Book-Keeping, Book-Keeping & Account

LCCI
Level 1 & 2
GENIUS - ACCOUNTANCY TRAINING CENTRE
Syllabus Topics
1. The Accounting Equation
2. Double Entry System
3. Financial Statements
4. The Division of the Ledger
5. Banking Transactions and

Cash Book: Two Columns
6. Cash Book: Three Columns - Cash Discount
7. Sales Day Book, Purchases Day Book, Returns inwards Day

Book, Returns outwards Day Book
8. The Journal
9. The Petty Cash - Imprest System
10. Adjusting for Accruals and Prepayments
11. Depreciation of Non-current Assets
12. Bad Debts and Allowance for Doubtful Debts
13. Bank Reconciliation Statements
14. Capital and Revenue Expenditure
15. Preparing Financial Statements
If you have studied this textbook well,

and prepared fully for your examination,
luck will play only a very small part in the
outcome.
Page: 2
BOOK-KEEPING, BOOK-KEEPING & ACCOUNTS (IAS)

GENIUS - ACCOUNTANCY TRAINING CENTRE Mandalay
CHAPTER 1
The Accounting Equation
The resources of the business are termed assets.
Assets of the business = Assets provided by the owner
Assets provided by the owner is given the term equity (capital).
Assets = Equity (Capital)
Any amounts owing to persons other than the owner are given the term liabilities.
The accounting equation now reads:
Assets = Equity (Capital) + Liabilities
This equations are a form of Financial Statements termed the Balance Sheet (Statement of
Financial Position).
L Wang
Statement of Financial Position as at 1 September Year 6
$ $
ASSETS
Non-current Assets
Premises xxx
Motor Vehicle xxx
Computer xxx xxx
Current Assets
Inventories xxx
Trade Receivables xxx
Cash in hand xxx xxx
Total Assets xxx
EQUITY AND LIABILITIES

Proprietors Capital xxx
Non-current Liabilities
Loan from T Wells xxx
Current Liabilities
Trade Payables xxx
Bank Overdraft xxx xxx
Total Equity and Liabilities xxx
Page: 3
LCCI FIRST & SECOND LEVEL - STUDY TEXT

EXERCISES
1.1 Insert the missing figure in each of the following:
Assets Equity Liabilities

$ $ $
(a) 1,260 940
(b) 3,200 750
(c) 5,800 920
(d) 7,840 4,910
(e) 9,000 0
1.2 List the following items and alongside each write the word asset or liability as
appropriate:
- Loan from T Masters

- Trade Receivables
- Fixtures and Fittings
- Premises
- Trade Payables
- Inventories
- Bank overdraft
1.3 Draw up W Pentecosts complete Balance Sheet (Statement of Financial Position)

from the following incomplete data at 30 June Year 9. Your answer should include
the missing item.
$
Cash at bank 2,614
Trade Payables 4,150
Inventories 5,860
Fixtures and fittings 1,900
Trade Receivables 3,750
Motor vehicles 4,200
Loan from D Galbraith 3,600
End of Chapter - 1
Page: 4

CHAPTER 2
Double Entry System
1. Ledger
Left-hand side Right-hand side

= Debit side = Credit side
(or Dr) (or Cr)
Asset account
Increases Decreases
+ -
Liabilitiy account
Decreases Increases
- +
Capital account
Decreases Increases
- +
Each of these represents a T account. This two-sided account layout has long been used to
apply and show double-entry book-keeping.
Page: 5

EXERCISES
2.1 Draw up the following table. In the right-hand columns you should enter the names
of the accounts which are to be debited and credited respectively.
Debit Credit
(a) Bought office furniture for cash
(b) Sold goods on credit to T Rich
(c) Bought motor vehicle on credit from
L Wolfson & Co
(d) A customer, R Price, pays the business by cheque
(e) The owner puts a further amount into the business
by cheque
(f) Paid by cheque for the motor vehicle bought from
L Wolfson & Co
2.2 Prepare accounts in the books of N Eley to record the following transactions:
Year 5
Aug 1 Started business with $6,000 in the bank
Aug 6 Bought a motor vehicle on credit from Elstead Garage for $2,800
Aug 15 Purchased goods by cheque $420
Aug 23 Bought office equipment on credit from Logmore & Sons for $370
Aug 29 Paid by cheque the amount due to Elstead Garage
2.3 Enter the following transactions into the accounts of T Pointer:

Year 3
Mar 1 Started business with $5,000 cash
Mar 4 Transferred $4,500 of the cash into a newly-opened business bank
account
Mar 8 Bought office equipment, paying by cheque $250
Mar 15 Bought goods on credit from T Earl for $360
Mar 20 Sold for cash $80 goods which had cost the same amount
Mar 27 Paid T Earl by cheque the amount that was owing
2.4 You are required to enter the following transactions of D White in appropriate
accounts:
Year 4
Oct 2 Bought goods on credit $370 from W Steel
Oct 5 Sold goods for cash $96
Oct 8 Bought delivery vehicle (for use in the business) by cheque $3,100
Oct 14 Returned goods to W Steel $30
Oct 20 Sold goods on credit $490 to F Platt
Oct 24 Sent cheque to W Steel $340
Oct 27 F Platt returned goods $35
2.5 Enter the following transactions of R Webster in appropriate accounts:

Year 5
Mar 1 Commenced business with $10,000 in the bank
Mar 3 Bought office furniture by cheque $460
Mar 5 Bought goods on credit $375 from T Hunt
Mar 8 Returned goods to T Hunt $55
Mar 12 Sold goods on credit $156 to B Wright
Mar 15 Bought motor vehicle on credit from Scales Motors $3,600
Page: 6

Mar 19 B Wright returned goods $26

Mar 23 Sent cheque for $3,600 to Scales Motors
Mar 26 Sent cheque to T Hunt in settlement of account
Mar 30 Received cheque $70 from B Wright
2.6 Record the following in appropriate accounts, using the rules of double entry:
Year 4
May 1 L Western commenced business with cash of $15,000
May 3 Transferred $13,000 cash into a bank account
May 6 Purchased goods on credit from J White for $760
May 8 Paid rent in cash $250
May 10 Bought office equipment by cheque $1,300
May 14 Returned to J White goods $30
May 17 Sold goods on credit to T Swann for $270
May 21 Paid rent in cash $250
May 24 Paid insurance by cheque $140
May 26 Sent cheque to J White for $300
May 28 Sold goods for cash $290
May 30 Received cheque from T Swann in settlement
May 31 L Western made drawings in cash of $120
2.7 Record the following in appropriate accounts, using the rules of double entry:
Year 4
Apr 1 L Timms started in business with $5,000 in the bank
Apr 3 Bought office equipment for $370 by cheque
Apr 5 Paid rent by cheque $260
Apr 8 Purchased goods on credit $420 from A Smart
Apr 11 Returned goods to A Smart $35
Apr 14 Drew from bank for office cash $130
Apr 15 Paid wages in cash $115
Apr 18 Sold goods on credit to R Squires $175
Apr 21 Bought stationery by cheque $20
Apr 24 Sold goods for cheque $85
Apr 27 Paid by cheque the amount owing to A Smart
Apr 30 Timms paid a further $1,000 into the bank account
2.8 Enter the following in trade receibales and trade payables accounts only. Balance
each account at 31 March Year 5 and bring your balances down as appropriate.
Year 5
Mar 2 Bought goods $270 on credit from T Dove
Mar 4 Sold goods $145 on credit to N Small
Mar 7 Returned goods which had cost $35 to T Dove
Mar 10 Bought goods $360 on credit from A Smith
Mar 13 N Small returned goods which he had bought on 4 March for $20
Mar 15 Bought goods $310 on credit from T Dove
Mar 21 Sent cheque for $70 to A Smith in part payment
Mar 26 N Small returned goods which he had bought on 23 March for $35
Mar 28 Sent cheque for $235 to T Dove
Mar 30 Received cheque from N Small for $125
Mar 31 Sent cheque for $290 to A Smith
Page: 7

2.9 On 31 December Year 4, T Lennon had the following account balances:
$
Motor vehicle 4,500
Purchases 2,960
Sale revenues 4,230
Inventory 1,800
Cash at bank 6,740
Wages 2,310
Rent 1,250
Drawings 180
General expenses 930
Loan from D Waller 2,000
Capital 21,700
Prepare the trial balance of T Lennon at 31 December Year 4.
End of Chapter - 2
Page: 8

CHAPTER 3
Preparing Financial Statements
3.1 Format of the Income Statement of a Sole Trader
Owen Jones
Income Statement for the year ended 31 December 20X0
$ $
Revenue xxx
Less: Cost of goods sold
Opening inventory xxx
Purchases xxx
xxx
Less: Closing inventory xxx xxx
Gross profit xxx
Add: Income
Discount Receive xxx
Interest Receivable xxx xxx
xxx
Less: Expenses
Motor expenses xxx
Rent and rates xxx
Light and heat xxx
Sundry expenses xxx
Depreciation
Motor Vans xxx
Office Equipment xxx xxx
Net profit for the year xxx
Page: 9

3.2 Format of the Statement of Financial Position for a Sole Trader
Owen Jones
Statement of Financial Position at 31 December 20X0
Cost Accumulated Net Book

Depreciation Value
$ $ $
ASSETS
Non-current Assets
Premises xxx xxx xxx
Motor vehicles xxx xxx xxx
xxx xxx xxx
Current Assets
Inventories xxx
Trade receivables xxx
Less: Allowance for doubtful debts xxx xxx
Prepayments xxx
Cash at bank xxx
Total Assets xxx
Capital and Accumulated Profits

Capital at 1 January 20X0 xxx
Add: Net profit for the year xxx
Less: Drawing for the year (xxx)
xxx
12% Debentures xxx
Current Liabilities
Trade payables xxx
Accruals xxx xxx
Page: 10

EXERCISES
3.1 From the following trial balance of T Wedburn, prepare Income Statement for the
year ended 31 December Year 6 together with a Balance Sheet (Statement of
Financial Position) at that date.
T Wedburn
Trial Balance at 31 December Year 6
Dr Cr
$ $
Purchases 26,200
Sales/Revenue 34,670
Wages 6,100
Rent 1,200
Insurance 160
Lighting and heating 380
Cash at bank 4,130
Premises 54,000
Drawings 2,600
Capital 68,660
105,030 105,030
Wedburn valued his inventory at 31 December Year 6 at $3,100.
3.2 From the following trial balance of P Franks, prepare Income Statement for the year
ended 28 February Year 5 together with a Balance Sheet (Statement of Financial
Position) at that date.
P Franks
Trial Balance at 28 February Year 5
Dr Cr
$ $
Purchases 155,400
Inventory, 1 March Year 4 12,600
Returns inwards 5,200
Returns outwards 6,650
Heating and lighting 3,900
Salaries and wages 48,500
Sundry expenses 4,650
Rent and rates 2,300
Premises 104,000
Equipment 28,000
Bank 960
Cash 76
Page: 11


Loan; repayable 28 Feb Year 9 32,000
Drawings 10,600
Capital 145,270
420,936 420,936
Inventory at 28 February Year 5 was valued at $16,100.
3.3 From the following trial balance of T Williams, prepare Income Statement for the
year ended 31 May Year 7 together with a Balance Sheet (Statement of Financial
Position) at that date.
T Williams
Trial Balance at 31 May Year 7
Dr Cr
$ $
Purchases 103,500
Wages and salaries 15,320
Buildings 32,000
Inventory, 1 June Year 6 27,230
Carriage inwards 630
Rent 5,400
Returns outwards 960
Insurance 325
Returns inwards 430
Loan from T Smart, repayable
in Year 11 15,000
Sundry expenses 475
Carriage outwards 2,340
Cash at bank 4,450
Cash in hand 195
Drawings 11,400
Capital 62,005
229,405 229,405
Inventory at 31 May Year 7 was valued at $30,580.
End of Chapter - 3
Page: 12

CHAPTER 4
The division of the ledger
The sub-divisions could be as follows:
(a) customers personal accounts (receivable accounts) Receivables Ledger
(b) suppliers personal accounts (payable accounts) Payables Ledger
(c) concerned with the receiving and paying out of

money, whether by cash, cheque or other methods Cash Book
(d) the remaining accounts General Ledger

(or nominal ledger)
Types of account
The basic division is into:
(a) Personal accounts - the individual accounts of receivables and payables
(b) Impersonal accounts - the accounts of things rather than of people
Impersonal accounts are sometimes sub-divided into:

(i) Real accounts - covering assets, eg premises, motor vehicles, stock, cash and
bank, etc.
(ii) Nominal accounts - the various income and expense accounts, eg sales, wages,
insurance
Further division of the ledger

Possible sub-divisions of the sales ledger are:
(i) on an alphabetic basis - according to customer names (first letter of surname),
e.g A-E, F-J, K-N, O-S, T-Z
(ii) on a numerical basis - each new customer is given the next available number:
the system builds up progressively, e.g 1-400; then starting 401-800; etc.
(iii) on a geographic (or territorial) basis - areas or regions. Possibly according to

sales territories
(iv) on a product basis - according to product categories
(v) by type of customer - trade customer accounts (=firms) might be kept separate
from those of private individuals.
(vi) Another possible sub-division is according to the level of credit (i.e outstanding
debt) allowed.
Some organisations keep a separate private ledger. Instead of being kept in the general
ledger, certain accounts - capital, drawings, income statements - are kept separately with
only the proprietor and one or more senior staff having access. This is to maintain
confidentiality.
Page: 13

Note that the capital account and the drawings account are classed as personal accounts.
The income statement, though, is classed as a nominal account.
Illustration
Transaction Name of ledger Entries in accounts
(a) Purchase of goods General ledger Dr Purchases
by cheque Cash book Cr Bank
(b) purchase of goods General ledger Dr Purchases

on credit Payables ledger Cr Trade Payables
(c) sale of goods Cash book Dr Cash

for cash General ledger Cr Sales
(d) sale of goods Sales ledger Dr Trade Receivable

on credit General ledger Cr Sales
(e) puchase of motor General ledger Dr Motor vehicle

vehicle by cheque Cash book Cr Bank
(f) payment by cheque Purchases Dr Trade Payables

of a supplier Cash book Cr Bank
EXERCISES
4.1 Set out and complete the following table:
Account Division Account Division

Transaction to be of the to be of the
debited ledger credited ledger
(a) Goods bought
for cash
(b) Sold goods on

credit
(c) Paid rent by

cheque
(d) Bought
furniture by
cheque
(e) Goods bought
on credit
(f) Customer paid

account in cash
Page: 14

4.2 Name the ledger in which you would expect each of the following accounts to
appear:
(a) Purchases account

(b) D Smith - Trade Accounts Receivable
(c) Rent payable
(d) Machinery
(e) Drawings
(f) Sales
4.3 (a) Name four types of personal account.
(b) What type of account is each of the following?
(i) machinery
(ii) sales
(iii) general expenses
(iv) bank
(v) inventory
End of Chapter - 4
Page: 15

CHAPTER 5
Banking Transactions and
Cash book: two columns
EXERCISES
5.1 Prepare a two-column cash book from the following transactions, balancing at the end
of the month.
Year 3
Nov 1 F Mills started in business with $3,000 in cash
Nov 2 Banked $2,800 of the cash
Nov 4 Paid rent by cheque $140
Nov 7 Bought goods by cheque $370
Nov 10 Bought stationery for cash $46
Nov 12 Paid wages in cash $120
Nov 14 Withdrew from bank for office cash $160
Nov 17 Cash sales paid direct into the bank $230
Nov 20 Paid carriage in cash $34
Nov 23 Cash sales $220
Nov 26 F Mills withdrew $60 in cash for private use
Nov 28 Banked $200 of cash
Nov 30 Bought goods by cheque $430
5.2 Prepare a two-column cash book from the following details, balancing it at the end of
the month.
Year 8
May 1 Balances brought forward from previous monthj:
Cash $67; Bank $1,037 (Dr)
May 3 Drew cheque payable to D Petts $215
May 5 Withdrew from bank for office cash $50
May 7 Paid wages in cash $80
May 10 Cash sales $375: $300 of this was paid direct into the bank account
May 13 The proprietor withdrew by cheque for private use $360
May 16 Drew cheque payable to L Ryan $294
May 19 Bought goods by cheque $490
May 22 Cash sales $240
May 24 Banked $250 cash
May 27 Paid general expenses in cash $32
May 29 Drew cheque payable to T Marle $330
End of Chapter - 5
Page: 16

CHAPTER 6
Cash Book: Three Columns - Cash Discount

There are two types of cash discounts that are recorded in the ledger accounts:
(i) Discount allowed
This is cash discounts allowed by the business to its customers (trade account
receivables) when they pay their accounts quickly.
(ii) Discount received

This is cash discounts received by the business from its suppliers when it pays what
it owes quickly.
EXERCISES
6.1 Maria Metaxa had the following Cash Book balances at 1 February 20X7.
Cash $65
Bank $3,196 Dr
During the month of February 20X7, she had the following transactions:
Feb 2 Bought $50 of postage stamps from cash.

Feb 4 Cash sales banked the same day, $2,610
Feb 6 Cash purchases, paid by cheque, for $1,075
Feb 6 Paid wages by cheque, $2,167
Feb 8 Received a cheque from D Pole for $1,250 in settlement of a debt of
$1,280
Feb 12 Drew a cheque to increase cash in hand by $100
Feb 15 Paid electricity by cheque, $53
Feb 16 Purchased stationery for cash, $38
Feb 21 Paid travelling expenses of $19 from cash
Feb 23 Received a cheque for $1,760 from E Holme in settlement of his
account of $1,800
Feb 25 Paid telephone bill by cheque, $132
Feb 28 Paid P Barratt & Co. $1,240 by cheque in settlement of their account
of $1,260
Feb 28 Drew a cheque payable to D Smart in settlement of his account;
$2,200 less 2% cash discount.
Required:
(a) Prepare a Three-column Cash Book, balancing it at 28 February. Bring down the
balances at 1 March 20X7.
(b) Post the totals of discount allowed and discount received from the Cash Book to
the Discount Allowed and Discount Received Accounts.
Page: 17

6.2 Sally Foon had the following balances at 1 Octorber 20X2:
Cash $68
Bank $1,692 Cr
The following are her transactions for the month of Octorber 20X2:
Oct 2 Received a cheque of $160 from P Mace in full settlement of a debt of

$168. This was paid straight into the bank.
Oct 10 Cash sales paid direct to bank, $2,086
Oct 12 Drew a cheque for $75 in favour of W Eastern
Oct 12 Received a cheque for $560 from G Lai in settlement of the balance
owed
Oct 14 Paid $35 cash for stationery
Oct 16 Paid to F Samway the sum of $86 by cheque in settlement of an
amount owed to him of $90
Oct 18 Drew cheque for office cash, $150
Oct 20 Cash sales $1,120: cash kept in office safe.
Oct 21 Received loan interest of $60, and paid this into bank. The sales of
the previous day were also banked
Oct 22 Paid cleaners wages out of cash, $35
Oct 22 The cheque from G Lai, received on 12 Octorber 20X2, was returned
by the bank marked refer to drawer.
Oct 24 Paid telephone charges by cheque, $147
Oct 26 Received a cheque of $704 from B Charlke in settlement of his
account amounting to $720.
Oct 28 Paid $40 out of cash for office expenses.
Oct 30 Paid to L Hall by cheque in full settlement of the $260 balance on his
account, less 5% cash discount.
Oct 30 The bank notified Sally that they had charged $20 interest to her
account.
Required:
(a) Prepare a Three-column Cash Book for the month of October 20X2. Balance the
cash and bank columns, bringing down the balances at 1 November 20X2.
(b) Total the two discount columns and state to which ledger accounts the totals will
be posted and to which side of each account.
(c) Post the totals of the discount allowed and discount received from the Cash Book
to the Discount Allowed and Discount Received Accounts.
End of Chapter - 6
Page: 18

CHAPTER 7
Sales Day Book, Purchases Day Book, Returns

Inwards Day Book, Returns Outwards Day Book
1. Sales Day Book (Sales Journal)

Sales invoice
= source document
Sales Day Book

= book of prime entry
Promptly
Monthly transfer
transfer
Receivables Ledger
General Ledger -Trade Accounts Receivable
Sales Account debited
credited
The structure of the sales day book
2. Purchases Day Book (Purchases Journal)

Purchases invoice
= source document
Purchases Day Book

Promptly
Monthly transfer
transfer
General Ledger Payables Ledger

- Purchases Account - Trade Accounts Payable
debited credited
The structure of the purchases day book
Page: 19

3. Return Inwards Day Book (Return Inwards Journal)
Credit Note issued

= source document
Return Inwards Day Book

Promptly
Monthly transfer
transfer
General Ledger Receivables Ledger

- Returns Inwards Accounts -Trade Accounts Receivable
debited credited
The structure of the return inwards system
4. Return Outwards Day Book (Return Outwards Journal)

Credit Note received
= source document
Return Outwards Day Book

Monthly
Promptly transfer
transfer
Payables Ledger General Ledger

- Trade Accounts Payable -Return Outwards Accounts
debited credited
The structure of the return outwards system
EXERCISES
7.1 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; and
(c) record the transfer to the Sales Account in the General Ledger at the end
of the month.
Page: 20

Credit sales to:

List Trade
Price Discount
20X5 %
July 2 D Smith 612 20
July 7 T Ronald 640 25
July 12 N Smithers 320 20
July 18 L Malt 186 -
July 23 D Smith 260 15
July 30 T Ronald 580 25
7.2 From the following details you are to:

(a) enter the items in the Purchases Day Book;
(b) post the items to the relevant accounts in the Purchases Ledger; and
(c) record the transfer to the Purchases Account in the General Ledger at the end of
the month.
Credit purchases to:

20X3
April 1 D Bellamy 306
April 3 A Browne 215
April 10 Swift & Co 438
April 14 D Bellamy 280
April 21 R Green 176
April 27 Swift & Co 342
7.3 20X8
July 2 Credit purchase from T Wilton, 216
July 4 Credit sale to A Dobbs at list price of 360, subject to 20% trade
discount
July 7 Returned goods to T Wilton, 30
July 12 Credit sale to R Western at list price of 430, subject to 20% trade
discount
July 15 A Dobbs returned to us goods with a list price of 40
July 18 Credit purchase from T Wilton, 340
July 21 Credit sale to J Fuller at list price of 420, subject to 15% trade
discount
July 23 R Western returned to us goods with a list price of 70
July 25 Credit purchase from Avon Supplies, 163
July 28 Returned goods to Avon Supplies, 27
July 30 Credit sale to F Long, 46
Required:
(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
Ledger.
(c) Record the transfer to appropriate accounts in the General Ledger at the
end of the month.
End of Chapter - 7
Page: 21

CHAPTER 8
The Journal
(i) The Journal is used to record transactions that are not entered in the other
books of original entry.
(ii) Alternative names for the Journal are the General Journal or Journal Proper.
(iii) A journal entry states which account is to be debited and which account is to be
credited, along with a narrative to explain the reason for the entry.
(iv) The journal is not a part of the double entry system; it is just a form of diary
supporting the double entry.
Advantages of using the journal

(i) It is a valuable and easily accessible record concerning the purchase and sale of
non-current assets on credit.
(ii) There is less chance of omitting a transaction completely, or of making an entry

on only one side of the accounts.
(iii) It makes fraud by book-keepers more difficult.
(iv) It helps in explaining entries, e.g. various adjustments or the correction of

errors.
8.1 G Gunter is a sole trader and the following were some of his transactions during
the month ended 31 December 20X8.
(i) On 10 December 20X8, old office furniture was sold on credit to Y

Underberg for $120.
(ii) On 12 December 20X8, purchased a new delivery van on credit from KN

Traders for $14,500.
(iii) On 15 December 20X8, G Gunter took goods for his own use valued at
$340.
(iv) F Fern owed G Gunter $230 in respect of goods supplied on credit. Fern
is bankrupt and Gunter receives a cheque for $130 in full settlement of
the debt on 20 December 20X8. The balance of the debt was written off
as a bad debt.
Required:
Prepare journal entries for each of the above transactions. (Narratives are not
required.)
Page: 22

8.2 Show the journal entries necessary to record the following:
20X7
Aug 1 Bought computers on credit from Siskin Computers, $900
Aug 2 The owner took $350 cash for personal use
Aug 7 Returned a faulty computer to Siskin Computers, $300
Aug 13 Bought motor van on credit from Motor Traders for $5,700
Aug 18 D Wong owed the business $2,990, which she is unable to pay in full.
A cheque was received from her for $990 and it was decided to write
off the balances as a bad debt.
Aug 29 Sold fixtures and fittings which were no longer suitable to J

Cummings on credit for $1,250.
End of Chapter - 8
Page: 23

CHAPTER 9
The Petty Cash - Imprest System
(i) Petty Cashier starts the period (week/month) with a fixed amount of money called
the float which is given by the Main Cashier.
(ii) Petty Cashier makes petty cash payments to persons who have completed Petty
Cash Vouchers.
(iii) At the end of the period the Main Cashier checks how much of the Petty Cash float
was paid out.
(iv) Main Cashier reimburses the Petty Cashier with the amount paid out to bring the
float back to the original amount.
EXERCISES
9.1 The following is an analytical petty cash book, using the imprest system, and
applying the following particulars:
Year 3
May 1 The cashier hands a cheque for $100 to the petty cashier to enable
him to obtain cash for the starting float of petty cash.
Voucher No. $
May 3 Stationery 1 5.60
May 5 Postage 2 8.70
May 8 Cleaning expenses 3 15.20
May 12 Payment of amountg owing
to K Sutton in the payables
Ledger 4 27.40
May 20 S Smitt - travel expenses 6 4.50
May 23 Stationery 7 3.20
May 27 Received by petty cashier;
from A Gee, in payment for
a private telephone call 1.20
May 31 The cashier reimburses the
petty cashier the amount paid
out to date.
Required:
(a) Write up a Petty Cash Book for the month of May Year 3 using analysis
columns for stationery, postage, ledger, cleaning and travel.
(b) Give two reasons why a business would use a Petty Cash Book in addition to
the main Cash Book.
Page: 24

9.2 S Garner keeps his petty cash on the imprest system. The imprest float was set at
$200. On 1 May 20X3, the balance of petty cash brought forward amounted to $87.
On 1 May 20X3, S Garner drew cash from the bank to restore the imprest. The
following transactions took place during May 20X3:
May $
3 Paid motor vehicle expenses 32.00
5 Purchased stationery 12.70
8 Purchased postage stamps 9.50
11 Paid cleaning expenses 8.00
14 Paide travelling expenses 11.30
16 Paid D Kane, a supplier 24.80
18 Purchased postage stamps 12.80
21 Purchased stationery 15.10
25 Paid cleaning expenses 9.00
27 Purchased petrol 14.50
30 Parcel post charges 13.20
On 1 June 20X3, S Garner decided to increase the imprest to $250.
Required:
(a) Write up S Garners Petty Cash Book, using the following analysis columns:
motor vehicle expenses

stationery
postage
travelling expenses
cleaning expenses
ledger
Balance the Petty Cash Book at 31 May 20X3, carry down the balance and
show the amount drawn from the bank to make up the imprest at 1 June
20X3.
(b) State the ledger to which the total of each analysis column will be posted.
(c) What is the name of the source document for the petty cash book?
End of Chapter - 9
Page: 25

CHAPTER 10
Adjusting for Accruals and Prepayments
10.1 Expense Accrual

An expense accrual is an amount owing for an accounting period, which remains unpaid
at the end of that period. Expense accrual is also known as accrued expense.
This is done by:
adding the amount of accrual to the amount shown in the trial balance when
including the item in the income statement.
including the amount of the accrual in the balance sheet (statement of
financial position) as a current liability.
10.2 Expense Prepayment

An expense prepayment is an amount paid during the current financial period to cover
an expense for the next financial period. Expense prepayment is also known as prepaid
expense.
This is done by:
Subtract the amount of the prepayment from the amount shown in the trial
balance when including the item in the income statement.
Include the amount of the prepayment in the balance sheet (statement of
financial position) as a current asset.
10.3 Income accrual

An income accrual is income that is due for the financial period, but has not been received
by the end of that period.
This is done by:
Add the amount of the accrual to the amount shown in the trial balance
before it is added to the gross profit in the income statement.
Include the amount of the accrual in the balance sheet (statement of financial
position) as a current asset.
10.4 Income prepayment

A prepaid income is an income received in advance of the accounting period that it relates
to the next accounting period, not the current one.
This is done by:

Subtract the amount of the prepayment from the amount shown in the trial
balance before it is added to the gross profit in the income statement.
Include the amount of the accrual in the balance sheet as a current liability.
Page: 26

EXERCISES
10.1 Ash prepares his accounts annually to 31 December and maintains a single expense
account for Rent, Rates and Insurance.
On 1 January 20X6, the opening accruals and prepayments on this ledger account
were a rent accrual of $500, a rates prepayment of $400 and an insurance
prepayment of $250. The following transactions occurred during the year to 31
December 20X6.
(i) Rent of $500 was paid on 15 January 20X6; $650 on 1 March 20X6, 1 June
20X6 and 1 September 20X6. The amount of $650 due on 1 December was
not paid until 10 January 20X7.
(ii) Insurance totaling $550 was paid on 30 June 20X6 for the year to 30 June
20X7.
(iii) Rates of $1,700 were paid on 1 April 20X6 for the year to 31 March 20X7.
Required:
(a) Prepare the Rent, Rates and Insurance account for the year ended 31
December 20X6, clearly showing the charge to the Income Statement.
(b) Prepare a Balance Sheet (Statement of Financial Position) extract at 31
December 20X6 to show the accruals and prepayments.
10.2 The following balances were extracted from the books of B Kouzalai for the year
ended 30 June 20X7:
$
Revenues 286,370
Purchases 129,860
Inventory at 1 July 20X6 19,223
Inventory at 30 June 20X7 13,980
Stationery 3,650
Heat and light 2,840
Motor vehicle expenses 1,620
Rent payable 11,920
Commission received 1,210
Additional information at 30 June 20X7:

(1) Wages and salaries owing $820
(2) Rent payable accrued $300
(3) Heat and light prepaid $80
(4) Commission receivable due but unpaid $141.
Required:
(a) Prepare an Income Statement for the year ended 30 June 20X7.
(b) Prepare a Balance Sheet (Statement of Financial Position) extract showing the
entries required in the Current Assets and Current Liabilities at 30 June 20X7.
(c) Explain the difference between an accrual and a prepayment.
End of Chapter - 10
Page: 27

CHAPTER 11
Depreciation of Non-current Assets
11.1 The nature of depreciation

Depreciation is an estimate of the fall in value of non-current assets over a period. It
is that part of the cost of a non-current asset used up during a period of use by a
business.
11.2 Causes of depreciation

The main causes of depreciation are as follows:
Physical deterioration, i.e. the wear and tear caused by using the
non-current assets, such as motor vehicles and machinery, over time. In
the case of land, it may be eroded or wasted away by the elements of
nature.
Economic factors, i.e. the non-current asset may become obsolete or
out of date due to an improved product being available, e.g. computers.
Passage of time, i.e. even if an item is not used very often, as the
years pass and it becomes older, it will lose value.
11.3 Methods of calculating depreciation

(i) Straight-line Method (Fixed Instalment Method)
(ii) Reducing Balance Method (Diminishing Balance Method)
EXERCISES
11.1 Andy Pang purchased the following:
$
Fixtures and Fittings 25,000
Office Furniture 18,400
The fixtures and fittings have an estimated life of eight years and a disposal value of
$1,000. The office furniture has an estimated life of ten years and a disposal value of
$200.
Required:
Calculate the straight-line depreciation charge for:
(a) Fixtures and Fittings
(b) Office Furniture
11.2 V Hannah purchased machinery at a cost of $8,000 on 1 January 20X5.

Depreciation is to be charged at 25% per annum using the reducing balance method.
Required:
(a) Calculate the depreciation charge for the years ended 31 December 20X5, 31
December 20X6 and 31 December 20X7.
(b) Show the entries in the Provision for Depreciation account for the years
ended 31 December 20X5, 31 December 20X6 and 31 December 20X7.
(c) Show the Balance Sheet extracts for each of the years, 20X5, 20X6 and 20X7.
Page: 28

11.3 M Dixon started business on 1 January 20X7. On that date she bought two motor
vans for $4,200 each. On 1 August she bought another van for $5,600. Depreciation
is 20% of cost per annum, on the basis that depreciation is charged for each month
of ownership.
Required:
Write up the Motor Vans account and the Provision for Depreciation Account for the
year ended 31 December 20X7.
11.4 On 1 January 20X4, Tisha Lee paid $9,200 for furniture and fittings. She
depreciated these using the straight-line method. She estimates that, at the end of
eight years, their residual value would be $1,400.
On 1 July 20X4, she purchased motor vehicles costing $15,000 for the business. She
depreciated vehicles at the rate of 40% per annum using the reducing balance
method. Her depreciation policy is: any asset purchased in the first six months of a
year has a whole years depreciation while any asset purchased in the second half of
the year has only a half-years depreciation.
Her financial year ends on 31 December.
Required:
(a) Prepare for the years ended 31 December 20X4, 20X5, 20X6 and 20X7:
(i) The Furniture and Fittings Account

(ii) The Provision for Depreciation of Furniture and Fittings
(iii) The Motor Vehicles Account
(iv) Provision for Depreciation of Motor Vehicles.
(b) Show the Balance Sheet (Statement of Financial Position) Extracts at 31

December 20X7 for both Furniture and Fittings and Motor Vehicles.
End of Chapter - 11
Page: 29

CHAPTER 12
Bad Debts
Bad debts are debts that the business is unable to collect. Bad debts are an expense to the
business and are charged against the current profit for the year.
EXERCISES
12.1 M Kassolides incurred the following bad debts during the financial year ended 31
March 20X7:
20X7 $
Jan 30 C Lumas 348
Feb 28 Dent and Son 268
Mar 31 J Lowe 125
A debt of $560,owed by B Down, was paid in part by cheque, $140, on 31 March

20X7. The balance was written off as bad debt.
Required:
(a) Prepare a Bad Debts account.
(b) Prepare an Income Statement extract for the year ended 31 March 20X7.
(c) State the entries, including bank, that should be made when a bad debt is
recovered in a later financial year to the one in which it was written off.
12.2 P Zanders financial year ends on 31 December 20X5.
On 1 December 20X5, he had a balance on his Bad Debts account of $4,340.
On 10 December 20X5, he was informed that M Gorn, a debtor, had stopped trading
and was unable to pay the balance on his account, $1,875.
On 12 December 20X5, a cheque was received for $1,304 from B Late. This was in
settlement of a debt written off as a bad debt on 31 October during the financial
year ended 31 December 20X4.
Required:
Prepare the following for the year ended 31 December 20X5:
(a) Bad Debts Account
(b) B Late Account
(c) Bad Debts Recovered Account
(d) Income Statement Extract.
End of Chapter - 12
Page: 30

CHAPTER 13
Bank Reconciliation Statements

(i) A bank reconciliation statement is prepared to reconcile and explain the difference
between the cash book and bank statement balances and to identify any errors.
(ii) Differences in the cash book and bank statement balances could be due to time
differences, transactions conducted directly through the bank or errors.
(iii) The reconciliation process has two stages; first, updating the cash book and second,
preparing the bank reconciliation statement.
EXERCISES
13.1 The following information relates to the banking transactions of N Swann for August
20X9:
Cash Book (Bank Columns Only)
$ $
20X9 20X9
Aug 1 Bal b/d 2,420 Aug 2 General Expenses (#1012) 67
Aug 4 Sales 835 Aug 9 Wages (#1013) 330
Aug 23 Sales 716 Aug 12 Drawings (#1014) 140
Aug 29 R Quaile 185 Aug 15 Purchases (#1015) 406
Aug 31 Sales 640 Aug 24 Rent (#1016) 290
Aug 25 Wages (#1017) 345
Aug 27 T Wagstaffe (#1018) 502
Aug 31 Balance c/d 2,716
4,796 4,796
Bank Statement
Debit Credit Balance
$ $ $
20X9
Aug 1 Bal b/f 2,420 Cr
Aug 3 #1012 67 2,352 Cr
Aug 4 Credit 835 3,188 Cr
Aug 7 S/O - rates 136 3,052 Cr
Aug 11 #1013 330 2,722 Cr
Aug 15 #1014 140 2,582 Cr
Aug 20 #1015 406 2,176 Cr
Aug 22 D/D - insurance 153 2,023 Cr
Aug 23 V Credit 716 2,739 Cr
Aug 27 #1017 345 2,394 Cr
Aug 29 C/T - T Plamer 268 2,662 Cr
Aug 30 Bank interest 8 2,670 Cr
Page: 31

Required:
(a) Update the Cash Book with the appropriate items at the end of August and bring
down the revised balance at September 1, 20X9.
(b) Prepare the Bank Reconciliation Statement for N Swann at 31 August 20X9, starting
with the bank statement balance.
13.2 G Johnson received his bank statement for the year ended 31 March 20X8. At that
date, it showed that his balance in the bank was $22,900 while his cash book
balance was $23,399.
When he checked the bank statement with his cash book, he found the following:
(i) A standing order payment for rent of $672 had not been entered in his cash
book.
(ii) Cheques drawn by G Johnson amounting to $1,215 had not been presented
to the bank.
(iii) A credit transfer of $814 from T Brock had not been entered in his cash book.
(iv) G Johnson had entered a payment of $470 to P May as $740 in his cash
book.
(v) Bank charges of $46 had not been entered in his cash book.
(vi) The bank had not credited G Johnson with receipts of $2,186 paid into the
bank on 31 March 2008.
(vii) A cheque for $520 from D Holt had been returned by the bank marked refer
to drawer but this had not been recorded in the cash book.
(viii) G Johnson had omitted sales receipts amounting to $626 from his cash book
but they were shown on his bank statement.
Required:
(a) Complete G Johnsons Cash Book at 31 March 20X8.
(b) Prepare a Bank Reconciliation Statement starting with the bank statement
balance.
(c) State briefly the main reason for preparing a bank reconciliation statement.
End of Chapter - 13
Page: 32

CHAPTER 14
Capital and Revenue Expenditure
(i) Capital expenditure is the expenditure on the purchase of non-current assets, or
expenditure to increase the value of an existing non-current asset. Capital
expenditure will increase the assets owned by a business and will appear on the
balance sheet (statement of financial position).
(ii) Revenue expenditure is the cost incurred in the day-to-day running of the
business; it is not concerned with increasing the value of non-current assets. At the
end of the financial year, these costs will be transferred to the income statement.
EXERCISES
14.1 State which of the following items should be treated as capital expenditure and
which as revenue expenditure:
(a) insurance premium for a delivery vehicle
(b) repainting of the shop door
(c) installation of a burglar alarm system
(d) purchase of a shop display counter
(e) purchase of goods for resale
(f) purchase of new tyres for the delivery vehicle
(g) wages of the shop assistant.
14.2 D Pinder had the following transactions during the year ended 31 December 20X2:
(i) Purchased equipment for use in the business, $1,050.
(ii) Paid installation charges for the equipment, $150.
(iii) Took out an annual maintenance contract on the equipment, $210.
(iv) Bought goods for the business, $2,300.
(v) Purchased a new property for expansion purposes, $12,000.
(vi) Paid legal fees relating to the purchase of the property, $890.
Required:
Complete the table below, showing whether each transaction is either capital or
revenue expenditure by placing the relevant amount under the relevant column. The
first transaction has been completed as an example.
Capital Revenue
No.
Expenditure Expenditure
1. $1,050
2.
3.
4.
5.
6.
Page: 33

14.3 The following list of transactions relate to J Breasleys business for the year ended
28 February 20X5:
(i) Purchased a new cash register for use in the business.

(ii) Purchased goods for resale.
(iii) Paid for repainting the office.
(iv) Paid electric bill.
(v) Paid for installation of equipment.
(vi) Paid managers salary.
(vii) Paid for office extensions.
(viii) Purchased vehicle.
(ix) Bought petrol for vehicle.
(x) Paid bank charges.
Required:
(a) State whether each of the above transactions are capital or revenue
expenditure.
(b) Explain the meaning of:
(i) capital expenditure

(ii) revenue expenditure.
End of Chapter - 14
Page: 34

CHAPTER 15
Preparing Financial Statements
EXERCISES
15.1 John Cleaver has just completed his second year of trading. His Trial Balance,
extracted from the Ledger at 31 December 20X6, is as follows:
John Cleaver
Trial Balance at 31 December 20X6
Dr Cr
$ $
Capital 26,120
Loan from brother 8,000
Purchases and Sales/Revenues 49,370 82,578
Returns inwards and outwards 188 326
Inventory at 1 January 20X6 3,930
Drawings 12,300
Receivables and Payables 22,100 9,380
Bank overdraft 1,196
Wages 5,593
Rent 1,860
Insurance 270
Heat and light 440
Advertising 510
Carriage outwards 1,803
Bad debts 436
Non-current Assets (at cost) 32,000
Accumulated depreciation
on Non-current Assets 3,200
130,800 130,800
The following adjustments are to be taken into account:
(i) Inventory at 31 December 20X6 is $2,876.
(ii) Cleaver borrowed the $8,000 from his brother on 1 January 20X6. He has
agreed to pay 15% interest per annum but no payment has yet been made.
(iii) Provide for annual depreciation of non-current assets at 10% on cost.
Required:
Prepare Cleavers Income Statement for the year ended 31 December 20X6, and a
Balance Sheet (Statement of Financial Position) at that date.
Page: 35

15.2 M Tiong, a sole trader engaged in wholesaling, extracted the following Trial Balance
from his books at the close of business on 30 April 20X5:
M Tiong
Trial Balance at 30 April 20X5
Dr Cr
$ $
Office furniture and equipment 6,000
Discounts 1,170 390
Cash at bank 3,240
Cash in hand 160
Inventory at 1 May 20X4 2,970
Purchases and Sales/Revenue 13,890 35,030
Rent, rates and insurance 2,340
Delivery vehicle, at cost 7,400
Provision for depreciation on delivery vehicle 2,000
Capital at 1 May 20X4 20,600
Drawings 4,500
Vehicle running expenses 1,840
Sundry expenses 410
61,670 61,670
In addition, Tiong has noted the following points:
(i) Inventory at 30 April 20X5 has been valued at $3,160.
(ii) Wages accrued amount to $280.
(iii) The depreciation provision on the delivery vehicle is to be increased by

$1,200. A provision of $500 is to be created in respect of depreciation on
office furniture and equipment.
(iv) During the year, Tiong took goods, at a cost price of $90, for his own use. He
has not yet recorded this in the books of account.
(v) Insurance paid in advance is $120.
Required:
Prepare, in respect of M Tiong:
(a) An Income Statement for the year ended 30 April 20X5.
(b) A Balance Sheet (Statement of Financial Position) at 30 April 20X5.
End of Chapter - 15
Page: 36

Pacagua aha
vandmi.
LCCI LEVEL II Book-keeping &

Accounts
Att hi attano ntho, ko hi ntho paro siy?
One is ones own refuge, who else can be the

refuge?
Dhammapada
Page: 37

Syllabus Topics
1. Advanced aspects of Depreciation
2. Adjusting for Accruals and Prepayments
3. Bad Debts and Allowance for Doubtful Debts
4. Errors and the Use of a Suspense Account
5. Control Accounts
6. Introduction to Partnership Accounts
7. Admission and Retirement of Partners
8. Dissolution of a Partnership
9. Limited Companies Preparing Financial Statements
10. Incomplete Records
11. Inventory Valuation
12. Manufacturing Accounts
13. Non-trading Organisations
14. Ratios Analysis
Page: 38

CHAPTER 1
Advanced Aspects of Depreciation
Depreciation is an accounting adjustment that measures the fall in value of a non-current
asset over a period of time.
1.1 Preparing entries in the depreciation expense account
Example 1.1
Kerry leases a small shop. On 1 July 20X4, she purchased fixtures and fittings costing
$25,000 and a van costing $12,000. She decided to depreciate the fixtures and
fittings at 20% per year on a straight-line basis and the van at 30% per year on a
reducing (or diminishing) balance basis.
Kerry prepares her accounts annually to 30 June.
Required:
Record the transactions for the purchase and depreciation of the assets for the years
ended 30 June 20X5 and 20X6, balancing the ledger accounts at the end of each
year. Kerry maintains separate ledger accounts for the cost and accumulated
depreciation of each type of non-current asset but only one depreciation expense
account.
1.2 Other methods of depreciation
Example 1.2
Excaliber bought a machine on 1 January 20X6 for $160,000. The expected useful
life is four years and the residual value is estimated to be $20,000.
Required:
Calculate the depreciation charge for the year ended 31 December 20X6 and the net
book value at 31 December 20X6, using each of the following bases:
1. Straight line
2. Reducing (or diminishing) balance at 51%
3. Revaluation - estimated value at 31 December 20X6 is $95,000
4. Machine hours - the machine worked for 60,000 hours and has an estimated
useful working life of 150,000 hours.
1.3 Disposal of a non-current asset

Example 1.3
PC Processing owns computer equipment with a cost of $45,000 and accumulated
depreciation of $13,500 at 1 January 20X6. The computer equipment is depreciated
at 30% per year, using the straight-line method, on a monthly basis.
On 1 July 20X6, the company sold all of the computer equipment for $28,750.
Required:
Prepare the ledger accounts record the disposal and show the profit or loss on
disposal transferred to the Income Statement at the year ended 31 December 20X6.
Page: 39

1.4 Preparing entries for assets traded-in or exchanged for a

replacement asset
Example 1.4
Build-It is a manufacturing company that owns three machines. The cost and
accumulated depreciation of these machines at 1 January 20X6 is as follows:
Machine Machine Machine

1 2 3
$ $ $
Cost 1 January 20X6 45,000 62,500 58,000
1 January 20X6 22,000 34,000 27,000
On 1 April 20X6, Machine 1 was traded-in (part exchanged) for Machine 4. The
trade-in value was $20,000 and the company paid an additional $40,000 by cheque.
On 31 October 20X6, Build-It exchanged Machine 3 for Machine 5, which was valued
at $38,500.
The year-end date is 31 December 20X6.
Required:
Prepare the Asset Disposal Account to calculate the profit or loss on disposal for
Machine 1 and 3. The company does not charge any depreciation in the year of
disposal.
EXERCISES
1.1 Denholm Ltd purchased a machine on 1 January 20X5 for $120,000 and two motor
vehicles costing $14,000 each. The company depreciates its assets on the following
bases:
Machine - 10% straight-line

Motor vehicles - 25% reducing balance.
Required:
Record the relevant entries in the ledger accounts for Motor Vehicle Cost,
Accumulated Provision for Depreciation and Depreciation Expense for each of the
years ended 31 December 20X5 and 20X6. You may assume that the company
maintains separate accounts for Cost and Accumulated Depreciation for each class of
asset, but only one Depreciation Expense Account.
1.2 Silas Ltd purchased four machines on 1 January 20X7,
Machine A $35,000
Machine B $42,000
Machine C $22,500
Machine D $50,000
Page: 40

The company depreciates its machines on an annual 12% straight-line method basis.
Depreciation is calculated monthly from the date of acquisition to the date of
disposal.
On 30 April 20X7, the company sold Machine C for $15,360 and on 31 October 20X7
Machine A was sold for $28,600.
Required:
Record the relevant entries in the Machinery Cost, Accumulated Provision for
Depreciation, Depreciation Expense and Asset Disposal Ledger Accounts for the year
ended 31 December 20X7.
1.3 Thaw Ltd purchased four trucks on 1 April 20X5. The trucks are depreciated at 25%
based on the straight-line method on a monthly basis. You have been supplied with
the following information:
Truck 1 Truck 2 Truck 3 Truck 4

$ $ $ $
Cost 1 April 20X5 25,000 30,000 36,000 40,000
6,250 7,500 8,750 11,250
1 April 20X6
Sold 30 September 20X6 27,500
Sold 31December 20X6 22,800
Required:
(a) Calculate the depreciation charge on each truck for the year ended 31 March
20X7.
Truck 1 Truck 2 Truck 3 Truck 4

$ $ $ $
Depreciation for year

ended 31 March 20X7
(b) Record the relevant entries in the ledger accounts for Truck Cost,
Accumulated Provision for Depreciation, Depreciation Expense and Asset
Disposal for the year ended 31 March 20X7.
Page: 41

1.4 Weber Industries started in business on 1 April 20X5 and purchased three machines
for $30,000 each. Depreciation is charged on the machines using the reducing
balance method at 35% per annum. On 1 April 20X6 the accumulated depreciation
for each machine was $10,500.
On 1 July 20X6, Weber Industries traded in one of the machines for a truck. The
trade-in value was $18,000 and the business paid an additional $21,000 in cash. The
truck is to be depreciated at 25% using the straight-line method.
On 1 October 20X6, one of the machines was exchanged for a newer model with a
value of $25,000.
Depreciation is charged on an annual basis with a full years charge in the year of
purchase and none in the year of disposal.
Required:
Prepare the asset disposal account for the year ended 31 March 20X7.
End of Chapter - 1
Page: 42

CHAPTER 2
Adjusting for Accruals and Prepayments

2.1 Calculating accruals and prepayments
When preparing the Income Statement, it is important to match income and
expenses in the correct accounting period. This is known as the matching concept
and is carried out using accruals and prepayments.
An accrual is a provision for income or expenses that relate to

the accounting period, but that have not yet been invoiced.
A prepayment is an adjustment for income that has been

received, or expenses that have been invoiced, in advance of
any service or goods being provided.
EXERCISES
2.1 P Jones, a sole trader, had the following account balances on 1 January Year 7:
Rent payable Cr $70

Insurance Dr $40
Telephone Cr $45
Rates Dr $210
During the year, the following payments were made by cheque:
Year 7
Jan 1 Rent payable (quarterly, in advance) 210
Feb 1 Insurance premium for year to 31 January Year 8 600
Feb 1 Telephone bill 127
Mar 1 Rent payable (increased amount) 300
May 1 Telephone bill 146
May 1 Rates for half year to 30 September Year 7 540
Jun 1 Rent payable 300
Aug 1 Telephone bill 163
Sep 1 Rent payable 300
Nov 1 Rates for the half year to 31 March Year 8 540
Nov 1 Telephone bill 184
Dec 1 Rent payable 300
P Jones calculates that at the end of the financial year; 31 December Year 7, he
owes $60 for telephone calls.
Page: 43

Required:
Open the four accounts listed above and post the necessary items to them. Balance
the accounts and make the appropriate transfers to the income statement for the
year ended 31 December Year 7.
2.2 Calculate the following accruals and prepayments at 30 June 20X1:
(a) An invoice for telephone costs totaling $900 was received on 31 August 20X1
and related to the period 1 June 20X1 to 31 August 20X1.
(b) Motor insurance of $420 was paid on 1 February 20X1 for the year to 31
January 20X2.
(c) An invoice for electricity of $840 was received on 15 August 20X1 and related
to the quarter ended 31 July 20X1.
(d) Rent of $8,000 for the six months to 30 September 20X1 was paid on 1 April
20X1.
2.3 Cedar maintains a single ledger account for premises expenses, which includes costs
for rent, rates, electricity and gas.
At 1 October 20X6, the balances on this account consisted of prepayments for rent of
$780 and rates of $1,500, and accruals of $275 for electricity and $130 for gas.
During the year, Cedar paid 12 installments of $800 for rent. The payment made in
September 20X7 related to October 20X7. Rates for the year to 31 March 20X8 were
paid in April 20X7 and totaled $1,700. Total payments during the year amounted to
$3,000 for electricity and $1,900 for gas.
In October 20X7, Cedar received an invoice for electricity charges for the period
ended 30 September 20X7 totaling $245. An invoice for $324 in respect of gas
charges for the three months to 30 November 20X7 arrived in early December.
Required:
Write up the ledger account for premises expenses for the year ended 30 September
20X7 showing the balances c/d and the transfer to the income statement.
End of Chapter - 2
Page: 44

CHAPTER 3
Bad Debts and Allowance for Doubtful Debts

3.1 The allowance for doubtful debts
This is done for two reasons:
(i) To charge possible bad debts as an expense in the Income Statement, and
(ii) To show a realistic trade receivables figure on the Balance Sheet.
A specific allowance for doubtful debts will be made for

individual customer account balances that are unlikely to be
recovered.
A general allowance for doubtful debts will be made for the

remaining customer account balances. This is usually
calculated as a percentage of outstanding trade receivables.
Example 3.1
The Flower Garden has total trade receivables of $29,555 at 30 April 20X3. Included in these
balances are amounts of $560 from Kingsley and $1,495 from Bott. The owner of The
Flower Garden believes that there is a chance that these debts may not be recovered and
would like to provide for them in the accounts. In addition, a general allowance of 2% of the
remaining trade receivables is to be created.
Calculate total allowance for doubtful debts.
Example 3.2
The following information relates to Kline, who has been trading for a number of years.
31/12/X4 31/12/X5 31/12/X6

$ $ $
Total Receivables 83,260 84,590 88,600
Specific allowance 1,260 490 4,600

General allowance 1.5% 1.5% 2%
Required:
Prepare the Allowance for Doubtful Debts Account for each of the years ended 31 December
20X4, 20X5, 20X6. Show the balances brought down and carried down and the transfer to
the Income Statement. Also, prepare extracts from the Income Statement and the Balance
Sheet for each year.
Page: 45

EXERCISES
3.1 Alice Jones started a new business on 1 October 20X4 making and selling ladies hats.
Below is a summary of the trade receivables, bad debts to be written off, bad debts
recovered and specific and general allowances for doubtful debts for the three years
ended 30 September 20X7.
Bad Specific General

Trade Bad debts
debts to allowance allowance
Year ended Receivables recovered
write off required as % of
$ $
$ $ Receivables
30 September 20X5 34,150 500 850 1%
30 September 20X6 39,275 1,800 245 1,475 2%
30 September 20X7 44,498 1,926 423 1,772 3%
Required:
Calculate the total allowance for doubtful debts at 30 September 20X5, 30
September 20X6 and 30 September 20X7.
3.2 (a) Using the information for Alice Jones (3.1 above), prepare the Ledger
Accounts for Bad Debts, Bad Debts Recovered and Allowance for Doubtful
Debts for each of the years ended 30 September 20X5, 30 September 20X6
and 30 September 20X7.
(b) Also prepare extracts from the Income Statement and the Balance Sheet at
30 September 20X7.
End of Chapter - 3
Page: 46

CHAPTER 4
Errors and the Use of a Suspense Account

4.1 Errors not affecting the trial balance agreement
(1) Error of Omission
This type of error occurs when an entry is simply omitted from

the books of account.
Example: Bank charges of $25 have not been entered.
(2) Error of Commission
This type of error occurs when an entry is posted for the

correct amount but to the wrong account. However, the
correct account in which the entry should have been made
and the incorrect account in which the entry was actually
made are of the same type/class of account, e.g. real,
nominal or personal.
Example: A payment of $215 to supplier ABC Ltd has been posted to the
account of supplier ABE Ltd.
(3) Error of Principle
An error of principle occurs when an entry is posted to the

wrong type of account, e.g. a capital account is used instead of
a revenue account.
Example: An invoice for a new machine costing $15,000 was posted to

Repairs and Renewals.
(4) Reversal of Entries
This type of error occurs when the correct accounts are used
but the debits and credits are reversed, i.e. each item shown
on the wrong side of the account.
Example: A sales invoice for $150 was debited to the Sales Account and
credited to the Receivables ledger account of Jones Ltd.
Page: 47

(5) Error of Original Entry
This type of error occurs when the original posting is made for
an incorrect amount.
Example: A bank payment of $570 for rent was posted to the correct
accounts but with a value of $750.
Where the same numbers have been posted in a different order, as here,
this is known as a transposition error. The figures have been transposed.
(6) Compensating Errors
This occurs when two or more errors cancel each other out.
This does not mean that these errors do not have to be found
and corrected but it does mean that they will not prevent the
Trial Balance from balancing. When only one of the errors has
been identified and corrected, the Trial Balance will not
balance until the other has been found and adjusted.
Example: The Motor Expenses Account has been undercast by $150, the
Sales Account has been overcast by $200 and the Purchases Account has
been overcast by $350.
4.2 Using a Suspense Account
A Suspense Account is a temporary holding account for any

difference on the Trial Balance. It enables the final accounts to
be prepared from the Trial Balance in the normal way, while
the source of the error is found.
EXERCISES
4.1 Complete the table to identify each of the types of error listed.
(None of these errors will affect the trial balance.)
Error Type of Error
(a) A purchases invoice for $452 had been

entered into the books of accounts as
$425.
(b) A sales invoice for $200 was debited

to the account of S Smith instead of S
Smyth.
Page: 48

(c) A purchases invoice for stationery,

totaling $375, had not been entered
into the books of account.
(d) The purchase of a computer, costing

$1,200, had been posted to the
Stationery Account.
(e) A sales receipt from Co-Com Ltd was

entered in the books of account as a
debit in Co-Com Ltds ledger account
and a credit in the bank account.
(f) The additions on the Sales account
were overcast by $200 and the
additions on the Rent account were
overcast by $200.
4.2 Prepare journal entries with narratives to correct the following:
(a) Credit purchases of $1,500 from Bryson Ltd were posted to the account of
Britsom Ltd.
(b) A sales invoice for $295 for Walters Ltd had been entered in the books of
account as $259.
(c) Carriage inwards of $62 had been posted to the debit side of the carriage
outwards account.
(d) A purchases payment for Slipshod Ltd of $678 was posted to the debit side of
the bank account and the credit side of the payables ledger account for
Slipshod Ltd.
(e) A cheque payment for petrol, totaling $38, has not been entered in the books
of account.
4.3 Henry Lim prepared a trial balance at 31 January 20X5. The trial balance agreed,
but on inspecting the books the following errors were discovered:
(i) General expenses, paid by cheque, $320, had not been entered in the books.
(ii) Goods previously sold to the Kowloon Trading Co., $330, were returned. This
had been debited to the personal account in the receivables ledger and
credited to the sales returns account.
(iii) A payment for insurance expenses of $103 had been posted to the Light and
Heat account.
(iv) The purchases journal was undercast by $250. The understatement of the
Purchases account figure was compensated by the misposting from the cash
book of wages, $3,420, as $3,670 to Wages account.
(v) Equipment sold at book value, for $1,198 cash. This was debited to the cash
account but credited in error to the firms sales account.
Required:
(a) (i) Name the types of error made in items (i) - (v) above. A different type
of error applies in each case.
(ii) Prepare journal entries including narratives to correct these errors.

Page: 49

Henry Lim prepared provisional final accounts, before the errors in (a) above were
discovered, which showed a net profit of $14,560.
Required:
(b) For each of the corrections in (a), enter in the appropriate column the
amount by which the net profit will change. If there is no effect, write no
effect. Calculate the correct net profit.
The first entry has been made for you.
Provisional
$14,56o
Net Profit
Item
+ -
Number
(1) $320 $14,240
(2)
(3)
(4)
(5)
4.4 The following Trial Balance has been extracted from the books of account of Resin at
30 September 20X9. Depreciation has already been provided.
Resin
Trial Balance at 30 September 20X9
$ $
Non Current Assets - Cost 26,535
Non Current Assets - Provision for depreciation 4,060
Inventory at 30 September 20X9 5,365
Allowance for doubtful debts 135
Bank (Dr) 554
Revenues 37,816
Cost of sales 26,574
Equity 38,947
Drawings 11,223
68,101 98,664
Suspense account 30,563
98,664 98,664
Page: 50

The following errors were subsequently discovered:
(1) Recording a ledger balance on the wrong side of the Trial Balance
The balances for Inventory, Allowance for Doubtful Debts and Drawings were
all on the incorrect side of the Trail Balance.
(2) Posting two debit entries or two credit entries instead of one debit
and one credit
Resins drawings of $400 had been credited to the Bank Account and credited
to the Drawings Account.
(3) Posting the correct debit entry but posting a different credit amount
Sales invoices raised by Resin for $1,250 had been correctly credited to the
Sales Account but posted to Trade Receivables as $1,205.
(4) Posting the debit entry but omitting the credit entry entirely
Resin purchased non-current assets costing $4,388. The non-current assets
account was correctly debited but no entry was made in the bank.
(5) Incorrect additions on individual ledger accounts

The figure for Trade Payables included on the Trial Balance of Resin was
found to be understated by $300.
(6) Omitting a ledger balance entirely from the Trial Balance

When the accounting records for Resin were checked, it was discovered that
a balance on the Wages and Salaries Account of $1,500 had not been
included in the Trial Balance.
Required:
(a) Prepare journal entries to correct errors 1-6 above.
(b) Prepare the Suspense Account and the revised Trial Balance at 30 September
20X9.
4.5 D Swift keeps his accounts using the double entry system and drew up a trial
balance at 31 December 20X9. It failed to agree, and D Swift incorrectly prepared
provisional final accounts, which showed a net profit of $4,100.
On investigation, the following errors were discovered:
(i) Purchases table total for month of December, $3,650, had been posted to the
purchases account as $3,560.
(ii) A payment of $600 made to a trade payable, B Jenkins, had been posted in
error to C Jennings.
(iii) Discounts received of $140 for the month of December had been posted to
the debit side of discounts allowed.
(iv) A bank payment of $54 for a telephone bill had been entered in the cash
book but the double entry had not been posted.
Page: 51

(v) A payment of $380 for rates had been debited to the Insurance Account in
error.
(vi) Wages Account had been debited with $1,480 in respect of the wages D Swift
had paid to his employees.
Required:
(a) Indicate the effect that each of these errors had on the trial balance using the
following layout:
Debit Credit
Overstated Understated Overstated Understated
$ $ $ $
(1)
(2)
(3)
(4)
(5)
(6)
(b) Indicate the effect each correction would have on the net profit and calculate
the correct profit.
If there is no effect, state no effect.
4.6 The book-keeper of Gardening Delight extracted a Trail Balance at 30 April 20X9 but
it did not balance. The following errors were subsequently discovered:
(i) A sales receipt of $314 had been posted to the credit side of C Clarks
account instead of D Clerks account.
(ii) A payment for motor expenses of $192 had been posted to the bank account
but the double entry had been omitted.
(iii) A new motor mower was purchased during the year for $2,650 but this had
been posted to purchases.
(iv) Discounts allowed of $98 had been posted to the credit side of the Discounts
Received Account.
(v) An invoice for gardening supplies (purchases) of $1,820 had been recorded in
the Purchases Account as $1,280.
Required:
(a) Prepare journal entries to correct errors (i) to (v) above.
(b) Prepare the Suspense Account and calculate the original difference in the
Trail Balance.
End of Chapter - 4
Page: 52

CHAPTER 5
Control Accounts
5.1 The purpose of Control Accounts
The purpose of Control Accounts is to summarize the transactions of more detailed

Ledger Accounts.
The Control Accounts perform several important functions:
(i) They provide a summary balance, which can be used in the Trail Balance and
in the Balance Sheet. For example, the balance on the Receivables Ledger
Control Account is the total of all of the individual receivables balances. The
Control Account balance is used on the Trial Balance and the Balance Sheet
instead of listing every individual receivable balance.
(ii) The Control Accounts provide instant information to the owner or manager of
the business. They provide a total figure for receivables or payables without
the need to spend time extracting a full list of receivables and payables.
(iii) The balance on the Control Account will always equal to the total balances of
the subsidiary accounts unless an error has occurred. This means that Control
Accounts can be used to check the arithmetic accuracy of the accounting
transactions and can be helpful in locating errors.
(iv) Control Accounts can help with constructing final accounts where a business
has not kept a full set of double entry accounts.
5.2 Receivables Ledger Control Account (Receivables Control Account)
Receivables Ledger Control Account
$ $
Balance b/d Sales returns (return inwards)
Credit sales Bank (payments received)
Interest charged to receivables Discounts allowed
Bank: (returned cheques) Bad debts written off
Contra entries
Balance c/d
Anything that Anything that
increases the amount decreases the amount
owing is debited. owing is credited.
Page: 53

5.3 Payables Ledger Control Account (Payables Control Account)
Payables Ledger Control Account
$ $
Purchases returns (returns outwards) Balance b/d
Bank: (payments to suppliers) Credit purchases
Discounts received Interest charged by payables
Contra entries
Balance c/d
Anything that Anything that
decreases the amount increases the amount
owed is debited. owed is credited.
5.4 Discrepancies between the Ledgers and the Control Accounts
(a) Errors in the Control Account:
The source records are incorrect. For example, the Day Book or Cash
Book might have been added up incorrectly.
Adjustments have been posted to the ledger accounts but not to the
Control Account. For example, a bad debt might have been written off
in a customers ledger account but not included in the Control Account.
The Control Account has been sub-totaled incorrectly.
(b) Errors in the Ledger Accounts:
Entries could have been omitted or posted incorrectly on to an

individual ledger account.
Individual ledger accounts have been incorrectly subtotaled.
The list of ledger balances might be incomplete, i.e. one or more of

the individual balances have been omitted from the list.
Page: 54

Exercises
5.1 The following information has been extracted from the accounting records of Osman
for the half year to 30 June 20X4:
$
Balances at 1 January 20X4
Receivables Ledger Control Account - Dr 15,030
Receivables Ledger Control Account - Cr 42
Payables Ledger Control Account - Dr 9
Payables Ledger Control Account - Cr 11,145
Transactions to 30 June 20X4

Paid to suppliers 70,264
Credit sales 93,450
Return outwards 180
Return inwards 797
Receipts from customers 89,948
Credit purchases 71,685
Contra entries 329
Bad debts written off 153
Discounts allowed 2,610
Discounts received 2,138
Balance at 30 June 20X4

Required:
Prepare the Receivables Ledger Control Account and the Payables Ledger Control
Account for the half-year ended 30 June 20X4.
5.2 The following information relating to March 20X7 has been extracted from the ledger
accounts of Foley Fixings:
$
Balances at 1 March 20X7
Allowance for Doubtful Debts 287
For the month ended 31 March 20X7

Paid to suppliers 46,771
Credit sales 67,660
Discounts received 1,512
Credit purchases 51,494
Return inwards 2,756
Bad debts written off 240
Discounts allowed 2,180
Customer cheques dishonoured 470
Page: 55


Interest charged to customers 112
Contra entries 431
Return outwards 1,335
Balances at 31 March 20X7

Receivables Ledger Control Account - Dr ?
Payables Ledger Control Account - Cr ?
Allowance for Doubtful Debts 312
Prepare the following:

(a) Receivables Ledger Control Account for March 20X7
(b) Payables Ledger Control Account for March 20X7
(c) A Balance Sheet extracts showing receivables and payables at 31 March 20X7.
5.3 The following balances have been extracted from the books fo Lilley Logistics at 31
May 20X3.
$ $
Receivables Ledger Control Account 69,246 Receivables Ledger 69,641
Payables Ledger Control Account 32,840 Payables Ledger 33,482
Suspense Account 119 Dr
The balance on the Suspense Account was generated when the Trial Balance was
prepared. The balance on the Receivables and Payables Ledger Control Accounts
have been used in preparing the Trial Balance.
A number of errors were discovered, following an examination of the accounting

records for Lilley Logistics for the year ended 31 May 20X3:
(i) The Receivables Ledger includes a debit balance of $280 due from Smithson
Industries Ltd and the Payables Ledger includes a credit balance of $195 due
to the same company. Only the net balance will be received.
(ii) Discount received of $87 had been correctly posted to the Payables Ledger
Control Account but omitted from the Payables Ledger.
(iii) A balance on the Customer Account of F Edgar for $116 had been omitted
from the list of Receivables Ledger balances.
(iv) The Payables Ledger Account for B Curran had been overstated by $63.
(v) A sale invoice for $976 had been entered correctly into the Receivables
Ledger but had been posted to the Receivables Ledger Control Account as
$967.
(vi) Payment of $342 to supplier had been correctly entered into the Payables
Ledger and the Payables Ledger Control Account but had been entered in to
the bank as $442.
Page: 56

(vii) The Purchase Day Book was undercast by $492.
(viii) A bad debt of $600 had been written off in the Receivables Ledger but no
entry had been made in the Receivables Ledger Control Account.
(iX) The balance on the Receivables Ledger Control Account was understated
$1,102.
Required:
Record the correcting entries for these errors into the Receivables Ledger Control
and Payables Ledger Control accounts and the Suspense Account. Reconcile the
Receivables Ledger Control Account balance with the Receivables Ledger and the
Payables Ledger Control Account with the Payables Ledger.
5.4 Prepare journal entries to correct the following (narratives are not required). You are
to assume that the business uses Receivables and Payables Ledger Control Accounts.
(i) Credit purchases of $1,500 from Bryson Ltd were posted to the account of
Britsom Ltd.
(ii) A sales invoice for $295 for Walters Ltd had been entered in the books of
account as $259.
(iiii) Carriage inwards of $62 had been posted to the debit side of the Carriage
Outwards Account.
(iv) A purchases payment for Slipshod Ltd of $678 was posted to the debit side of
the Bank Accounted and the credit side of the Payables Ledger Account for
Slipshod Ltd.
(v) A cheque payment for petrol, totaling $38, has not been entered in the books
of account.
5.5 The following information has been extracted from the books of H Henry Ltd at 31
March 20X8:
$
Balance on Receivables Ledger Control Account 21,942 (Dr)
Total Receivables Ledger balances 22,058 (Dr)
Balance on Suspense Account 442 (Dr)
The book-keeper at H Henry Ltd enters sales and purchases invoices individually into
the Receivables and Payables Ledgers and the income and expense accounts in the
general ledger, but uses the totals from the Sales and Purchase Day Books to
prepare the Receivables and Payables Ledger Control Accounts.
(i) A sales invoice has been recorded in the Sales Day Book and the Receivables
Ledger as $2,800 instead of $2,300.
(ii) The Sales Day Book has been under-cast by $750.
Page: 57

(iii) A bad debt for $245 has been written out of the Receivables Ledger but no
entry has been made in the Receivables Ledger Control Account.
(iv) A sales invoice for $2,750 has not yet been recorded.
(v) The balance on the account of customer T Tallis for $326 was omitted from
the list of Receivables Ledger Balances.
(vi) A sales receipt for $792 was posted correctly to the Bank Account and the
Receivables Ledger but as $729.00 in the Receivables Ledger Control Account.
Required:
Correct the errors to clear the Suspense Account and balance the Receivables Ledger
Control Account with the list of Receivables Ledger balances.
End of Chapter - 5
Page: 58

CHAPTER 6
Introduction to Partnership Accounts
6.1 The Partnership Agreement
The Partnership Agreement normally includes:
(i) Fixed capital

(ii) Interest on capital
(iii) Interest on drawings
(iv) Salary
(v) Profit share
If the partners do not have a formal Partnership Agreement then Section 24 of

the Partnership Act of 1890 will apply. It states:
No partner will receive a salary.

There will be no interest on capital or drawings.
Profits and losses will be shared equally between the partners.
Any loan to the partnership by the partners attract interest of 5% p.a.
6.2 Forming a partnership
Example 6.1
Charlie and David had been sole traders for several years but decided to form a
partnership on 1 January 20X2. The Balance Sheets from their individual businesses
at 31 December 20X1 were as follows:
Charlie David
$ $
Plant and equipment 42,000 35,000
Motor vehicles 4,000 25,000
Inventory 8,500 6,750
Trade Receivables 18,200 24,000
Bank (6,000) 5,000
Trade Payables (11,750) (14,260)
Net assets 54,950 81,490
The plant and equipment was valued at $40,000 and $32,000 respectively. David
decided to keep his motor vehicle ($25,000) as a personal asset. 5% of the trade
receivables from each business were considered to be uncollectable and the value of
trade receivables was reduced accordingly. Charlie agreed to pay $6,000 into the
partnership bank account to clear the bank overdraft of his business.
Required:
Calculate the value of capital introduced by each partner and prepare the partnership
Balance Sheet (Statement of Financial Position) at 1 January 20X2.
Page: 59

6.3 Preparing Financial Statements

(a) Format of the Income Statement of a Partnership
Smith and Jones

Income Statement for the year ended 31 March 20X0
$ $
Revenue xxx
Purchases xxx
xxx
Gross profit xxx
Less: Expenses
Motor expenses xxx
Rent and rates xxx
Light and heat xxx
Sundry expenses xxx
Depreciation
Motor Vans xxx
Office Equipment xxx xxx
Net profit before appropriations xxx
(b) Format of Appropriation Statement of a Partnership
Smith and Jones

Appropriation Statement for the year ended 31 March 20X0
$ $
Net profit before appropriations xxx
Add: Interest on drawings

Smith xxx
Jones xxx xxx
xxx
Less: Salaries
Smith xxx
Jones xxx (xxx)
Less: Interest on Capital

Smith xxx
Jones xxx (xxx)
xxx
Sharing Profit:
Smith xxx
Jones xxx (xxx)
-
Page: 60

(c) Format of Partners Current Accounts
Smith Jones Smith Jones

$ $ $ $
Drawing xxx xxx Balance b/d xxx xxx
Interest on Drawing xxx xxx Salaries xxx xxx
Interest on
Capital xxx xxx
Balcance c/d xxx xxx Sharing Profit xxx xxx
xxx xxx xxx xxx
Balance b/d xxx xxx
(d) Format of a Statement of Financial Position of a Partnership
Smith and Jones

Statement of Financial Position as at 31 March 20X0
Depreciation Value
ASSETS $ $ $
Non-current Assets
Intangible Assets
Goodwill xxx xxx xxx
Tangible Assets
Motor Vans xxx xxx xxx
Office Equipment xxx xxx xxx
xxx xxx xxx
Current Assets
Inventories xxx
Prepayments xxx
Cash at bank xxx
Total Assets xxx

Capital Accounts
Smith xxx
Jones xxx xxx
Current Accounts
Smith xxx
Jones xxx xxx
xxx
Page: 61

12% Debentures xxx
Current Liabilities
Trade payables xxx
Accruals xxx xxx
Example 6.2
Tiger and Snake are in partnership and share profits and losses 2:1. A draft Trial Balance
has been extracted from the partnership books of account at the end of the year, 31
December 20X8.
Dr Cr
$ $
Equipment at cost 1 January 20X8 40,000
Equipment provision for
depreciation 1 January 20X8 4,000
Buildings at cost 65,000
Motor vehicles at cost 1 January 20X8 18,500
Motor vehicles provision
for depreciation 1 January 20X8 3,700
Sales 120,000
Purchases 45,000
Opening Inventory 2,750
Bank 6,400
Insurance 2,800
Capital accounts: Tiger 40,000
Snake 20,000
Drawings: Tiger 2,000
Snake 4,000
Current accounts: Tiger 11,300
Snake 9,088
Allowance for doubtful debts 1,002
237,450 237,450
There are a number of items that need to be taken into consideration:
Depreciation is to be provided at 10% straight-line on equipment and 25%

reducing balance on motor vehicles.
Closing Inventory is valued at $3,000.
Insurance of $400 is prepaid and wages of $800 are to be accrued.
The allowance for doubtful debts is to be increased to 5% of trade receivables.
Interest on drawings is charged at 5% p.a. on the balance in the trial balance.
Snake receives a salary of $4,000.

Page: 62

Required:
(a) Prepare the Partnership Income Statement and Appropriation Account for the year
ended 31 December 20X8.
(b) Prepare the Partners Current Accounts at 31 December 20X8.
(c) Prepare the Partnership Balance Sheet (Statement of Financial Position) at 31

December 20X8.
EXERCISES
6.1 Exe, Why and Zed had each been trading as a sole trader for many years but on 1
July 20X6 they decided to form a partnership to pool their expertise. Each of the new
partners provided the Balance Sheets from their individual businesses at 30 June
20X6:
Exe Why Zed
$ $ $
Plant and equipment 32,800 40,000 15,750
Motor vehicles 18,700 6,400 10,900
Inventory 2,500 1,750 3,000
Trade Receivables 8,640 6,340 1,700
Bank 1,115 864 1,234
Trade Payables (5,850) (3,600) (885)
Net assets 57,905 51,754 31,690
The partners have agreed that the plant and equipment was valued at $28,000,
$37,500 and $15,000 respectively. Why decided to keep his motor vehicle ($6,400)
as a personal asset. Zed estimates that the true value of his inventory is $3,250 and
the other partners accept this valuation. 5% of the trade receivables from each
business were considered to be uncollectable and the value of trade receivables was
reduced accordingly.
Required:
Calculate the value of capital introduced by each partner and prepare the partnership
Balance Sheet (Statement of Financial Position) at 1 July 20X6.
6.2 Jake and Misty are in partnership sharing profits and losses in the ratio 3:1. They
have a partnership agreement that provides for interest on the partners Capital
Accounts at 8% per annum and charges interest on drawings at 5% per annum.
The net profit for the year to 31 December 20X2 was $39,661, before accounting for
interest of 5% on a loan of $20,000 to the partnership from Jake. The following
additional information is available.
Jake ($) Misty ($)
Capital accounts 1 January 20X2 26,000 19,500
Current accounts 1 January 20X2 2,340 Cr 4,420 Dr
Drawings for the year 16,620 23,760
Salary - 7,800
Required:
Prepare the partnership Appropriation Account for the year ended 31 December
20X2 and the partners Current Accounts for the same period. Interest on drawings is
to be charged in full and no interest is chargeable on the debit balance b/d on Mistys
current account.
End of Chapter - 6
Page: 63

CHAPTER 7
Admission and Retirement of Partners

7.1 Goodwill
Goodwill is an intangible asset and is defined as the excess of

the value of the business as a whole over the value of the
individual assets and liabilities.
Example 7.1
Eric had been trading as a window cleaner for ten years. He agreed to sell his business to
Henry on 1 April 20X3. The Balance Sheet of Eric at 31 March 20X3 was as follows:
Eric
Balance Sheet at 31 March 20X3
$ $
ASSETS
Non-current Assets
Ladders and equipment 500
Current Assets
Inventory of cleaning materials 120
Trade Receivables 25
Cash in hand 15
160
Total Assets 660

Capital Account 575
Current Liabilities
Trade Payables 85
Total Equities and Liabilities 660
Eric agreed to retain responsibility for collecting the trade receivables and will keep the cash
in hand. Henry agreed to pay the trade payables.
If Henry paid Eric $800 for the window cleaning business, calculate the value of goodwill.
Page: 64

7.2 Accounting for Goodwill

It is necessary to account for goodwill in a partnership when one of the following
events occurs:
(i) When a partnership is formed from existing sole trader businesses.
(ii) When there is a change in partners through the admission of a new partner
or the retirement of an existing partner.
(iii) When the profit share ratio between partners is changed.
When goodwill is created the journal entry is:
Dr Goodwill
Cr Partners Capital Accounts
Example 7.2
Ink and Jet form a partnership on 1 May 20X7 introducing tangible net assets from
their sole trader businesses of $35,000 and $38,500 respectively. They agree that
the value of goodwill for Inks business is $5,000 and $7,500 for Jets business.
(a) Prepare the ledger account for Goodwill, the Partners Capital Accounts and
Balance Sheet to reflect this.
Ink and Jet decide to share profit in the ratio of 3:1 and do not wish goodwill to
remain in the accounts of the partnership.
(b) Prepare the ledger account for Goodwill and the Partners Capital Accounts to
reflect this, and the revised Balance Sheet.
7.3 The Revaluation Account

It is important that when there is a change in the partnership the true value of the
partnerships assets and liabilities are recognized when calculating the partners
share. This is achieved through the use of a Revaluation Account.
The relevant journal adjustments are:
For an increase in asset value:

Dr Asset with the amount of the increase
Cr Revaluation account
For a decrease in asset value:

Dr Revaluation account
Cr Asset with the amount of the decrease
For an increase in the value of a liability:

Dr Revaluation account
Cr Liability with the amount of the increase
For a decrease in the value of a liability:

Dr Liability with the amount of the decrease
Cr Revaluation account
Page: 65

Example 7.3
The Balance Sheet for King and Lyn on 1 January 20X3, before admitting Mann to
the partnership, was as shown below. The old profit sharing ratio for King and Lyn
was 3:2 respectively. The new profit sharing ratio for King, Lyn and Mann is 5:4:3
respectively.
King and Lyn

Balance Sheet at 1 January 20X3
$ $
ASSETS
Non-current Assets
Land and buildings 75,000
Plant and machinery 30,000
105,000
Current Assets
Inventory 22,500
Bank 3,750
41,250
Total Assets 146,250

Capital accounts
King 60,000
Lyn 40,000
100,000
Current accounts
King 19,250
Lyn 8,250
27,500
127,500
Current Liabilities
Total Equity and Liabilities 146,250
The partners agree the following valuations at 1 January 20X3:

$
Inventory 15,750
Goodwill 24,000
Mann pays $26,000 into the partnership bank account as his capital contribution. The
partners do not wish goodwill and the valuations to remain in the accounts.
Required:
Prepare the Revaluation Account, partners Capital Accounts and the Balance Sheet
(Statement of Financial Position) following the admittance of Mann to the partnership.
Page: 66

7.4 Retirement of a partner
Example 7.4
Ned, Oli and Pete are in partnership and make up their accounts annually to 31
December. They share profits in the ratio 2:2:1 respectively. On 31 December 20X7,
Ned retires. The partnership agreement states that any retiring partner should
receive 25% of the amount due immediately, with the remaining balance being
transferred to a loan account. The loan is to be repaid over the next three years in
equal installments on 31 December. In addition, the loan will attract 5% interest
calculated on the balance on 1 January each year to be paid with the capital
repayment on the following 31 December. If there are insufficient funds available in
the bank to pay the initial installment, then the partnership must negotiate a bank
overdraft.
Ned, Oli and Pete

Balance Sheet at 31 December 20X7
$ $
ASSETS
Non-current Assets
Goodwill 25,000
144,000
Current Assets
Inventory 8,900
Bank 15,200
48,500

Capital accounts
Ned 65,000
Oli 65,000
Pete 16,000
146,000
Current accounts
Ned 9,600
Oli 8,750
Pete 6,800
25,150
171,150
Current Liabilities
Page: 67

The partners agree the following valuations at 31 December 20X7:
$
Inventory 8,700
Goodwill 36,000
The partners would like these valuations to remain in the Balance Sheet of the
partnership.
As part of the retirement settlement, Ned is to take his company motor vehicle
valued at $8,000 on the balance sheet. Following Neds retirement, Oli and Pete will
share profits equally.
Required:
Prepare the Revaluation Account, the partners Capital Accounts and the Balance
Sheet (Statement of Financial Position) following the retirement of Ned.
EXERCISES
7.1 Cary Grant has been a sole trader for many years. He decides to retire and sell his
business, other than the motor vehicle and the bank balance, as a going concern to
Henry Foda for $45,000 on 1 August 20X7. The Balance Sheet of Cary Grants
business at 31 July 20X7 is as follows:
Cary Grant
Balance Sheet at 31 July 20X7
$ $
ASSETS
Non-current Assets
Motor vehicle 16,800
39,200
Current Assets
Inventory 3,700
Bank 1,160
21,610
Total Assets 60,810

Capital Account 57,915
Current Liabilities
Required:
Calculate the value of the goodwill purchased by Henry Fonda.
Page: 68

7.2 Knot and Berry are in partnership and share profits and losses in a ratio of 2:1. The
Balance Sheet of the partnership at 31 December 20X2 is:
Knot and Berry

ASSETS $ $
Non-current Assets
131,700
Current Assets
Inventory 19,125
Bank 12,120
54,195

Capital accounts
Knot 90,000
Berry 74,000
164,000
Current accounts
Knot 6,792
Berry 4,003
10,795
174,795
Current Liabilities
Knot decides to retire on 31 December 20X2 when goodwill was valued at $34,500
and the plant and machinery was valued at $92,000. $458 of the trade receivables
was considered to be uncollectable. Knot was to be paid 25% of any balance due to
him immediately, with the remaining balance converted to a loan repayable in two
years time.
On the same day, 31 December 20X2, Rasp was admitted to the partnership. It was
agreed that the new profit sharing ratio would be 3 (Berry):1 (Rasp). Rasp
introduced plant and machinery of $15,000, goodwill of $2,000 and paid $25,000
into the new partnership Bank Account. Goodwill is not to remain in the books of the
partnership but the other valuations are to be kept in the accounts.
Required:
Prepare the following for the Knot and Berry Partnership:
(a) The Revaluation Account

(b) The partnership Bank Account
(c) The partnership Goodwill Account
(d) The partners Capital Accounts.
Page: 69

For the Berry and Rasp Partnership:
(e) The Balance Sheet at 1 January 20X3 for the Berry and Rasp partnership.
7.3 Freeman and Hardy share profits and losses 3:2. On 1 July 20X1, they prepared their
partnership Balance Sheet:
Freeman and Hardy

Balance Sheet at 1 July 20X1
ASSETS $ $
Non-current Assets
131,250
Current Assets
Inventory 28,125
Bank 4,600
51,475

Capital accounts
Freeman 75,000
Hardy 50,000
125,000
Current accounts
Freeman 24,060
Hardy 10,215
34,275
159,275
Current Liabilities
The partners admit Willis into the partnership on 1 July 20X1 and he pays $33,000
into the partnership Bank Account. Profits and losses will now be shared 2:2:1.
The partners agree the following valuations of assets and liabilities at 1 July 20X1 but
do not wish these values to remain in the Partnership Accounts:
Land and buildings $105,000

Fixtures and fittings $35,000
Inventory $29,500
Goodwill $28,000
Required:
Prepare the Revaluation Account, Partners Capital Accounts and the Balance Sheet
following the admittance of Willis to the partnership.
End of Chapter - 7
Page: 70

CHAPTER 8
Dissolution of a Partnership
8.1 Accounting entries for dissolving a partnership
There are many reasons why a partnership might cease, for example:
The partners may decide to stop trading and sell the business as a going
concern.
A partner may decide to retire and the other partners may not be able to find
a replacement partner or be able to continue.
The partners may decide to return to sole trader status.
The partners may decide to operate the business as a limited company.
The partnership might have failed, leading to the dissolution (termination) of

the partnership.
DISSOLUTION PROCEDURES
Debit Credit
Close the Asset Accounts by

transferring the balances to
Dissolution
Step 1 the Dissolution Account (all Asset Account
Account
except bank and cash
balances).
Close the Liability Accounts
by transferring the balances
Dissolution
Step 2 to the Dissolution Account Liability Account
Account
(except bank overdraft and
loans from partners).
Sell the assets and bank the Dissolution
Step 3 Bank/Cash
proceeds. Account
Deal with assets taken over Partners Capital Dissolution

Step 4
by the partners. Accounts Account
Collect from trade Dissolution

Step 5 Bank/Cash
receivables. Account
Dissolution
Step 6 Paid to trade payables Bank/Cash
Accounts
Dissolution
Step 7 Pay any costs of dissolution. Bank/Cash
Account
Page: 71

Transfer the balance on the

Dissolution Account to the
partners Capital Accounts Dissolution Partners Capital
Step 8
in the profit sharing ratio Account Accounts
(entries reversed if loss on
dissolution).
Repay any partners loans to Partners Loan
Step 9 Bank/Cash
the partnership. Accounts
Transfer the partners
Current Account balance to
Partners
their Capital Account (the Partners Capital
Step 10 Current
entries will be reversed if Accounts
Accounts
the Current Account is a
debit balance).
If a partner now has a debit
balance on their Capital
Partners Capital
Step 11 Account they need to pay Bank/Cash
Accounts
cash into bank to clear the
balance
Pay the balances on the
partners Capital Accounts Partners Capital
Step 12 Bank/Cash
with the bank and cash Accounts
balance.
Example 8.1
Sally and Tanya had been in partnership for six years when they decided to dissolve
their partnership. The partnership profits and losses had been shared 3:2. The last
Balance Sheet of the partnership was prepared to 31 December 20X7, when the
partnership ceased trading.
Sally and Tanya

$ $
ASSETS
Non-current Assets
Office equipment 14,700
33,200
Current Assets
Inventory 4,200
Bank 2,665
19,115
Total Assets 52,315

Capital Accounts
Sally 15,000
Tanya 14,000
29,000
Page: 72

Current Accounts
Sally 3,225
Tanya (2,152) 1,073
30,073
Current Liabilities
Loan from Sally 12,500
22,242
The office equipment was sold at auction for $12,000 and the inventory was sold for
$3,000. The partnership had two cars, which the partners took at an agreed
valuation; Sally taking one for $9,000 and Tanya one for $7,500.
The partners managed to collect $11,750 from trade receivables, after allowing for
discounts and bad debts. Trade Payables were paid $9,257 after taking early
settlement discounts. Dissolution costs of $450 were paid.
Required:
Prepare all the ledger accounts to record the dissolution of the partnership.
8.2 Garner versus Murray rule
The Garner vs. Murray rule states that if a partner is unable to

clear his or her debt to the partnership, then the amount of the
deficiency is shared amongst the other partners in the ratio of
their last agreed capital.
The last agreed capital of the partners will be the credit balances on their Capital
Accounts from the most recently prepared Balance Sheet.
Example 8.2
Una, Vale and Wall dissolved their partnership on 31 December 20X4 and produced a
Balance Sheet prior to making the final payments to the partners.
Una, Vale and Wall

$
Bank 40,950
Capital Accounts Una 34,500

Vale (debit balance) (9,800)
Wall 16,250
40,950
Vale is unable to pay back her debit balance. Una, Vale and Wall have always shared
profits 2:2:1 respectively, and the balances on the Capital Accounts according to the
last agreed Balance Sheet before the dissolution were Una $30,000, Vale $20,000
and Wall $10,000.
Required:
Show how the deficiency will be dealt with according to the Garner vs. Murray rule.
Page: 73

8.3 Sale of a partnership as a going concern
A Realisation Account is used when the partnership is

sold as a going concern.
A Dissolution Account is used when the partnership is

dissolved for any other reason.
There are a number of points to note:
(i) If the Balance Sheet has a Loan Account from a partner then this must be
settled through the Bank Account and not credited to the partners Capital or
Current Account.
(ii) The valuations used for goodwill and assets are those agreed by the partners
not the purchaser.
(iii) If consideration is made in shares then the value used is the market value
and not the nominal value of the shares.
(iv) The full amount of the purchase consideration, share value and cash, is
credited to the Realisation Account.
(v) If the partners have a deficit on their Capital Account they are required to
repay this into the partnership Bank Account.
Example 8.3
Xeno, Yum and Zip have been in partnership for a number of years and have always
shared profits in the ratio 2:2:1 respectively. On 31 December 20X3, Applegate plc
made an offer to purchase the partnership business as a going concern.
The Balance Sheet of the partnership at 31 December 20X3 was as follows:
Xeno, Yum and Zip

$ $
ASSETS
Non-current Assets
519,006
Current Assets
Inventory 55,500
Bank 16,300
248,300
Page: 74


Capital accounts
Xeno 200,000
Yum 180,000
Zip 90,000
470,000
Current accounts
Xeno 85,600
Yum 35,250
Zip 18,356
139,206
609,206
Current Liabilities
Loan from Xeno 21,000
158,100
All assets and liabilities of the partnership were taken over by Applegate plc with the
exception of the motor vehicles, the bank balance and the loan from Xeno. The
partners retained their own motor vehicle, each valued at $9,032, and the
partnership repaid the loan to Xeno. Applegate plc discharged the purchase price by
paying $50,000 into the partnership Bank Account and issuing, to the partnership,
250,000 Ordinary $1 shares, which had a market value of $2.60 per share. The
shares were allocated in the profit sharing ratio.
On 31 December 20X3, the partners valued goodwill at $35,000 and the land and
buildings at $395,000. Applegate plc considered the land and buildings to be worth
$425,000.
Required:
Write up the following Ledger Accounts in the partnership to account for the above
transactions:
(a) Revaluation Account

(b) Realisation Account
(c) Bank Account
(d) Applegate plc Account
(e) Ordinary Shares in Applegate plc Account
(f) Partners Capital Accounts
Page: 75

EXERCISES
8.1 Ham, Shem and Jake are in partnership and share profits and losses equally. In the
year to 31 December 20X7, they noticed a significant drop in sales and decided to
dissolve the partnership.
The fixtures and fittings and stock were sold at auction. The total proceeds were
$29,500. Shem agreed to take the delivery van at a valuation of $2,500. Costs of
$600 were incurred on dissolution.
The partners collected in all of the trade receivables and took $299 discount before
paying to their trade payables.
The last Balance Sheet prior to dissolution was as follows:
Ham, Shem and Jake

$ $
ASSETS
Non-current Assets
Delivery van 4,000
28,000
Current Assets
Inventory 8,400
Bank 355
20,955
Total Assets 48,955

Capital accounts
Ham 10,000
Shem 10,000
Jake 10,000
30,000
Current accounts
Ham 851
Shem (2,265)
Jake (980)
(2,394)
27,606
Current Liabilities
Loan from Jake 12,000
21,349
Required:
Prepare the relevant Ledger Accounts to record the dissolution of the partnership.
Page: 76

8.2 Con, Cave and Round dissolved their partnership on 30 June 20X6. The final
balances, after realizing the assets and paying the liabilities, were as follows:
Con, Cave and Round

Balance Sheet at 30 June 20X6
$
Bank 6,650
Capital Acocunts Con (debit balance) (27,000)

Cave 18,900
Round 14,750
6,650
Con, Cave and Round have always shared profits 3:2:1 respectively and the balances
on the Capital Accounts, according to the last Balance Sheet before the dissolution,
were Con $40,000, Cave $30,000 and Round $20,000. Con has filed for personal
bankruptcy and is unable to repay the debit balance on his Capital Account.
Required:
Prepare the partners Capital Accounts to deal with Cons balance and calculate the
final payments to Cave and Round.
8.3 Ely and Bath were in partnership sharing profits and losses equally. Lincoln Ltd
offered to purchase the partnership as a going concern on 1 July 20X2. The terms of
the agreement were that Lincoln Ltd purchased the land and buildings, the plant and
equipment and the stock for a total of $965,000. $400,000 was paid into the
partnership Bank Account and the remainder was settled by ordinary shares in
Lincoln Ltd.
The partnership collected 95% of the trade receivables, the remainder being
considered bad debts and uncollectable. The partnership was also responsible for
paying the trade payables and the loan from Ely.
The final Balance Sheet of the partnership before the sale showed the following:
Ely and Bath

$ $
ASSETS
Non-current Assets
738,150
Current Assets
Inventory 83,250
Bank 6,520
232,370
Page: 77


Capital accounts
Ely 400,000
Bath 400,000 800,000
Current accounts
Ely 35,622
Bath 17,218 52,840
852,840
Current Liabilities
Creditors 109,680
Loan from Ely 8,000 117,680
Required:
Prepare the following ledger accounts to reflect the above:
(a) Realisation Account
(b) Account with Lincoln Ltd
(c) Bank Account
(d) Capital Accounts for Ely and Bath.
8.4 Hales and Owen traded as partners until 30 June 20X4, when they both decided to
dissolve the partnership and retire. Profits and losses had been shared in the ratio of
2:1 respectively.
The summarized Balance Sheet at 30 June 20X4 was:
Hales and Owen

ASSETS $ $
Goodwill 4,500
Tangible assets other than bank 41,000
Total Assets 45,500

Capital accounts Hales 15,000
Owen 10,000 25,000
Current accounts Hales 3,000

Owen 1,925 4,925
29,925
Current Liabilities
Creditors 11,900
15,575
They sold the tangible assets for $35,000 and banked the proceeds. They paid the
trade payables in full. The partners agreed that the goodwill was worthless.
Prepare the journal entries to dissolve the partnership.

End of Chapter - 8
Page: 78

CHAPTER 9
Limited Companies Preparing Financial
Statements
9.1 Limited Companies
A limited company is regarded as a separate legal entity from its owners,

who are known as shareholders.
This means that the company is a legal person; it has a different legal
existence from the shareholders.
A company may sue or be sued in its own name and owns property
separately from its shareholders.
This concept of a separate legal entity forms the basis of limited liability of
shareholders, which means that they are only liable for the debts of the
company to the level of investment.
There are two types of limited company, private limited companies and public
limited companies:
A private limited company must include Ltd in its name

and may not offer its shares to the public.
A public limited company must include plc in its name,

may offer its shares and debentures to the public and is
probably listed on the Stock Exchange.
9.2 Types of Shares

(i) Ordinary Shares (Equity Shares)
The shareholders of ordinary or equity shares are the owner of the company.
They will usually have the right to vote at the Annual General Meeting and
are entitled dividends but these are not guaranteed.
(ii) Preference Shares

Preference shareholders are not usually entitled to vote at General Meetings.
They receive a specified dividend which is payable before dividends for
ordinary shares.
9.3 Different meanings of share capital
Authorised share capital is the maximum number of

shares that a company can issue.
Issued share capital is the number of shares that have

been issued or sold to shareholders.
Share premium arises when a company issues shares for

more than their nominal or par value. The premium over
this amount must be transferred to a Share Premium
Account.
Page: 79

9.4 Format of the Income Statement of a Limited Company
Peter Pope Ltd

$ $
Revenue 18,300
Opening inventory 2,200
Purchases 13,100
15,300
Less: Closing inventory 2,100 13,200
Gross profit 5,100
Less: Expenses
Motor expenses 1,000
Light and heat 1,300
Sundry expenses 200 4,000
Profit from operations 1,100
Less: Finance Costs
Debenture Interest 30
Preference Dividend Paid 5
Preference Dividend Proposed 5 40
Net profit before tax 1,060
Less: Corporation Tax paid 60
Net profit after tax 1,000
9.5 A typical Statement of Changes in Equity
Peter Pope Ltd

Statement of Changes in Equity for the year ended 31 December 20X0
Share Share General Retained Total
Capital Premium Reserve Earnings Equity
$ $ $ $ $
Balance at 1 January 20XO xxx xxx xxx xxx xxx
Changes in equity for 20XO

Issue of share capital xxx xxx xxx
Transfer to General Reserve xxx (xxx)
Net profit after tax xxx xxx
Ordinary Dividends
Paid (xxx) (xxx)
Proposed (xxx) (xxx)
Balance at 31 Dec 20XO xxx xxx xxx xxx xxx
Page: 80

9.6 A typical Statement of Financial Position
Peter Pope Ltd

Statement of Financial Position at 31 March 20X0

Depreciation Value
$ $ $
ASSETS
Non-current Assets
Intangible Assets
Goodwill xxx xxx xxx
Tangible Assets
Plant and equipment xxx xxx xxx
Motor vehicles xxx xxx xxx
xxx xxx xxx
Current Assets
Inventories xxx
Prepayments xxx
Cash at bank xxx
Total Assets xxx

Capital and Reserves
$1 ordinary shares xxx
Share premium xxx
General reserve xxx
Accumulated profits xxx
Equity xxx
10% $1 preferred shares xxx
12% Debentures xxx xxx
Current Liabilities
Trade payables xxx
Accruals xxx
Proposed dividends xxx xxx
Page: 81

EXERCISES
9.1 You have been given the following Trial Balance for Largo Ltd for the year ended 30
September 20X1.
Largo Ltd
Trial Balance at 30 September 20X1
$000 $000
Administrative expenses 540
Debenture interest for half-year 48
Ordinary shares of $1 each 240
Interim ordinary dividend paid 25
Bank 150
12% Debentures (redeemable 20X8) 800
Trade receivables 590
Trade payables 476
Motor vehicles - cost 600
Plant and machinery - cost 1,800
Motor vehicles - accumulated
depreciation 1.10.X0 60
Plant and machinery - accumulated
depreciation 1.10.X0 320
Wages and salaries 30
Purchases 2,120
Retained profits 1.10.X0 111
Rent, rates and insurance 244
Directors remuneration 160
Revenue 4,800
Inventory at 1.10.X0 500
6,807 6,807
Additional information:
(i) The inventory at 30 September 20X1 has been valued at $568,000.
(ii) At 30 September 20X1 rent and rates owing amounted to $28,000 and
$20,000 had been paid in advance for insurance.
(iii) The interest on the debenture loan needs to be accrued for a half-year.
(iv) The directors propose a final dividend of 10p per share. This was declared
before the year end.
(v) Depreciation is provided at 10% straight line on motor vehicles and 25%
reducing balance on plant and machinery.
Required:
Prepare Income Statement and Statement of Changes in Equity for the year ended
30 September 20X1 and a Balance Sheet (Statement of Financial Position) at that
date for Largo Ltd.
Page: 82

9.2 Legato plc prepares its accounts to 31 December each year. At 31 December 20X8,
its Trial Balance was as follows:
Legato plc
Trial Balance at 31 December 20X8
$ $
Plant - cost 144,000
Plant - accumulated depreciation
Jan 1 20X8 24,000
Motor vehicles - cost 64,000
depreciation Jan 1 20X8 24,000
Inventory Jan1 20X8 20,000
Retained profits Jan 1 20X8 12,000
Purchases 100,000
Revenue 224,000
Cash at bank 4,800
Ordinary shares of 25p each 64,000
10% Preference shares of $1 each 24,000
Directors fees 23,200
Printing, telephone and stationery 5,600
Trade payables 11,200
General expenses 4,800
Rent, rates and insurance 8,800
Share premium account 4,800
8% debenture loan 40,000
Trade receivables 20,800
428,000 428,000
(i) The interest on the debenture loan needs to be accrued for the whole year.
(ii) Depreciation of the non-current assets is to be provided for as follows:

Plant - 10% on cost
Motor vehicles - 25% reducing balance.
(iii) Closing inventory is valued at $39,200.
(iv) The directors propose that the preference dividend be paid in full and an
ordinary dividend of 2p per share. These decisions were publicly announced
before the year end.
Required:
31 December 20X8 and a Balance Sheet (Statement of Financial Position) at that
date for Legato plc.
Page: 83

9.3 Molto plc extracted a list of balances from their accounting records on 31 December
20X3.
$
Net profit for the year ended Dec 31, 20X3 166,100
Profit and loss account at Jan 1 20X3 52,800
General reserve at Jan 1 20X3 34,100
Bank (debit) 31,900
6% Preference shares 110,000
5% Debentures 22,000
Ordinary shares of $1 each 198,000
Fixtures - cost 159,500
Fixtures - accumulated depreciation Dec 31 20X3 33,550
Vehicles - cost 22,000
Vehicles- accumulated depreciation Dec 31 20X3 5,500
Receivables 111,100
Payables 103,400
Prepayments 4,950
Inventory at Dec 31 20X3 396,000
The dividend of the preference shares is to be paid and the directors propose
ordinary dividend of 5p per share. They also wish to transfer $22,000 to the general
reserves. All of these items were publicly announced before the year end. Debenture
interest of $1,100 was paid during the year and is already included in the net profit
figure.
Required:
Prepare Statement of Changes in Equity for the year ended 31 December 20X3 and
Balance Sheet (Statement of Financial Position) at that date for Motor plc.
9.4 Rall Ltd prepares their accounts annually to 31 March. The Trial Balance has been
extracted from the books and records of the company at 31 March 20X6.
Rall Ltd
Trial Balance at 31 March 20X6
$ $
Freehold property - cost 201,600

Freehold property - accumulated
depreciation April 1 20X5 40,320
Motor vehicles- accumulated
Directors remuneration 88,000
Revenue 1,071,900
Purchases 567,000
Inventory at April 1 20X5 80,400
10% Debentures (redeemable 20X9) 90,000
Page: 84

Administrative expenses 114,374

Debenture interest 6,750
Distribution expenses 18,264
Bank 2,924
Retained profits April 1 20X5 119,010
Interim ordinary dividend paid 30,000
1,636,866 1,636,866
(i) The closing inventory valuation at 31 March 20X6 is $84,420.
(ii) Additional directors remuneration of $3,000 is to be accrued.
(iii) The Depreciation expense should be a full years charge.
(iv) Depreciation is to be provided at the following rates:
Freehold property - 4% on cost

Motor vehicles - 25% reducing balance
Plant and machinery - 15% on cost
(v) A final ordinary dividend of 7p per share has been proposed by the directors.
This was declared before the year end.
Required:
31 March 20X6 and a Balance Sheet (Statement of Financial Position) at that date for
Rall Ltd.
9.5 Poco plc has authorized share capital consisting of 200,000 ordinary shares at $1
each and 65,000 8% preference shares at $1 each. The company prepared the
following Trial Balance at 31 May 20X8.
$ $
Receivables 140,153
Debenture interest 1,690
Directors salaries 43,680
Fixtures and fittings (cost $45,500) 23,270
General reserve 91,000
Advertising 13,650
Bad debts 763
Bank interest 2,639
Cash in hand 481
Page: 85

Payables 40,654
Delivery expenses 19,634
Purchases 349,003
Revenue 609,141
Inventory at 1 June 20X7 26,364
Insurance 2,470
8% preference shares of $1 each 56,875
Leasehold premises (cost $364,000) 318,500
Motor vehicles (cost $73,060) 69,615
Profit and loss account at 1 June 20X7 45,362
10% debentures 33,800
1,078,852 1,078,852
(i) Inventory at 31 May 20X8 was valued at $48,230.
(ii) Half a years debenture interest is to be accrued.
(iii) Depreciation is to be provided as follows:
(a) Leasehold premises at 4% per annum on cost

(b) Motor vehicles at 20% per annum on cost
(c) Fixtures and fittings at 40% reducing balance.
(iv) A dividend of 8p per share is proposed on the ordinary shares and the full
years preference dividend is proposed. These decisions were publicly
announced before the year end.
(v) $5,460 owes for wages and salaries and $260 has been prepaid for rent at 31
May 20X8.
(vi) The allowance for doubtful debts is to be increased to $3,770.
Required:
31 May 20X8 and Balance Sheet (Statement of Financial Position) at that date for
Poco plc.
End of Chapter - 9
Page: 86

CHAPTER 10
Incomplete Records
Incomplete records is the term used to describe a book-
keeping system that does not use double entry principles.
EXERCISES
10.1 Phil Fordham runs a stationery wholesale business. He uses a cash book to record
his bank transactions. He has provided the following information:
1 January 31 December
20X3 20X3
Assets and Liabilities at $ $

Shop fittings 13,200 11,200
Inventory 42,240 49,170
Bank (debit) 23,100 30,060
Cash 1,650 2,640
Trade Payables 34,320 26,400
Bank transactions in the year ended 31 December 20X3
$
Receipts from sales 210,870
Payments to supplies 136,920
Drawings 16,500
Business expenses 50,490
During the year, cash sales amounted to $1,900 and business expenses paid in cash
amounted to $910. There were no additions to shop fittings during the year.
Required:
(a) Calculate the opening and closing capital.
(b) Calculate net profit.
(c) Draw up Income Statement for the year ended 31 December 20X3 and a
Page: 87

10.2 Fran Fosset is a sole trader. She does not keep a full set of book-keeping records but
assures you that she pays all her takings into the bank and makes all business
payments by cheque.
A summary of the bank statements for the year to 30 June 20X8 shows the following
transactions:
$
Receipts:
Cash received from Trade Receivables 98,450
Bank interest 138
Payments:
Wages for staff 11,770
Rent 1,045
Vehicle running expenses 1,815
Other general expenses 4,202
Payments to Trade Payables 53,020
Drawings 5,720
You have also managed to obtain some information relating to balances at 30 June
20X7 and 30 June 20X8.
30 June 30 June
20X7 20X8
$ $
Motor vehicle (cost less depreciation) 5,225 3,850

Bank 963 21,979
Inventory 4,400 4,950
Fran Fosset has informed you that at 30 June 20X8 rent of $550 needs to be accrued
and general expenses of $935 have been prepaid.
Required:
(a) Calculate the opening capital for Fran Fosset as at 1 July 20X7.
(b) Calculate the Revenues figure for the year to 30 June 20X8.
(c) Calculate the Purchases figure for the year to 30 June 20X8.
(d) Prepare the Income Statement for the year ended 30 June 20X8 and a
Page: 88

10.3 Sand and Iego are in partnership trading as electrical engineers. They prepare
accounts annually to 31 March but do not keep a full double entry set of book-
keeping records.
They provide you with the following information:
Assets and liabilities at 1 April 20X1 31 March 20X2
$ $
Inventory 35,000 38,500
Plant and equipment 70,000 64,750
Bank 2,100 1,694
Business expenses prepaid 420 543
Business expenses accrued 870 762
Capital account: Sand 60,000 60,000
Capital account: Iego 30,000 30,000
Current account: Sand 15,290 Unknown
Current account: Iego 6,260 Unknown
Bank summary: $
Business expenses paid 42,000
Drawings: Sand 24,000
Drawings: Iego 18,000
Payments to suppliers 57,806
The partnership agreement provides for interest at 5% per annum on capital account
balances, a salary for Iego of $5,000 per annum and profit to be shared 3:2 to Sand
and Iego respectively.
Required:
Prepare Income Statement (including an Appropriation Account) for Sand and Iego
for the year ended 31 March 20X2 and a Partnership Balance Sheet (Statement of
End of Chapter - 10
Page: 89

CHAPTER 11
Inventory Valuation
11.1 Valuing Closing Inventory
Closing inventory is valued at the close of a trading year (or other period). This is
done through inventory taking. Each category of inventory is valued by multiplying
the actual number of items in inventory by the inventory value per item.
Number of item in inventory x inventory value per item = inventory value
Each item of inventory should be valued according to the rule of valuing at:
The lower of cost price or net realizable value
Net realizable value (NRV) is defined as the selling price less the costs of getting
the goods into a saleable condition. This means, for example, that any costs
which have to be incurred in repairing any damaged goods before they can be
sold must be subtracted first.
Example
11.1 Alistair Wardle valued his inventory in hand at cost $4,670. Included in this are
four items whose inventory value he is now reconsidering.
Item 1 cost $320. The likely selling price has fallen from $480 to $450.
Item 2, which cost $175, has been damaged and cannot be repaired. Its
normal selling price is $260 but it is now expected to sell for $230.
Item 3, which cost $210, has been damaged and is to be repaired at a cost of
$55. Once repaired it is expected to sell for only $220.
Item 4, which is cost $186. Its normal selling price is $240 but it is now
expected to sell for only $160.
Calculate revised inventory valuation using the principle of lower of cost or net
realizable value.
11.2 Raymond sells household electrical appliances. As a part of his closing inventory he
has a microwave, which cost $47. The microwave will sell for $65. However, before it
can be sold it requires a repair, which will cost $20.
Required:
(a) Calculate the value of the microwave to be included as a part of Raymonds
closing inventory. Show all your workings.
(b) Complete the following sentences:

Inventory should be valued at ----------------------- or ---------------------,
whichever is lower. This is example of using the concept of -------------.
Page: 90

11.2 Valuing goods in customers hands

In valuing inventory, consideration must be given to circumstances where goods are
physically or legally in the hands of the customer. Two such circumstances are:
(a) Where goods have been supplied on a sale or return basis, and
(b) Where customers goods remain on the premises of the business.
Example 11.3
The owner of Notley Engineering values the inventory of his business at $89,250 on
30 June 20X5, after undertaking a physical inventory taking. He informs you that:
(i) In April he sold $15,000 of goods to Teecass Ltd on a sale or return basis.
The original cost of the goods was 75% of the selling price. Teecass Ltd has
sold half of these goods by 30 June 20X5.
(ii) On 28 June 20X5, Notley Enginerring sold, and invoiced, goods to Fenchard
Brothers. These goods are still in the warehouse waiting to be delivered. The
goods cost $17,100 and have been included in the inventory valuation.
Required:
Calculate the value of inventory to be included in the financial statements of Notley
Engineering on 30 June 20X5.
11.3 Inventory Valuation Adjustments
Example 11.4
Adie Gianna owns a retail dress shop. Her financial year ended on 31 December
20X2. She was unable to take inventory until 5 January 20X3. Inventory in the shop
at that date, valued at cost, was $43,830.
The following additional information was available.
(i) A delivery of dresses from her supplier was made to the shop on 2 January
20X3. The purchase cost of the delivery was $9,780. No other deliveries were
received between 31 December 20X2 and 5 January 20X3.
(ii) Sales made between 31 December 20X2 and 5 January 20X3 amounted to
$6,300. These sales were made at her usual gross profit mark-up of 50%.
(iii) Returns inwards between 31 December 20X2 and 5 January 20X3 were $330
at the selling price. The sales were made at her normal mark-up.
Required:
Prepare a calculation showing the inventory valuation at 31 December 20X2.
Page: 91

11.4 Inventory losses

There are a number of reasons why a business might suffer a loss of inventory. For
example, theft of goods or inventory destroyed by fire or flood.
Three steps can be used to calculate the inventory loss:
Step 1: Inventory available for sale = Opening Inventory + Purchases
Step 2: Cost of goods sold = Sales - Gross Profit
Step 3: Estimated closing inventory = Inventory available for sale -

Cost of goods sold
Inventory loss = Estimated closing inventory - Actual

inventory
Example 11.5
Karen Wolff owns a stationery shop and believes that some of her inventory has
been stolen during the year ended 31 December 20X8. She provides you with the
following information:
Sales for the year $95,000 Purchases for the year $62,000
Opening Inventory $8,000 Closing Inventory $15,000
Her gross margin is 45% on sales.
Calculate the inventory loss for the year.
Example 11.6
Fenwick and Sons had their warehouse destroyed by fire on 31 May 20x5. None of
their inventory was salvaged. Inventory had been valued at the year ended 31 March
20X5 as $29,260. Sales in the period 1 April to 31 May 20X5 were $61,300 and
purchases were $25,770. On 31 May 20X5, Fenwick and Sons sold some goods to a
customer on a sale or return basis, therefore this inventory was not in their
warehouse. The sale for $5,000 is included in the sales figure of $61,300.
Sales are made at a gross profit of 25%.
Calculate the value of the insurance claim.
11.5 Cash losses

If it is suspected that cash has been stolen, then the approach is slightly different.
Goods have been sold, and gross profit earned on those sales, then cash has been
stolen from takings. The loss will appear in the Profit and Loss Account as an
expense if it is not covered by insurance.
Example 11.7
The owner of Ariadnee Fashions has contacted you because she believes that one of
her part-time employees has been stealing cash from the business. All sales are
made on a cash basis and sales are recorded through an electronic till. She does not
believe that any inventory has been stolen.
Page: 92

The business has had a constant gross profit of 30% for many years and the
following information is available:
Opening inventory $18,300 Cash sales through till $58,870

Closing inventory $21,200 Purchases $45,600
EXERCISES
11.1 Geoffrey Willowmead started in business on 1 July 20X6 importing birdhouses and
selling them to garden centres. A summary of his transactions for the year ended 30
June 20X7 is as follows:
Type of birdhouse Purchases Revenues
$ per $ per
Quantity Quantity
house house
Small hanging birdhouse 5,000 15 3,500 22
Large hanging birdhouse 8,000 19 6,200 25
Small thatched birdhouse 9,000 35 6,500 45
Large thatched birdhouse 12,000 45 9,700 65
Required:
Calculate the value of inventory at 30 June 20X7 and prepare a Trading Account for
Geoffrey Willowmead at that date.
11.2 Classy Feet, a shoe shop, valued its inventory at 31 March 20X4 at 15,692. Included
in this inventory figure are the following items:
(i) Fifteen pairs of multi-coloured trainers, which had faded after being in the
window display. The selling price of these will have to be reduced to 80% of
their cost price of $35.
(ii) Due to a mild winter the shop sold fewer boots than usual. This inventory,
which cost $1,200, must be sold at a discount of 70% on its total selling price
of $2,000.
(iii) A consignment of twenty pairs of ladies shoes, which cost $26 per pair,
require new heels at a cost of $4 per pair before they can be sold for $28 per
pair.
(iv) A selection of mens formal footwear, extra large and extra small sizes, with
an original total cost of $500, are now out of fashion and unsaleable; they
will be donated to a local charity shop.
Required:
Calculate the correct value of inventory at 31 March 20X4 to be included in the
financial statements of Classy Feet.
Page: 93

11.3 Carol Carlton is a sole trader. She has shop premises in the High Street and a small
warehouse on a local industrial estate. On 14 February 20X7, the warehouse was
broken into and some of the inventory was stolen.
Carol had valued her inventory at 31 December 20x6 at $38,720.
During the period 1 January 20X7 to 14 February 20X7 she had made sales of
$18,000 and purchased goods at a cost of $12,000.
Carol sells all her products at a gross profit of 35%.
The value of inventory in the shop on 14 February 20X7 was $9,360.
Required:
Calculate the value of inventory stolen from the warehouse on 14 February 20X7.
End of Chapter - 11
Page: 94

CHAPTER 12
Manufacturing Accounts
12.1 Cost analysis in Manufacturing Accounts
Costs may be categorized as Direct costs and Indirect manufacturing

costs/Production overheads.
Direct costs are costs that may be traced specifically to the

item being manufactured.
Direct costs may be further broken down into:
(i) Direct materials

(ii) Direct labour
(iii) Direct expenses
When all of the direct costs are added, the total is known as Prime cost.
Indirect manufacturing costs/Production overheads include all

those other costs which occur in the factory but which cannot
be easily traced to the products being manufactured. These are
sometimes referred to as Factory overheads.
Examples of indirect manufacturing costs include:
rent and rates of the factory

heating and lighting of the factory
depreciation of production machinery
repairs to production machinery
wages to forklift drivers or cleaners
salary of the factory supervisor
Production (or manufacturing) cost = Prime cost + Production overheads
Other indirect costs are;
(i) Selling and distribution overheads - such as sales staff salaries and
commission, carriage outwards, depreciation of delivery vans, advertising,
etc.
(ii) Administration overheads - such as office managers salaries, legal and

accountancy charges, depreciation of office equipment, office staff salaries,
etc.
Page: 95

12.2 The Format of Manufacturing and Income Statement

(All figures are illustration only)
Trimble Ltd
Manufacturing and Income Statement for the year ended 30
September 20X5
Raw materials
Opening inventory - raw materials 12,160
Purchases - raw materials 138,227
Less Closing inventory - raw material (13,920)
Cost of raw materials consumed 136,467

Direct wages/labour 97235
Direct expenses 17,315
Prime cost 251,017
Add Production overheads

Indirect wages 44,800
Insurance 15,400
Power, heat and light 13,132
Plant and machinery repairs 11,232
Depreciation: Plant and machinery 16,200
146,718
397,735
Add Opening work in progress 6,320
Less Closing work in progress (5,200)
1,120
Production (manufacturing) cost 398,855

Manufacturing Profit 79,771
Transfer to Trading Account 478,626
Page: 96

Revenues 779,771
Opening inventory - finished goods 29,160
Production (manufacturing) cost 478,626
Less Closing Inventory - F.G. (30,560)
477,226
Gross Profit 302,545
Less expenses
Salesmens salaries 19,600
Insurance 6,600
Power, light and heat 5,630
Depreciation: Plant and machinery 1,800
Increase in allowance for doubtful
debts 800
(101,823)
Net profit 200,722

Add Manufacturing Profit 79,771
Total Profit 280,493
EXERCISES
12.1 Ribble Ltd manufactures a variety of plastic garden furniture. The company prepares
accounts annually to 30 April. At 1 May 20X7, the Trial Balance was as follows:
$000 $000
Ordinary share capital 177,900
Inventory at 1 May 20X7: Raw materials 9,880
Work in progress 5,135
Finished goods 23,692
Revenues 455,000
Salesmens salaries 15,925
Purchases - raw materials 112,309
Direct wages 146,185
Indirect wages 36,400
depreciation 1 May 20X7 87,700
Fixtures and fittings - cost 27,625
Fixtures and fittings - accumulated
Page: 97


Insurance 17,870
Power, heat and light 15,240

Bank 8,840
784,451 784,451
(i) Depreciation is to be provided at the following rates:
Plant and machinery 10% using the straight-line method
Fixtures and fittings 20% using the straight-line method
Motor vehicles 30% using the reducing balance method
(ii) Inventories and work in progress at 30 April 20X8 were:

Raw materials $11,310
Work in progress $14,225
Finished goods $24,830
(iii) Expenses are to be apportioned as follows:

Factory Administration
% %
Rent and rates 70 30
Insurance 70 30
Power, heat and light 70 30
Motor expenses 50 50
Plant and machinery repairs 90 10
Depreciation - Plant and machinery 90 10
Fixtures and fittings - 100
Motor vehicles 50 50
(iv) Direct wages of $2,730 need to be accrued and there is a prepayment of

$1,560 for plant and machinery repairs.
Required:
Assume that Ribble Ltd wish to transfer the production cost to the Trading Account
at a mark-up of 15%.
(a) Prepare the Manufacturing and Income Statement for Ribble Ltd for
the year ended 30 April 20X8 and the Balance Sheet at that date.
(b) Prepare the provision for unrealised profit account and show the
revised manufacturing profit and the balance sheet figure for
inventories of finished goods.
Page: 98

12.2 Classify each of these costs by ticking the relevant box.
Direct Indirect Direct Direct Production

materials materials Labour expenses overheads
Raw materials
Business rates
Wages of factory
foreman
Crane hire for one
order
Royalties
Depreciation of
machinery
Machine operators
wages
Grease for machines
12.3 Resin Ltd is a manufacturing company. At 30 September 20X7, the following

balances were extracted from their ledger:
$ $
Inventory at 1 October 20X6 - Raw materials 89,900
- Work in progress 188,500
Production overheads 609,000
Carriage on raw materials purchased 39,150
Direct wages 861,300
Direct expenses 47,850
Purchases of raw materials 756,900
Returns to raw materials suppliers 26,100
The work in progress, valued at production cost at 30 September 20X7, was

$220,400; Raw materials at 30 September 20X7 were valued at $146,450. Direct
wages of $17,400 are to be accrued.
Required:
Prepare the Manufacturing Account for Resin Ltd for the year ended 30 September
20X7.
12.4 Assume that Resin Ltd (in question 12.3 above) values its work in progress at prime
cost. Work in progress at 1 October 20X6 was valued at $139,200 and work in
progress at 30 September 20X7 was valued at $162,400.
Required:
(a) Prepare the Manufacturing Account for the year ended 30 September 20X7.
(b) Calculate the production cost transferred to the Trading Account of Resin Ltd
if the company transfers production cost at a mark-up of 20%.
Page: 99

12.5 Edwin Crump Ltd sells golf accessories. They manufacture golf clubs and buy in
other finished golf accessories for resale.
An analysis of opening and closing inventory was as follows:
1 January 31 December
20X8 20X8
$ $
Raw materials 29,900 50,700
Work in progress 20,800 28,600
Finished goods:
Golf clubs 32,500 44,295
Other purchased golf accessories 31,200 36,750
Wages and salaries are to be allocated:
Total for Direct Indirect Administrative

the year production production
$ % % %
Wages 403,000 75 15 10
Salaries 109,200 50 50
Other balances extracted from the books of Edwin Crump at 31 December 20X8
were:
$
Revenues of golf clubs 1,665,300
Revenues of other golf accessories 713,700
Carriage on raw materials 35,640
Carriage on purchases of golf accessories 18,960
Depreciation (60% Factory, 40% Office) 114,400
Purchases of raw materials 651,300
Purchases of golf accessories for resale 509,600
Purchases returns of raw materials 19,500
Production overheads 241,800
Administrative overheads 132,600
Required:
(a) Prepare the Manufacturing Account for Edwin Crump Ltd for the year ended
31 December 20X8.
(b) Prepare the Trading Account for the same period. This should be in columnar
form to show the gross profit on sale of manufactured golf clubs and gross
profit on bought-in golf accessories.
End of Chapter - 12
Page: 100

CHAPTER 13
Non-trading Organisations
13.1 Terminology
There are some differences in terminology between financial statements for trading
orgainsations and those for non-trading orgainisations.
Business Non-trading organization

Income Statement Income and Expenditure Account
Net Profit Surplus or Excess of income over expenditure
Net Loss Deficit or Excess of expenditure over income
Capital Accumulated Fund
13.2 Receipts and Payments Account

A Receipts and Payments Account summarises all of the cash received and cash paid
during the year. The cash in hand and the balance at the bank are shown in one
account, therefore any transfers between cash and bank will not be shown in the
Receipts and Payments Account.
An example of a Receipts and Payments Account is shown in T account format

below:
Receipts and Payments Account
$ $
RECEIPTS PAYMENTS
Balance b/d - Cash in hand 150 Rent paid 750
Balance b/d - Cash at bank 668 Electricity 228
Subscriptions 3,564 Purchases of assets 1,200
Donations 500 Secretarys expenses 425
Sundry expenses 635
Balance c/d - Cash in hand 170
Balance c/d - Cash at bank 1,564
4,972 4,972
Page: 101

It is possible to show the receipts and payments in the form of a vertical statement:
Receipts and Payments Account for the year ended 31 March

20X7
$ $
Cash in hand April 1 20X6 150
Cash at bank April 1 20X6 668
818
Receipts
Subscriptions 3,654
Donations 500
4,154
Payments
Rent Paid 750
Electricity 228
Purchase of assets 1,200
Secretarys expenses 425
Sundry expenses 635
3,238
Cash in hand March 31 20X7 170
Cash at bank March 31 20X7 1,564
1,734
13.3 Subscriptions Account
Subscriptions Account
$ $
Balance b/d - Subscriptions owing 150 Balance b/d - Subscriptions prepaid 125
Income and Expenditure Account 3,532 Subscriptions received 3,542
Balance c/d - Subscriptions prepaid 145 Balance c/d - Subscriptions owing 210
3,877 3,877
Balance b/d - Subscriptions owing 210 Balance b/d - Subscriptions prepaid 145
Page: 102

13.4 Preparing Financial Statements

(a) Format of Caf Trading Account of a Club and Society
Bamm Rugby Club

Caf Trading Account for the year ended 31 December 20X0
$ $
Revenue xxx
Purchases xxx
xxx
Profit from Caf xxx
(b) Format of Income and Expenditure Account of a Club and Society
Bamm Rugby Club

Income and Expenditure Account for the year ended 31 December 20X0
$ $
Income
Subscriptions xxx
Function room hire xxx
Advertising revenue xxx
Profit from Caf xxx
xxx
Less: Expenditure
Caterers for function room xxx
Groundsmens wages xxx
Heat and Light xxx
Gym staff wages xxx
Printing, Stationery, and telephone xxx
Other expenses xxx xxx
Excess of income over expenditure xxx
Page: 103

(c) Format of Statement of Financial Position of a Club and Society
Bamm Rugby Club

Statement of Financial Position as at 31 December 20X0

Depreciation Value
$ $ $
ASSETS
Non-current Assets
Premises xxx xxx xxx
Equipment xxx xxx xxx
xxx xxx xxx
Current Assets
Inventories xxx
Subscriptions in arrears xxx
Prepayments xxx
Cash at bank xxx xxx
Total Assets xxx
Accumulated Funds
Accumulated Funds at 1 January 20X0 xxx
Add: Excess of income over expenditure xxx
xxx
Life year membership funds xxx
Current Liabilities
Caf Trade payables xxx
Subscriptions paid in advance xxx
Accruals xxx xxx
Page: 104

EXERCISES
13.1 The treasurer for Kidling Gardeners Association has prepared a Receipts and
Payments Account for the year ended 30 June 20X6.
RECEIPTS $ PAYMENTS $
Balance b/d - Cash at bank 345 Costs of visiting speakers 900
Subscriptions 2,175 Purchase of seeds 1,090
Flower show entry fees 210 Hire of hall for meetings 1,200
Revenues of seeds 1,812 Advertising 95
Annual trip to Chelsea Flower Show 650 Insurance 120
Equipment hire 490 Secretarys expenses 375
Flower show prizes 195
Annual trip expenses 530
5,682 5,682
Balance b/d - Cash at bank 1,177
The following additional information is available:
30 June 30 June
20X5 20X6
$ $
Gardening tools and equipment (NBV) 2,725 2,044
Inventory of seeds 130 145
Trade Payables for seeds 175 126
Prepaid insurance 55 60
Subscriptions in arrears 115 105
Subscriptions in advance 85 145
The association buys seeds in bulk and sells them to members. Members can also
hire the associations gardening equipment for a nominal charge.
There were no additions to gardening tools and equipment during the year.
Required:
Prepare the Seeds Trading, Income and Expenditure Account for Kidling Gardeners
Association for the year ended 30 June 20X6 and the Balance Sheet (Statement of
Page: 105

13.2 Covington Handbell Ringers Society has 50 members who pay an annual
subscription of $150 each. You have been given the following information:
Receipts for the year ended 31 December 20X7 $

Subscriptions received for 20X7 6,000
Subscriptions received for 20X6 (in arrears) 600
Subscriptions received for 20X8 (in advance) 450
Concert ticket sales 3,000
10,050
Payments for the year ended 31 December 20X7 $

Hire of concert venue 2,025
Hire of practice hall 2,600
Maintenance of hand bells 1,200
Purchase of music 2,450
Club secretary expenses 275
8,550
Assets and liabilities 31 December 31 December

20X6 20X7
$ $
Bank balance 1,312 2,812
Hand bells - valuation 12,000 10,000
Subscriptions in arrears 600 1,200
Subscriptions paid in advance 300 450
Owed to suppliers of music 65 112
The difference in the valuation of the handbells is due to depreciation.
On 31 December 20X7, the society received a bequest from a former member of

three sets of handbells valued at $4,000. The policy of the society is to credit large
donations or bequests to the Accumulated Fund. These handbells are not included in
the valuation at 31 December 20X7.
Required:
(a) Calculate the Accumulated Fund for Covington Handbell Ringers Society at 31
December 20X6.
(b) Prepare the Subscriptions Account for the year ended 31 December 20X7.
(c) Prepare the Income and Expenditure Account for Covington Handbell Ringers
Society for the year ended 31 December 20X7.
(d) Prepare the Balance Sheet (Statement of Financial Position) for Covington
Handbell Ringers Society at 31 December 20X7.
Page: 106

13.3 Bamm Rugby Club and Gymnasium has three outdoor rugby pitches, a club house
with caf, a function room and a gymnasium. The function room is available for hire
by non-members and the club will provide a paying caf and will subcontract
caterers for more formal dining, if required. The rugby pitches are hired during the
week by local schools. The club prepares its accounts to 31 December each year.
Members of the rugby club have full access to the gym and the caf.
Annual membership fees, due by 1 January each year, were 100 for 20X6 and $120
for 20X7. The fees for 20X8 will be $140. From 1 January 20X6, members were
offered the opportunity to take out a five-year membership for $500. The five-year
membership fees are released to the Income and Expenditure Account, equally over
five years, and the balance is held in a five-year Membership Fund. The five-year
membership offer was taken up by 50 members in 20X6 and 42 members in 20X7.
The Receipts and Payments account for the year ended 31 December 20X7 was as
follows:
RECEIPTS $ PAYMENTS $
Balance b/d - Cash at bank 14,732Suppliers of caf food and drink 68,290
Annual Subscriptions 48,000Caterers for function room 25,000
Five-year subscriptions 21,000Groundsmens wages 12,450
School hire of rugby pitches 18,500Purchase of equipment 8,000
Caf takings 96,830Heat and Light 19,450
Function room hire 36,200Printing, stationery and telephone 11,300
Advertising revenue 9,640Caf staff wages 25,600
Gym staff wages 32,000
Other expenses 29,892
244,902 244,902
Fifteen members had not paid their subscriptions for 20X6 by 31 December 20X6 but 24
members had paid in advance for 20X7. At 31 December 20X7, the club had not received
subscriptions for 20X7 from 21 members but 10 members had paid in advance for 20X8.
20% of heat and light costs are to be transferred to the Caf Trading Account.
Other information:
31 December 31 December
20X6 20X7
$ $
Caf Inventory 9,264 9,875
Club equipment (NBV) 102,750 99,675
Club premises (NBV) 240,000 225,000
Owed to supplier for caf food and drink 2,400 3,650
Prepaid other expenses 1,122 1,976
No equipment was disposed of during the year ended 31 December 20X7.
Page: 107

Required:
In respect of Bamm Rugby Club and Gym:
(a) Calculate the balance on the Accumulated Fund and the Five Year
Membership Fund at 31 December 20X6.
(b) Prepare the Annual Subscriptions Account for the year ended 31 December
20X7.
(c) Prepare the Caf Trading Account for the year ended 31 December 20X7.
(d) Prepare the Income and Expenditure Account for the year ended 31
December 20X7.
(e) Prepare a Balance Sheet (Statement of Financial Position) at 31 December

20X7.
13.4 A musical appreciation society had 35 members for the year ended 31 December
20X5. The annual subscription fee is $50 per member.
(i) On 1 January 20X5, five members had not paid their subscriptions for 20X4
and two members had already paid their subscription for 20X5.
(ii) At 31 December 20X5, four members had not yet paid their subscription for
20X5 but twelve members had paid their subscriptions for 20X6.
(iii) The receipts and payments account for the year ended 31 December 20X5
showed that the society had received subscriptions of $200 relating to 20X4,
$1,450 relating to 20X5 and $600 relating to 20X6.
Required:
Prepare the Subscriptions Account for the year ended 31 December 20X5.
End of Chapter - 13
Page: 108

CHAPTER 14
Ratio Analysis
14.1 Ratio Analysis
Ratio analysis can be used to assess a businesss financial performance, to evaluate
its financial position and as an aid when trying to predict future performance and
suitability.
Ratios can be sub-divided into three categories:
(a) Profitability or Performance ratios

(i) Return on Capital Employed (ROCE)
The ROCE measures the return or profit of a business in

relation to the owners capital. It shows how well a business is
utilizing capital to create revenue. The return is expressed as a
percentage of the capital employed.
The formula for Return on Total Capital Employed is:
()
= %

Where:
Total Capital employed = Ordinary share capital + % Preference Share
Capital + Reserves + Non-current Liabilities
The formula for Return on Total Shareholders Funds is:
()
= %

Where:
Total Shareholders Funds = Ordinary share capital + % Preference Share

Capital + Reserves
The formula for Return on Equity (Ordinary Shareholders Funds)

is:

()
= %
Where:
Ordinary Shareholders Funds = Ordinary share capital + Reserves
Page: 109

(ii) Gross profit as a percentage of revenues
This measures the percentage of sales revenue remaining after

meeting the cost of goods sold. It shows how much gross
profit is being generated per 1 of sales. It enables a judgment
to be made on how successfully the business has been trading.
The formula to calculate this is:

= %

(iii) Gross profit as a percentage of cost of sales
This measures the percentage of profit added to the purchase

or cost price of the goods sold.

= %

(iv) Net profit as a percentage of Revenues
This measures the percentage of sales revenue retained by the

business after the cost of sales and all other operating
expenses have been paid.

= %

(b) Liquidity/Working Capital ratios
(i) Current/Working Capital Ratio
The current or working capital ratio expresses how many times

the current liabilities of a business are covered by its current
assets.
Page: 110

The formula to calculate current ratio is:
(ii) Liquidity/Acid test ratio
The liquidity ratio is similar to the current asset ratio but it

omits invenotry from the calculation. This is because inventory
is the least liquid current asset. It has to be sold, converted to
receivables and then collected before the cash appears in the
business bank account.
The formula to calculate liquidity ratio is:
Effects of transactions on working capital and liquidity
Effect on
Effect on Effect on Effect on
liquid funds
working working liquidity
(bank +
capital capital ratio ratio
receivables)
Increase in
Sale of a fixed bank balance
Increase Increase Increase
asset so increase
working capital
Nil effect as
Purchase of
cash will be
inventory for No effect Decrease Decrease
replaced by
cash
inventory
Nil effect as
the increase in Decrease
Purchase of
inventory is because of
inventory on No effect No change
offset by the increased
credit
increase in payables
trade payables
Repayment of
Decrease in
a long term Decrease Decrease Decrease
working capital
loan
Nil effect as
Receipt of cash
the receivables
from trade No effect No effect No effect
are replaced by
receivables
cash
Page: 111

(C) Asset Utilization
(i) Inventory turnover Ratio
The inventory turnover rate calculates the number of times that

inventory is replaced during an accounting period, usually one
year.
The formula to calculate Inventory turnover rate is:
Where:
Average inventory = (Opening inventory + Closing inventory)
An alternative way of looking at inventory turnover is to calculate the

average inventoryholding period in days or months. This is
calculated as:
or
(ii) Receivables collection period
This ratio is used to calculate the average time in days that it

takes a business to collect from its trade receivables.
The formula to calculate Receivables collection period is:
Page: 112

(iii) Payables settlement period
The payables settlement period ratio calculates the average

time in days that a business takes to pay its payables.
The formula to calculate Payables settlement period is:
(iv) Revenues to capital employed
This calculation measures the investment needed to achieve

the level of sale revenues. It is often expressed as the value of
sale revenues achieved for every $1 of investment.
The formula to calculate Revenues to capital employed ratio is:
Expressed as a percentage;

= %

Expressed as a ratio;
Expressed as a turnover rate;
Page: 113

EXERCISES
14.1 Meridian Ltd sells outdoor clothing to the public through two retail shops located in
the west of England. You are provided with the financial statements of Meridian Ltd
for the year ended 31 October 20X3 and are required to analyse these in terms of
profitability, liquidity and asset utilisation.
Meridian Ltd
Income Statement for the year ended 31 October 20X3
$ $
Revenues 572,000
Cost of sales
Opening inventory 80,000
Purchases 400,000
480,000
Less Closing inventory (96,000)
384,000
Gross profit 188,000
Less: Expenses
Profit before interest 72,000
Less: Debenture interest 4,000

Net profit for the year 68,000
10% Preference dividend paid 10,000

Proposed final ordinary dividend 30,000 40,000
Retained profit for the year 28,000

Retained profit at 1 November 20X2 72,000
Retained profit c/d 100,000
Meridian Ltd
Balance Sheet at 31 Octorber 20X3
Cost Acc Depn NBV
ASSETS $ $ $
Non-current Assets
Land and buildings 440,000 100,000 340,000
Fixtures and fittings 120,000 48,000 72,000
Motor vehicles 140,000 40,000 100,000
700,000 188,000 512,000
Current Assets
Inventory 96,000
Receivables 60,000
Bank and cash in hand 54,000
210,000
Page: 114


Called up ordinary shares capital 400,000
Closing Retained earning 100,000
500,000
10% Preference shares 100,000
10% Debentures 40,000 140,000
640,000
Current Liabilities
Bank loans and overdraft -
Dividends 30,000
82,000
14.2 The following extracts are from the financial accounts of Danrow for the year ended
31 March 20X8.
Danrow
Balance Sheet at 31 March 20X8
$ $ $
ASSETS
Non-current Assets Cost Depn NBV
Plant and equipment 78,600 29,640 48,960
Fixtures and fittings 18,300 7,980 10,320
96,900 37,620 59,280
Current Assets
Inventory 18,000
Bank 2,760
49,560

Capital and Accumulated Profits
Opening balance 98,340
Add: Profit for the year 34,320
132,660
Less: Drawings 45,600
87,060
Current Liabilities
Accruals 1,620
21,780
Page: 115

Extract from the income statement for the year ended 31 March 20X8.
$
Revenues 345,600
Purchases 255,000
Cost of goods sold 259,200
Expenses 52,080
Net Profit 34,320
Required:
Calculate the following ratios for Danrow for the year ended 31 March 20X8
(calculations to be taken to 1 decimal place), and state the importance of each ratio.
(a) Gross profit margin percentage

(b) Net profit percentage
(c) Receivables collection period
(d) Payables settlement period
(e) Working capital/Current ratio
(f) Liquidity/Acid test ratio
14.3 Steer plc is interested in investing in another company and has obtained financial
information from two possible companies.

Rond Ltd Trub Ltd
$000 $000
Sale Revenues 3,825 4,950
Cost of sales 1,710 2,575
Gross profit 2,115 2,375
Distribution costs 540 675
Administration expenses 450 765
Profit before interest 1,125 935
Interest payable - 225
Net profit 1,125 710
Proposed dividend 225 315
Retained profit for the year 900 395
Sale revenues and purchases of both companies are all occur on a credit basis.
Balance Sheets at 31 March 20X1

Rond Ltd Trub Ltd
ASSETS $000 $000

Non-current Assets (NBV) 3,150 6,300
Current Assets
Inventory 1,125 900
Trade Receivables 450 1,125
Bank and cash in hand 225 5
Total Assets 4,950 8,330
Page: 116


Ordinary shares of $1 1,350 1,125
Retained Earning 2,970 2,885
4,320 4,010
Loan - 3,150
Current Liabilities
Trade Payable 405 675
Bank overdraft - 180
Dividends 225 315
Total Equity and Liabilities 4,950 8,330
Required:
Calculate the following ratios (to two decimal places) for Rond Ltd and Trub Ltd and
recommend which company offers the best investment opportunity for Steer plc.
Return on capital employed

Gross profit margin percentage
Net profit percentage
Sales to capital employed (times per annum)
Stock turnover (use closing stock and number of times)
Debtors collection period
Creditors settlement period (use cost of sales instead of purchases)
Working capital/Current ratio
Liquidity ratio/Acid test
14.4 Anita Watson was in business and at 1 April 20X8 the balance on her capital account
was $60,000. All her sales and purchases are on a credit basis.
Anita has provided you with some information for the year ended 31 March 20X9.
Inventory turnover 6 times

Mark-up 25%
Selling expenses 4% of sale revenues
Inventory at 31 March 20X8 $5,000 less than the following year
Inventory at 31 March 20X9 $28,500
Net profit percentage 10%
Non-current Asset NBV $39,000
Current Assets $48,750
Receivables collection period 30 days
Payables settlement period 60 days
Current assets consist of inventory, trade receivables and the balance at the bank.
Required:
Prepare Income Statement for the year ended 31 March 20X9 and a Balance Sheet
at that date, in as much detail as possible.
Page: 117

14.5 You have acquired the following information from John Duffy regarding his business
transactions for the year ended 31 December 20X8:
The balance on John Duffys Capital Account at 1 January 20X8 was $33,937.
Sale Revenues for the year were $262,500.
All sales and purchases are on credit.
Receivables collection period: 28 days.
Payables settlement period: 35 days.
Net book value of non-current assets at 31 December 20X8 (after charging
depreciation of $13,125): $52,500
Inventory at 1 January 20X8 was $7,392 and inventory at 31 December 20X8
was $11,088.
Inventory turnover: 15 times
Net profit percentage: 15%
Current ratio: 2:1
The only current assets are inventory and trade receivables. The bank
account is overdrawn at 31 December 20X8.
John Duffy withdrew $100 a week for personal expenses.
Required:
Prepare Income Statement for John Duffy for the year ended 31 December 20X8 and
a Balance Sheet at that date. (Calculations should be to the nearest $)
End of Chapter - 14
Page: 118

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Page: 119

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LCCI

1. The Accounting Equation

2. Double Entry System

4. The Division of the Ledger

5. Banking Transactions and

6. Cash Book: Three Columns - Cash Discount

7. Sales Day Book, Purchases Day Book, Returns inwards Day

9. The Petty Cash - Imprest System

10. Adjusting for Accruals and Prepayments

11. Depreciation of Non-current Assets

12. Bad Debts and Allowance for Doubtful Debts

13. Bank Reconciliation Statements

14. Capital and Revenue Expenditure

15. Preparing Financial Statements

If you have studied this textbook well,

BOOK-KEEPING, BOOK-KEEPING & ACCOUNTS (IAS)

Assets of the business = Assets provided by the owner

Assets provided by the owner is given the term equity (capital).

Assets = Equity (Capital)

Assets = Equity (Capital) + Liabilities

Total Assets xxx

EQUITY AND LIABILITIES

Total Equity and Liabilities xxx

LCCI FIRST & SECOND LEVEL - STUDY TEXT

Assets Equity Liabilities

- Loan from T Masters

1.3 Draw up W Pentecosts complete Balance Sheet (Statement of Financial Position)

BOOK-KEEPING, BOOK-KEEPING & ACCOUNTS (IAS)

Double Entry System

Left-hand side Right-hand side

LCCI FIRST & SECOND LEVEL - STUDY TEXT

2.3 Enter the following transactions into the accounts of T Pointer:

2.5 Enter the following transactions of R Webster in appropriate accounts:

BOOK-KEEPING, BOOK-KEEPING & ACCOUNTS (IAS)

Mar 19 B Wright returned goods $26

LCCI FIRST & SECOND LEVEL - STUDY TEXT

2.9 On 31 December Year 4, T Lennon had the following account balances:

Prepare the trial balance of T Lennon at 31 December Year 4.

BOOK-KEEPING, BOOK-KEEPING & ACCOUNTS (IAS)

3.1 Format of the Income Statement of a Sole Trader

Gross profit xxx

Net profit for the year xxx

LCCI FIRST & SECOND LEVEL - STUDY TEXT

3.2 Format of the Statement of Financial Position for a Sole Trader

Cost Accumulated Net Book

Total Assets xxx

EQUITY AND LIABILITIES

Capital and Accumulated Profits

Total Equity and Liabilities xxx

BOOK-KEEPING, BOOK-KEEPING & ACCOUNTS (IAS)

Wedburn valued his inventory at 31 December Year 6 at $3,100.

LCCI FIRST & SECOND LEVEL - STUDY TEXT

Trade Payables 15,716

Inventory at 28 February Year 5 was valued at $16,100.

Inventory at 31 May Year 7 was valued at $30,580.

BOOK-KEEPING, BOOK-KEEPING & ACCOUNTS (IAS)

(b) suppliers personal accounts (payable accounts) Payables Ledger

(c) concerned with the receiving and paying out of

(d) the remaining accounts General Ledger

(b) Impersonal accounts - the accounts of things rather than of people

Impersonal accounts are sometimes sub-divided into:

Further division of the ledger

(iii) on a geographic (or territorial) basis - areas or regions. Possibly according to