction of net profit
Note Enter each amount in the appropriate column. If there is no effect on the net profit, you should state no effect. (LCCIEB)
T/22.7
This exercise refers to T/22.1. Despite having failed to agree her trial balance, Lynn Webster calculated a provisional profit of 5,670. Required Prepare a statement as shown below and against each of the items (1) (5) enter the effect, with the amounts, on the provisional profit of correcting for the error/omission. If there is no effect, you should enter a tick ( ) in the column headed no effect.
Effect of corrections on net profit Increase (1) (2) (3) (4) (5) Reduce No effect
Underneath your statement, you should state the amount of the revised net profit, after the necessary adjustments have been made.
298
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T/23.1*
J Salmon, a sole trader, prepared the following trial balance from her books at 30 June Year 6:
Dr 80,000 82,000 263,500 3,400 15,700 2,300 650 35,000 28,200 23,000 19,000 12,000 3,360 3,420 12,300 10,720 420 3,930 556,900 Cr
Motor vehicles at cost Fixtures and fittings at cost Purchases and purchases returns Sales and sales returns Stock (1 Jul Yr 5) Discounts Provision for doubtful debts Bad debts Debtors and creditors Capital Drawings Provision for depreciation: Motor vehicles Fixtures and fittings Rent Motor-vehicle running expenses Rates and insurances Salaries Cash at bank Cash in hand Lighting and heating
7,300 370,000 1,600 600 27,400 108,000
556,900
At 30 June Year 6: (1) Depreciation is to be provided as follows: Motor vehicles Fixtures and fittings 25% on cost 10% on cost
(2) Stock was valued at cost 17,400. (3) The provision for doubtful debts is to be set at 2% of the debtors. (4) Motor-vehicle running expenses at 510 and lighting and heating at 420 were accrued. (5) The rates and insurances were prepaid by 120. Required Prepare for J Salmon: (a) a Trading and Profit & Loss Account for the year ended 30 June Year 6 (b) a balance sheet at 30 June Year 6. (LCCIEB)
299
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Page 300
T/23.1/A
J Salmon Trading and Profit & Loss Account for the year ended 30 June Year 6 Stock at 1 Jul Yr 6 Purchases less Purchases returns less Stock at 30 June Yr 6 Cost of goods sold Gross profit c/d Depreciation: Motor vehicles 20,000 Fixtures and fittings 8,200 Discounts allowed Bad debts Provision for doubtful debts Rent Motor-vehicle running expenses (3,360 + 510) Rates and insurances (3,420 - 120) Salaries Lighting and heating (3,930 + 420) Net profit 263,500 7,300 256,200 271,900 17,400 254,500 112,100 366,600 Gross profit b/d 28,200 2,300 650 100 12,000 3,870 3,300 12,300 4,350 46,630 113,700 Discounts received 15,700 Sales less Sales returns 370,000 3,400 366,600
366,600 112,100 1,600
113,700
300
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Page 301
Balance sheet at 30 June Year 6 Accumulated depreciation 43,000 27,200 70,200 17,400 35,000 700 34,300 120 10,720 420 62,960 Net book value 37,000 54,800 91,800
Fixed Assets Motor vehicles Fixtures and fittings Current Assets Stocks Debtors less Provision for doubtful debts Prepayments Cash at bank Cash in hand less Amounts due within 1 year Creditors Accrued (510 + 420) Net current assets Financed by: Capital add Net profit less Drawings
Cost 80,000 82,000 162,000
27,400 930
28,330 34,630 126,430 108,000 46,630 28,200 18,430 126,430
301
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Page 302
T/23.2
Hilda Braquette prepared the following trial balance at 31 October Year 5:
Dr Stock at 1 Nov Yr 4 Fixtures and fittings at cost Provision for depreciation of fixtures and fittings at 1 Nov Yr 4 Bank Cash in hand Debtors and creditors Motor vehicles at cost Provision for depreciation of motor vehicles at 1 Nov Yr 4 Purchases and sales Discounts allowed and received Drawings Motor-vehicle running expenses Wages Bad debts Provision for doubtful debts Returns inwards and outwards Rent Light and heat Insurance Office expenses Capital 6,820 14,000 2,800 3,200 148 10,300 24,000 75,820 2,140 13,200 5,860 43,972 390 1,180 10,400 650 1,080 2,100 215,260 6,920 7,200 161,360 1,580 Cr
210 850
34,340 215,260
Additional information at 31 October Year 5:

(1) (2) (3) Stock at cost Insurance prepaid Accrued due: Light and heat Office expenses (4) 80 140 220 8,460 240
Depreciation is provided as follows: Fixtures and fittings 10% per annum on cost Motor vehicles 20% per annum on cost Provision for doubtful debts is to be adjusted to 4% of debtors
(5)
Required For Hilda Braquette, prepare: (a) the Trading and Profit & Loss Account for the year ended 31 October Year 5 (b) a balance sheet at 31 October Year 5. (LCCIEB)
302
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Page 303
T/23.3
The following trial balance was extracted from the ledger of P Lippis, a sole trader, on 31 March Year 12:
Business premises at cost Purchases and sales Capital Stock at 1 Apr Yr 11 Purchases returns Fixtures and fittings at cost Provision for depreciation of fixtures and fittings Trade debtors: R Prince K Evitts J Carr Archway Supplies Trade creditors: K Porter Archway Supplies Cash in hand Cash at bank Wages Advertising Heat and light Insurances Other expenses Drawings Dr 85,000 39,800 8,310 285 12,700 2,540 480 1,010 180 370 2,210 4,096 47 1,093 8,942 110 1,092 368 459 7,240 167,201 Cr 64,650 93,420
167,201
The following additional information is to be taken into account: Stock valued at cost on 31 March Year 12, 7,935. Accruals at 31 March Year 12: wages 230; heat and light 98. Prepayment at 31 March Year 12, Insurances 46. Lippis received a bank statement, showing that there was a balance in his favour on 31 March Year 12, amounting to 1,140.A creditor had not yet presented a cheque drawn by Lippis for 79, and the bank applied bank charges amounting to 32. (5) Depreciation was to be provided on fixtures and fittings at 10% per annum on cost. (6) Archway Supplies was Lippis main supplier. Unusually, Archway purchased goods from Lippis, and it was agreed that the debtor balance should be a contra against the creditor balance. Required Prepare for P Lippis: (a) a Trading and Profit & Loss Account for the year ended 31 March Year 12 (b) a balance sheet at 31 March Year 12. (LCCIEB)
303
(1) (2) (3) (4)
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T/23.4
At 31 December Year 3, the end of her first year of trading, Hilda Braquette produced the following list of stock items and asked for your help:
Item (i) (ii) (iii) (iv) (v) (vi) (vii) Quantity 200 500 1,200 50 75 350 450 Original cost 2.00 5.00 1.00 3.00 4.00 3.00 2.00 Selling price 3.00 7.50 1.50 2.50 6.00 4.50 3.00 20 damaged saleable at half price Comments Stock value
20 broken to be thrown away 40 damaged saleable at half price old stock
Required Calculate the stock valuation of each item and total to show the value of Hilda Braquettes closing stock at 31 December Year 3.
304
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Page 305
T/23.5
The following balances were included in the trial balance of James Hanson at 31 March Year 4:
Debit 18,620 238 1,146 Credit 29,410 194
Purchases and sales Returns Stock at 1 Apr Yr 3
At 31 March Year 4, James Hanson counted and valued his stock in hand at cost, 1,382. This included the following 3 items of stock:
Cost price 120 72 80 Net realizable value 140 60 45
Item 1 Item 2 Item 3
Required (a) Prepare a statement, starting with the stock value of 1,382, showing any necessary adjustments in respect of the 3 items of stock above, to show a new stock valuation at 31 March Year 4. (b) Prepare a Trading Account for James Hanson for the year ended 31 March Year 4.
305
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Page 306
T/23.6
The financial year of F Lang, a trader, ends on 31 March. F Lang sells goods at a mark-up of 33 1/3 % on cost price. On 31 March Year 4, the value of his stock at cost was 12,360. On 17 March Year 5, he provisionally valued his stock at 14,220. Between 18 March Year 5 and the end of that financial year, the following took place: (1) Lang bought goods to a purchase invoice value of 740. (2) He returned goods to suppliers that had been invoiced to him at 273. (3) He sold goods to a selling value of 1,320. (4) Lang took goods that had cost 195 for his own private use. Required (a) Prepare a statement adjusting the value of stock at 31 March Year 5 for entry into the Stock Account at cost price. (b) Calculate the effect of the adjustment of the value of stock on the amount of the gross profit 94,800 for the year ended 31 March Year 5. (c) Prepare the Stock Account for the years ended 31 March Years 5 and 6 respectively, assuming that the value of stock at 31 March Year 6 was 15,300. (LCCIEB)
306
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Page 307
T/24.1
The Treasurer of the Southern Jazz Club drew up the following Receipts & Payments Account for the year ended 31 December Year 19:
Balance at bank, 1 Jan Yr 19 Members subscriptions Sale of Festival tickets Sale of food and drink 3,860 3,520 1,840 2,730 Hire of rooms Annual subscription to National Jazz Association Festival expenses Printing and postage Purchase of equipment Purchase of food and drink Balance at bank 2,100 150 1,970 868 1,200 2,480 3,182 11,950
11,950
The following additional information was available: (1) Members subscriptions in arrears at 31 December Year 19 amounted to 50. (2) On 1 January Year 19, the Club owned equipment worth 2,600. It was decided that the equipment owned at 31 December Year 19 should be depreciated by 700. Required Prepare the Income & Expenditure Account in respect of the Southern Jazz Club for the year ended 31 December Year 19. Note A balance sheet is not required.
307
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T/24.2*
Walton Cricket Club had the following Receipts & Payments Account for the year ended 31 December Year 8:
Receipts Balance at bank Subscriptions Refreshment takings Hire of ground Sale of raffle tickets 2,920 8,120 5,200 650 1,010 Payments Purchases refreshments Purchases equipment Wages of groundsman Wages of refreshment staff Telephone Secretarys expenses Light and heat Insurance Repairs/renewals Purchase raffle prizes Balance at bank 3,000 2,460 4,180 1,600 215 468 366 450 1,272 500 3,389 17,900
17,900
The following information was also available:

At 31 December Year 7 340 590 8,000 5,600 50 At 31 December Year 8 560 630 180 50 7,000 7,254 80
Stock of refreshments Creditors for refreshments Subscriptions in arrears Subscriptions in advance Pavilion Sports equipment Insurance prepaid
Required Prepare, for the Walton Cricket Club, for the year ended 31 December Year 8: (a) the Refreshments Account (b) the Income & Expenditure Account. (LCCIEB)
308
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Page 309
T/24.2/A
Walton Cricket Club Refreshments Account for the year ended 31 December Year 8 Stock at 1 Jan Yr 8 Purchases (3,000 - 590 + 630) less Stock at 31 Dec Yr 8 Cost of sales Wages Profit on trading 340 3,040 3,380 560 2,820 1,600 780 5,200 Sales 5,200
5,200
Income & Expenditure Account for the year ended 31 December Year 8 Expenditure Wages groundsman Telephone Secretarys expenses Light and heat Repairs and renewals Insurance (450 + 50 - 80) Depreciation: Pavilion 1,000 Equipment 806 Surplus, excess of income over expenditure 4,180 215 468 366 1,272 420 Income Profit from refreshments 780 Subscriptions 8,120 add Arrears 180 8,300 less In advance 50 8,250 Profit on raffles: Sale of tickets less Cost of prizes Hire of ground
1,010 500
1,806 1,463 10,190
510 650
10,190
309
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Page 310
T/24.3*
The Treasurer of the Belvedere Sports Club prepared the following Receipts & Payments Account for the year ended 30 September Year 11:
Receipts Balance at bank Sale of raffle tickets Sale of refreshments Subscriptions 3,160 810 4,020 4,160 Payments Purchase of refreshments Insurance Printing and stationery Light and heat Repairs to equipment Purchase of raffle prizes Wages refreshments staff Purchase of equipment Wages ground staff Postage Balance at bank 2,460 250 165 235 430 390 1,710 2,400 1,220 80 2,810 12,150
12,150
Additional information:
30 September Year 10 90 100 1,020 35 30 6,500 30 September Year 11 60 170 1,310 50 54 8,000
Subscriptions in advance Subscriptions in arrears Stock of refreshments Insurance paid in advance Light and heat accrued due Equipment
Required Prepare, for the Belvedere Sports Club, for the year ended 30 September Year 11: (a) a Refreshments Trading Account (b) an Income & Expenditure Account. Note A balance sheet is not required.
310
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Page 311
T/24.3/A
Belvedere Sports Club Refreshments Trading Account for the year ended 30 September Year 11 Stock at 1 Oct Yr 10 Purchases less Stock at 30 Sep Yr 11 Cost of sales Wages Profit on trading 1,020 2,460 3,480 1,310 2,170 1,710 140 4,020 Sales 4,020
4,020
Income & Expenditure Account for the year ended 30 September Year 11 Expenditure Insurance (250 + 35 - 50) Printing and stationery Light and heat (235 - 30 + 54) Repairs to equipment Wages ground staff Postage Depreciation of equipment Surplus of income over expenditure 235 165 259 430 1,220 80 900 1,531 4,820
** Subscriptions: add In advance 30 Sep Yr 10 In arrears 30 Sep Yr 11 90 170 4,160 260 4,420 less In arrears 30 Sep Yr 10 In advance 30 Sep Yr 11 100 60
Income Profit on refreshments Subscriptions Profit from raffle: Sale of tickets less Cost of prizes
140 4,260**
810 390
420
4,820
160 4,260
311
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Page 312
Appendix 2: Summarized answers to selected exercises

1.1 (1) (2) (3) (4) (5) (6) (7) Goods +350 Bank -350 Cash +290 Goods -290 Office furniture +318 D Jackson, Creditor +318 Loan,T Walls -1,500 Bank -1,500 Bank +965 F Wiles -965 Postage +11 Cash -11 Bank -617 T Gates -617
1.2
(i) Computer -3,600 Bank +3,600 (ii) Computer -3,600 Debtor +3,600 (iii) Computer -3,600 Bank +2,000 Debtor +1,600 Assets 23,660 Capital 16,190 Other liabilities 7,470 (i) 31 Oct Yr 3: Assets 22,905 Capital 16,045 Other liabilities 6,860 (ii) 30 Nov Yr 3: Assets 22,145 Capital 16,045 Other liabilities 6,100 Debited Purchases Cash Equipment T Ball D Trill Office furniture Debited A Darby Returns inwards Bank T Zuck Creditor, F Lane Returns inwards Debited Purchases Creditor Office equipment Rent Cash Bank Credited T Ball Sales Bank Returns outwards Sales Creditor,T Doyle Credited Sales A Brittle A Darby Returns outwards Bank A Darby Credited Cash Bank Office Services Ltd Cash Sales F Tracey
1.3 1.5
2.1 (1) (2) (3) (4) (5) (6) 2.2 (1) (2) (3) (4) (5) (6) 3.1 (1) (2) (3) (4) (5) (6)
312
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Appendix 2: Summarized answers
3.2 (1) (2) (3) (4) (5) (6) (7)
Debited Bank J King Telephone Cash Insurance Purchases Returns inwards
Credited T Ward (loan) Sales Bank Office furniture Bank R Veal B Trent
4.1 (a) Cr balance 1,215 4.1 (b) Debit balance on debtors account; representing an asset 4.6 5.3 5.4 7.1 7.3 7.4 7.6 Trial balance totals 31,780 Gross profit 17,210 Gross profit 27,180 Gross profit 18,030 Gross profit 85,260 Gross profit 18,170 Gross profit 82,350 Balance sheet: Net profit 5,090 Net profit 6,900 Net profit 7,270 Net profit 23,250 Net profit 6,850 Net profit 14,800
Fixed assets 162,500 Current assets 40, 894 Amounts due in more than 1 year 26,000 Creditors 16,394 Capital 161,000
9.2
Multiple choice: (1) (b) and (d) (2) (a) and (c) (3) (b) and (d)
10.1 Balances at 31 Mar Yr 5: Cash 117 Bank 978 (Dr) Discount Allowed Account Discount Received Account Dr 18 Cr 16
10.2 Balances at 31 May Yr 6: Cash 423 Bank 8,259 Discount totals: Discount allowed Discount received Dr 80 Cr 71
313
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Page 314
10.3 Balances of Cash Book before adjustment: Cash 99 Bank 383 (Dr) Balances after adjustment: Cash 99 Bank 200 (Dr) 10.4 (a) Bank balance at 31 May Yr 11: 1,198 (Dr)
(b) Discount Allowed Account Dr 25 Discount Received Account Cr 47 Both recorded in the General (Nominal) Ledger 11.1 (a) Sales Day Book total for August Year 6 2,133 11.2 (a) Sales Day Book total for September Year 6 1,672 11.3 (a) Purchases Day Book total for October Year 8 1,930 11.4 Balances at 31 Jul Yr 2: Cash 263 Bank 2,129 Discount totals: Dr Cr Discount allowed Discount received 60 30 1,305 152
12.1 (a) (i) Sales Day Book total (ii) Returns inwards Day Book total
12.2 (a) (i) Purchases Day Book total 1,141 (ii) Returns Outwards Day Book total 109 12.3 (a) Purchases Day Book total Sales Day Book total Returns Outwards Day Book total Returns Inwards Day Book total 12.4 (a) Purchases Day Book total Purchases Returns Day Book total Sales Day Book total (b) To encourage prompt payment. 12.5 (a) Purchases Day Book total 15,155 14.1 (a) Rates Telephone Insurance Rent receivable Wages To P/L 31 Dec Yr 5 1,510 Cr 262 Cr 700 Cr 4,000 Dr 46,470 Cr Balance b/d 1 Jan Yr 6 450 Dr 47 Cr 60 Dr 160 Dr 840 Cr 988 1,349 127 174 1,436 64 1,336
314
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Page 315
14.1 (b)
M Paine Balance sheet (extract) at 31 December Year 5 Amounts due within 1 year (current liabilities) Accruals: Telephone Wages
Current Assets Prepayments: Rates Insurance Rent receivable
450 60 160 670
47 840 887
14.2 (a) (i) Rent (ii) Commission receivable (iii) Telephone 14.2 (b)
To P/L 31 Dec Yr 10 4,950 Cr 65,800 Dr 1,010 Cr
Balance b/d 1 Jan Yr 11 1,350 Dr 4,700 Dr 300 Cr
L Reinholdt Balance sheet (extract) at 31 December Year 10 Amounts due within 1 year (current liabilities) Telephone accrual
Current Assets Rent in advance Commission due
1,350 4,700 6,050
300
14.4 (a) Insurance Stationery Telephone Rent payable Rent receivable 14.5 (a) (i) (ii) (iii) (iv) 14.6 (a) Rent receivable Rates Advertising Printing/stationery 15.1 Advertising Insurance Office cleaning Rent receivable
To P/L 31 Dec Yr 5 620 Cr 780 Cr 572 Cr 3,570 Cr 900 Dr To P/L 30 Jun Yr 5 360 Cr 560 Cr 1,640 Cr 2,220 Dr To P/L 30 Jun Yr 9 2,630 Dr 3,300 Cr 2,400 Cr 2,185 Cr
Balance b/d 1 Jan Yr 6 95 Dr 160 Dr 45 Cr 56 Cr 740 Dr 150 Dr Balance b/d 1 Jul Yr 5 190 Cr 50 Dr 280 Cr 190 Cr Balance b/d 1 Jul Yr 9 740 Cr 840 Dr 580 Dr 3,100 Dr 615 Cr
Depreciation charge Net book value (a) 2,100 (b) 4,160 8,300 6,240
315
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Page 316
15.2 Balances at 1 Jan Yr 8: (ii) Provision for depreciation of motor van (iv) Provision for depreciation of fixtures and fittings
8,356 Cr 3,440 Cr
15.4 Balances at 1 Jan Yr 8: (ii) Provision for depreciation of computer equipment 4,800 Cr (iv) Provision for depreciation of motor vehicle 7,120 Cr 15.5 Balances at 1 Jan Yr 6: (1) Provision for depreciation of fixtures and fittings 1,875 Cr (2) Provision for depreciation of motor vehicle 12,816 Cr 15.6 Balance at 1 Jan Yr 7: (ii) Provision for depreciation of furniture and equipment (v) Disposal of Motor Van Account: debit entry P/L profit on sale To P/L Account 31 Mar Yr 4 79 Cr 31 Mar Yr 5 54 Cr 31 Mar Yr 6 78 Dr Balance 1 Apr Yr 6 435 Cr 3,900 Cr 1,386
16.1 (a) (ii) Provision for doubtful debts:
16.2 (a) (i) (2) Provision for doubtful debts: To P/L Account 31 Dec Yr 1 1,410 Cr 31 Dec Yr 2 1,598 Cr 31 Dec Yr 3 1,210 Dr Balance 1.1.4 1,798 Cr 16.4 (a) Provision for doubtful debts: To P/L Account 31 Dec Yr 8 152 Cr 31 Dec Yr 9 764 Cr 31 Dec Yr 10 336 Dr 240 240 240 To P/L Account 31 Dec Yr 4 275 Cr 31 Dec Yr 5 245 Dr Balance 1 Jan Yr 6 780 Cr
(b)
Journal Debtor Bad debts recovered Cash/bank Debtor 240
16.5 (iv) Provision for doubtful debts:
316
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17.1 Cash Book (bank) balance: before adjustment 4,549 Dr after adjustment 3,632 Dr 17.2 (a) Cash Book (bank) balance after adjustment 3,966 Dr 17.3 Cash Book (bank) balance after adjustment 3,793 Dr 18.1 Total outlay 97.20 Travelling expenses 16.84 Stationery 13.57 Postage 5.95 Purchases 53.47 Cleaning expenses 7.37 Balance b/d 1 Jul Yr 7 2.80 Reimbursement 97.20 18.2 (a) Total outlay 253.80 Motor-vehicle expenses 97.60 Postage 18.20 Stationery 31.00 Travelling expenses 46.60 Ledger 60.40 Balance b/d 1 Apr Yr 6 46.20 Reimbursement 253.80 (b) (i) To debit of Motor Vehicle Expenses Account (ii) General (Nominal) Ledger 18.4 (a) Week 1: Total outlay 77.48 Wages 45.00 Postage 10.00 Travel 6.15 Sundries 6.58 Ledger 9.75 Reimbursement 77.48 Week 2: Total outlay 74.56 Wages 48.00 Postage 8.73 Travel 3.35 Sundries 14.48 (b) Any 2 from:

theft from box; cash in box incorrectly counted; incorrect amount paid out; amount paid out without being recorded, ie without a voucher.
19.1 (1) Capital (2) Revenue (3) Revenue (4) Capital (5) Revenue 19.2 (1) Revenue (2) Capital (3) Revenue (4) Revenue (5) 5,100 Capital 1,300 Revenue (6) Revenue (7) Capital (8) Revenue 19.3 (1) (2) (3) (4) (5) JK Distributors Revenue Capital Capital Revenue Capital Jameson Partners Capital Capital Revenue Revenue Revenue
317
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19.4
Capital expenditure Invoice Invoice Invoice Invoice 1 2 3 4 42,700 1,460 12,400
Revenue expenditure 25,175 890 62 2,535
Total expenditure 25,175 43,590 1,522 14,935
20.3 (b) Gross profit 29,445 21.1 (1) Compensating error (2) Error of principle (3) Error of original entry (4) Error of commission (5) Error of omission (6) Error of commission 21.2 (a) Errors of principle (b) Increase the gross profit by 1,090 21.3 (1) Principle (2) Omission (3) Original entry (4) Commission 21.4 Totals 382,102 21.5 (1) (2) (3) (4) (5) 22.5 (b) Profit overstated (1) (2) (3) (4) (5) (6) 22.6 (1) (2) (3) (4) (5) (6) Profit understated No effect Cause debit total to exceed credit total No effect No effect 314 430 Cause credit total to exceed debit total 270
5,300 1,800 240 Reduction of net profit 26 18 effect effect effect effect
Increase of net profit
No No No No
318
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22.7
Increased net profit (1) (2) (3) (4) (5)
Reduced net profit 515
No effect
186 1,460 1,560 3,206
515 5,670 2,691 8,361
Provisional net profit add Net adjustment Adjusted net profit
23.2 (a) Gross profit 86,850 Net profit 15,456 (b) Balance sheet: Net assets 36,596 Closing capital 36,596 23.3 (a) Gross profit 24,760 Net profit 12,205 (b) Balance sheet: Net assets 98,385 Closing capital 98,385
23.4 (i) 400 (ii) 2,400 (iii) 1,190 (iv) 125 (v) 300 (vi) 1,050 (vii) 890 Total 6,355 23.5 (a) Pre-adjusted stock value Item 1 no change Item 2 (12) Item 3 (35) Revised stock value (b) Gross profit 10,935 23.6 (a) Provisional value add Purchases less Returns 740 273 14,220 467 14,687 990 13,697 195 13,502 1,382 (47) 1,335
less Sales (1,320 less 25%) less Drawings
319
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Page 320
(b) Pre-adjusted gross profit deduct reduction in value of closing stock (14,220 -13,502) Revised gross profit
94,800 718 94,082
24.1 Deficit (on income/expenditure) 128 Closing accumulated fund 6,332
320
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Page 321
Appendix 3: Glossary
Account A record of transactions by category (such as purchases) or by person or organization. Accumulated fund The capital account of a club or society. Allowance An amount set against a previous purchase or sale. Assets Resources or items owned by the business. Bad debt A debt which is expected never to be paid; that is, an irrecoverable debt. Balance The amount on one side of an account that exceeds the amount on the other side to balance.The book-keeper finds and enters the difference and brings it down. Balance sheet A form of financial statement. Bank current account This account is used for the regular banking and withdrawal of money. Bank deposit account A relatively stable account; withdrawals are usually infrequent. Bank reconciliation statement A statement that accounts for the difference between the bank statement balance and the adjusted Cash Book balance. Bank statement A statement issued by a bank showing the customers account as recorded by the bank. Capital The amount of the owners financial stake in the business. Capital expenditure Expenditure that is expected to be of benefit to the firm over the long term. It is generally incurred on the purchase, alteration, or improvement of fixed assets. Carriage An expense incurred in, or charge made for, the delivery of goods. Carriage inwards A payment made for having purchases delivered. It should be added to purchases in the Trading Account. Carriage outwards A payment to a carrier for delivering goods to customers. It should be shown in the Profit & Loss Account. Cash discount An allowance for the early settlement of an account. Cash purchases Goods bought and paid for immediately (in cash or by cheque). Cash sales Goods sold with immediate payment (in cash or by cheque). Cheque A written instruction to a bank to make payment. Cheque clearance the passing of a cheque through the bank system, with payment completed.
321
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Commission Payment or money received (paid) for carrying out (benefiting from) a service, for example on sales, or providing (receiving) advice. Commission is commonly calculated as a percentage. Compensating error When errors cancel each other out. Contra Used for entries in the Cash Book where a debit bank entry is matched by a credit cash entry and vice versa. Cost of goods sold Opening stock plus purchases less closing stock for a given period. Counter credits Payments into a bank account (a number of cheques, for example) amounting to a stated sum, which are acknowledged by the bank as a credit into the account. Credit note Issued by the seller, granting credit for the return of goods or for deficiency in supply. Credit purchases Goods bought, with payment to be made at a later date. Credit sales Goods sold, with payment to be received by an agreed future date. Credit transfer A direct means of transferring money through the bank system, initiated by the paying party. Creditor A person (or business) to whom money is owed by a business. Current assets Short-term assets, which are directly involved in the trading activities of the firm. Current liabilities Amounts payable within one year. Debtor A person (or business) who owes money for goods or services supplied by a business. Deficit An excess of expenditure over income (for a given period). Depreciation The estimate of the fall in value of fixed assets over a period of time. Direct debit Credit transfer in reverse: it is the direct transfer of money through the banking system, initiated by the payee. Discount allowed A discount granted to a debtor for early payment. Discount received A discount granted by a creditor for early received payment. Dishonoured cheque A cheque that the drawer has failed to honour. Donation A gift of money. Doubtful debts As in provision for doubtful debts: debts that may never be recovered and for which an allowance is made. Drawer The party who first signs a cheque, that is, on whose bank account the cheque is drawn.
322
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Drawings Money, goods, or services withdrawn from the business for the owners personal benefit. Effective purchase price (or selling price) The list price less trade discount. Error of commission When a transaction is entered in a wrong account of the same class. Error of principle When a transaction is entered in the wrong class of account. Expense Outlay or cost. Expense accrual An amount due in respect of an accounting period that remains unpaid at the end of that period. Final accounts Used as a broad term to include the Trading and Profit & Loss Account and the balance sheet. Fixed assets Longer-term assets bought for use within the business. Gross profit An excess of sales income over cost of goods sold. Horizontal balance sheet Two-sided presentation, with assets on the balance sheet on the left and capital/liabilities on the right. Impersonal accounts Accounts concerning things rather than people, such as assets or expenses. Imprest system A system in which a fixed float is reimbursed periodically. Income accrual Income other than sales revenue, outstanding at the end of the period for which it was due. Income prepayment Income received in advance of the due period. Invoice A document issued on a credit sale, prepared by the seller and sent to the buyer. It gives details of the goods supplied, the amount to be paid and the terms of sale. Ledger The set of accounts belonging to a business. In a traditional manual system, these would be kept in a book or series of books. Liabilities Amounts owing to persons outside the business. List price The price of goods before the deduction of a trade discount. Longer-term liabilities Amounts payable in more than one year. Net profit Gross profit less other expenses. Net realizable value Selling price less any costs of getting the goods into a saleable condition. Nil balance No balance remaining on a given account.
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Nominal accounts Income and expense accounts. On account Payment towards an amount owing; a part payment. Opening entries Journal entries recording the opening balances of a new set of accounts. Overdrawn account Occurs when more funds have been withdrawn than put into the account; that is, a deficit. Payee The party to whom a payment is due to be made. Personal accounts Accounts of people or organizations with whom the business deals. Posting Entering transactions or period totals in accounts from day books (including the Cash Book). Prepayment A payment made in advance of an accounting period or due date. Prime entry As in books of prime entry: the point at which a transaction is recorded for the first time, prior to entry in the ledger. Private Ledger Normally used for keeping accounts of a highly confidential nature, such as the Capital Account. Profit The surplus of income over costs, usually calculated for a given time period. Provision An accounting allowance for an estimated known or possible fall in the value of an asset. Purchases Goods bought on credit or for cash, which are intended to be sold later. Purchases Ledger Comprised of suppliers accounts, that is, ledger creditors. Real accounts Comprised of assets. Receipts & Payments Account A summarized version of the Cash Book of a club or society. Reducing balance depreciation A fixed percentage is written off the reduced balance of the asset each year. Reimbursement Makes good the total of outlays in a given period. Returns inwards The return of previously sold goods by the customer, for which an allowance is given. Returns outwards The return of previously bought goods, to the supplier, who makes an allowance. Revenue Income. Revenue expenditure Expenses incurred in running the business and in maintaining fixed assets.
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Running balance The balance on the account is shown, updated, after each transaction entry. A running balance is presented in columnar format. Sales Ledger Comprised of customers accounts, that is, debtors. Set off One amount set against another, to reduce the amount owed or receivable. Source document The basis of an entry in the accounting system, such as a sales invoice. Standing order A direct transfer between bank accounts, involving fixed amounts at regular intervals. Straight line depreciation A fixed proportion is written off the original cost of the asset each year. Terms of sale The conditions for settlement of an account, such as a period of credit allowed or the rate of any cash discount. Trade discount The amount allowed as a reduction of the list price when goods are sold by one business to another business. Transaction on credit Taking ownership of an asset now but paying for it at a later date. Trial balance A periodic check that the total of the debit balances equals the total of the credit balances. Unpresented cheque A cheque not yet presented to the bank for payment. Vertical balance sheet A balance sheet presented to read downwards, like a story.
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Notes
Lesson 11
1 In practice, an invoice may be raised for all sales, both cash and credit. From the audit viewpoint, it is better to have all sales evidenced by an invoice. A retailer is unlikely to enter directly each small sale transaction by debiting the Cash Book and crediting the Sales Account. A summarizing method is likely to be used, eg a till roll acting as a day book.
Lesson 12
1 If the account were to be settled before a return is made, payment would then be made on the gross figure.
Lesson 19
1 Note that the relevant Financial Reporting Standard allows development expenditure to be capitalized, provided there is substantial belief that future product income will arise as a result of the development expenditure.
Lesson 20
1 In a computerized system, entering purchases of fixed assets into a journal may not be necessary. All purchases can be dealt with through the Sales Journal (or Sales Day Book), with coding to ensure that revenue and capital purchases are properly separated.
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prelims

FIRST LEVEL Teachers Guide

201 312 321 326

About the author

Cross-references to How to Pass Book-keeping, First Level (students book)

210 231 237 246 27284

Lesson 1: The accounting equation Transactions through double entry

Extended Syllabus references

2.1 2.2 2.3

The accounting equation

The accounting equation

Alternatively, the equation may be expressed as:

The accounting equation

(1) (2) (3) (4) (5)

The accounting equation

Here, there has been a switch between two assets.

The accounting equation

6 Use the following to show the effect after transaction (d):

The accounting equation

11 Emphasize the equation:

The accounting equation

Alternatively, you may show the following layout:

The accounting equation

The accounting equation

Lesson 2: Purchases, sales, and returns

Extended Syllabus references

5.4 5.5 5.6

Purchases, sales, and returns

2 Goods are now to be divided into:

purchases; and sales

Purchases, sales, and returns

addition to purchases = debit deduction from bank = credit

Purchases, sales, and returns

T Watling Year 7 30 Mar Bank 736 Year 7 12 Mar Purchases 736

Purchases, sales, and returns

Purchases, sales, and returns

Purchases, sales, and returns

Purchases, sales, and returns

are difficult to repack or transport; or are costly to send back.

returns outwards or purchases returns; returns inwards or sales returns.

Lesson 3: Expenses: profit or loss

Extended Syllabus references

employee wages; rent of the premises; and advertising.

Expenses: profit or loss

Expenses: profit or loss

The accounts will appear as follows:

Expenses: profit or loss

Alternatively, give the students the following formula:

profit* (or loss)

Lesson 4: Balancing accounts: the trial balance

Extended Syllabus references

Balancing accounts: the trial balance

3 Explain a nil balance:

Or a variation on the nil balance:

Balancing accounts: the trial balance

Balancing accounts: the trial balance

Lesson 5: Trading and Profit & Loss Accounts

Extended Syllabus references

Trading and Profit & Loss Accounts

Trading and Profit & Loss Accounts

6 Show the double-entry effect in the Purchases and Sales Accounts:

Trading and Profit & Loss Accounts