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Basic Accounting

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Page 1: Basic Concepts 1

Basic Accounting

Page 2: Basic Concepts 1

BASIC ACCOUNTING

SUNSYSTEMS TRAINING GUIDE SU003 V1.4 1

Contents Page

Objectives ..................................................................................................................... .........2

Session 1 - The Origin of Accounts ....................................................................................3

Questions!! (1) .....................................................................................................................3

Session 2 - The Principles of Accounting .........................................................................4

The Purpose of Accounting .................................................................................................4

Session 3 - Basic Terminology............................................................................................6

Questions!! (2) .....................................................................................................................6Questions!! (3) .....................................................................................................................7

Session 4 - Double Entry Book Keeping.............................................................................8

Questions!! (4) ...................................................................................................................10Questions!! (5) ...................................................................................................................14

Session 5 - The Effect Of Profit And Loss On Capital .....................................................17

Questions!! (6) ...................................................................................................................18

Session 6 - Balancing Off Accounts .................................................................................20

Questions!! (7) ...................................................................................................................21

Session 7 - The Trial Balance ............................................................................................22

Questions!! (8) ...................................................................................................................22

Session 8 - Trading And Profit And Loss Accounts ........................................................26

Questions!! (9) ...................................................................................................................27

Session 9 - The Balance Sheet .........................................................................................29

APPENDIX I - Glossary of Terms .......................................................................................31

APPENDIX II - Answers to Exercises.................................................................................35

Questions (1) .....................................................................................................................35Questions (2) .....................................................................................................................35Questions (3) .....................................................................................................................35Questions (4) .....................................................................................................................35Questions (5) .....................................................................................................................36Questions (6) ....................................................................................................................37Questions (7) .....................................................................................................................38Questions (8) .....................................................................................................................38Questions (9) .....................................................................................................................40Questions (10) ...................................................................................................................41

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BASIC ACCOUNTING

SUNSYSTEMS TRAINING GUIDE SU003 V1.4 2

Objectives

At the end of the day, delegates should be able to understand the basics of book keepingand accountancy. This will enable accountancy orientated problems to be worked throughlogically and with understanding. They should be able to:

• Understand the origins of accounting

• Understand the fundamental principles of accounting

• Understand the principles of double entry book keeping

• Understand the composition of basic financial reporting

Recommended for

• All personnel with little or no knowledge of bookkeeping who need this for their job.

• Personnel wishing to attend other SU courses, but lack accounting experience.

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SUNSYSTEMS TRAINING GUIDE SU003 V1.4 3

Session 1 - The Origin of Accounts

The book keeping method has been developed overcenturies. It is most easily explained by following thisdevelopment.....

Public and private book keeping first began in ancientEgyptian, Greek and Roman times. In the public sector,the development of community organisations in thesecivilisations was accompanied by the need forappointed officials to account for their use of publicfunds. In other words, they were obliged to keeprecords of, and account for, income and expenditure,and to have these records checked (audited) by other officials.

On the other hand, in the private sector merchants and landowners would ask their agentsto present an account of activities relating to the business or property. It became thecustom for the owners to hire professional examiners of accounts - auditors - to check theaccounts. These accounts were often presented verbally, and the term ’auditor’ comes fromthe Latin audire, to hear.

These accounts were merely lists of income and expenditure, the sort of simple accountsthat are still used or small organisations, such as clubs, today. However, by the fifteenthcentury, the larger Italian merchants had outgrown this system. Much of their wealth wastied up in stocks of merchandise, so they needed a system that could cope with valuationsof assets and wealth as well as simple records of purchases and sales. A system wasdeveloped that could not only deal with different types of business transactions, but wasalso self-checking - the double entry system. This system, first described by Pacioli in1494, still forms the basis of bookkeeping and accounts as we know them today.

Questions!! (1)

a) Where does the term ‘auditor’ come from?b) What sort of simple accounts are still used by small organisations, such as clubs,

today?c) What system was developed to deal with different types of business transactions?d) Who described this system and in what year?

Annual income: twenty pounds;annual expenditure: nineteenninety six; result: happiness.Annual income: twenty pounds;annual expenditure: twentypounds naught and sixpence;result: misery.(Mr Micawber in DavidCopperfield, Charles Dickens)

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SUNSYSTEMS TRAINING GUIDE SU003 V1.4 4

Session 2 - The Principles of Accounting

The Purpose of Accounting

In order to produce figures at all, it is necessary to keeprecords of all the relevant financial transactions.The transactions are summarised to give financial reports.These show either the results over a period of time: theamount saved, or the situation at a point in time (e.g. thevalue of a house at a particular date).

A definition of the purpose of accounting might therefore be:

“To provide records of all financial transactions, so that thefinancial position of a business and its relationship with the owners and interested outsideparties can be determined.”

The basic transaction recording process is the bookkeeping method. The basic books ofaccount are divided into ledgers, e.g. sales ledger, purchases ledger and nominal ledger.The name derives from the days when separate books were kept for each type oftransaction. Now the entries are usually entered into a computer for all but the smallestcompanies, but the ledger structure is maintained within the system. Within SunSystemsexamples are Ledger Accounting, Sales Order Processing and Purchase Order Processing.

It’s probably best to start with an example using personal finance. Most of us are concernedto manage our affairs so that our normal expenditure is covered by our wages or salary. Inother words, we would like to make a Profit - a surplus of income over expenditure - over aperiod of time (week, month, year). Life is made more complicated by the fact that, as wellas income and expenditure, we may have some assets - possessions of value - or someother form of wealth.

We shall use an illustration using two people, one called Charlie and the other called John.

Charlie and John work together and have identical income and their spending pattern isalmost identical. The one major difference between them is that Charlie rents a council flat,whereas John is buying a house. Their income and expenditure each month is as follows:

Monthly TransactionsCharlie John £ £

Income Take home pay 500 500

Expenditure Property costs (including rates, services etc.) 150 200 Other expenditure (food, clothes, car, etc.) 300 300

----- -----Monthly surplus 50

=== ===

As things stand in the average year, Charlie generates a surplus of 12 x £50 = £600, whichhe puts into his building society account. John on the other hand, saves nothing. Who doyou think is better off?

Answer:___________________________________________________________________

It certainly looks as though Charlie is the wealthier at the moment, but let’s take anotherlook. If we inspect their relative cash positions as they exist at the moment, we discover thefollowing:

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SUNSYSTEMS TRAINING GUIDE SU003 V1.4 5

Current cash positionsCharlie John £ £

Accumulated savings 5,000 -

Although they are lodged in the building society, Charlie’s savings can be classified as cashas they are easily convertible. So, who is better of on a cash basis?

Answer:___________________________________________________________________

Again, Charlie appears to be in the better position. Finally, let us judge them by the assetsthey own (ignoring the contents of their properties - televisions, furniture and so on - whichare roughly comparable).

Assets owned at the present timeCharlie John £ £

Second-hand car 1,000 1,000

Cash (in building society) 5,000 -

Property Value - 30,000

Less: Amount owing on mortgage - (10,000)

_____ 20,000

Total Assets 6,000 21,000

Now which one do we consider to be the better off?

Answer__________________________________________________________________

From this example you can see that there are several different ways of measuring finance.Charlie, for example, has a greater annual surplus than John, and much better cashresource. John, on the other hand, could be called the wealthiest, because, given time, hecould realise much greater value than Charlie. Although this example relates to individuals,the principles will apply to any financial undertaking. As you can see, all of the views arecorrect. We have just looked at them from different angles.

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SUNSYSTEMS TRAINING GUIDE SU003 V1.4 6

Session 3 - Basic Terminology

Finance can mean either the management of money, as in the ‘finance department’; or asource of money; as in ‘financing’ a car purchase.

The term accounts is often used interchangeably with the term finance - the financedepartment is often called the accounts department. Strictly speaking, the term accountsrefers to the books of accounts that form the basic accounting records of a business.

A debit can be money owed to us, the recording of an asset in a balance sheet account or apayment made (money spent) that will be attributable to Profit and Loss. These paymentsusually involve the running expenses of the business.

A credit is money owed by us to others, income or reserves of the company.

Questions!! (2)

Mark each of the following transactions as either a debit (D) or a credit (C)

a) An electricity bill due for payment ____b) An invoice outstanding to us for sales of SunSystems ____c) A bank overdraft ____d) Components purchased for Porting and Environment ____e) An office block in Hammersmith purchased ____f) VAT owed to HM Customs and Excise ____g) Cash sales made ____

The whole of financial accounting can be based on The Accounting Equation .....

Assets = Capital + Liabilities

The resources possessed by the firm are known as assets and some of these resourceswill have been supplied by the owner of the business. The total amount supplied by theowner is called capital . If some of the resources have been supplied by someone otherthan the owner, the debts owed are called liabilities.

The totals of each side of the equation will always equal one another and this will be true nomatter how many transactions are entered into. The actual assets, capital, and liabilitiesmay change, but assets will always equal the total of capital and liabilities.

Assets consist of property of all kinds, such as buildings, machinery, stocks of goods andalso benefits such as debts owing by customers, and the amount of money in the bankaccount.

Liabilities consist of money owing for goods supplied to the firm and for expenses, also forloans made to the firm.

Capital is often called the owner’s equity or net worth. It is the amount of money that thebusiness owes to the owner / shareholder.

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SUNSYSTEMS TRAINING GUIDE SU003 V1.4 7

Wealth represents the possessions or assets of a company or individual. The amount ofwealth created in a period is called the retained Profit. Profit, therefore, represents both:• The sum remaining from trading and investment after all debts have been paid. That is,

after trading expenses, interest payable, taxation, dividends to investors and all othercosts have been paid, and

• The difference between wealth at the start of a period and wealth at the end of a period.

If a company has less wealth at the end of a period than it started out with, the company hasmade a Loss in that period.

Questions!! (3)

1. Which of the following statements is wrong?

a) Assets - Capital = Liabilitiesb) Liabilities + Capital = Assetsc) Liabilities + Assets = Capitald) Assets - Liabilities = Capital

2. Which of the following is not an asset?

a) Buildingsb) Cash Balancec) Debtorsd) Loan from B. Treive

3. Which of the following is a liability?

a) Machineryb) Creditors for goodsc) Motor Vehiclesd) Cash at bank

4. Which of the following is wrong?

Assets Liabilities Capital £ £ £

a) 7,850 1,250 6,600b) 8,200 2,800 5,400c) 9,550 1,150 8,200d) 6,540 1,120 5,420

The accounts are reported in a variety of statements, one of which is the Balance Sheet.Although this is not the first accounting record to be made, it is a good place to start learningabout double entry book keeping.

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Session 4 - Double Entry Book Keeping

Double entry book keeping means that each transaction is recorded twice - as a debit and acredit. The double entry system has an account (details of transactions for that item) forevery asset, liability and for capital. The advantage of each entry being made twice is thatthe value of credits should equal the total of debits at the end of a given period. This is abasic test of accuracy. The statement of total debits and total credits is known as the TrialBalance. From the Trial Balance we can carry on and create the Balance Sheet and theProfit and Loss Account. For our purposes, we will start at the Balance Sheet.

On 1st May 1993, B. Blake started in business and deposited £5,000.00 into a bank accountspecially opened for the business.

B. BlakeDr. Balance Sheet as at 1 May 1993 Cr.------------------------------------------------------------------------------------------------------------------------Assets £ £Cash at bank 5,000 Capital 5,000

------- -------5,000 5,000

On 3rd May 1993, Blake buys a building for £3,000 and pays for it by cheque. The effect ofthis is that the cash at bank is decreased and a new asset, buildings appears.

B. BlakeBalance Sheet as at 3 May 1993

------------------------------------------------------------------------------------------------------------------------Assets £ £Buildings 3,000 Capital 5,000Cash at bank 2,000

------- -------5,000 5,000

On 6th May 1993, Blake buys some goods for £500 from D Smith , and agrees to pay forthem some time within the next two weeks. The effect of this is that a new asset, stock ofgoods is acquired, and a liability for the goods is created. A person to whom we owe moneyis called a creditor.

B. BlakeBalance Sheet as at 6 May 1993

------------------------------------------------------------------------------------------------------------------------Assets £ Capital and Liabilities £Buildings 3,000 Capital 5,000Stock of goods 500 Creditor 500Cash at bank 2,000

------- -------5,500 5,500

On 10th May 1993, goods which had cost £100 were sold to J Brown of the same amount,the money to be paid later. The effect is a reduction in the stock of goods and the creationof a new asset. A person who owes the firm money is known as a debtor. The balancesheet now appears as:

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SUNSYSTEMS TRAINING GUIDE SU003 V1.4 9

B. BlakeBalance Sheet as at 10 May 1993

------------------------------------------------------------------------------------------------------------------------Assets £ Capital and Liabilities £Buildings 3,000 Capital 5,000Stock of goods 400 Creditor 500Debtor 100Cash at bank 2,000

------- -------5,500 5,500

On 13 May 1993, goods which had cost £50 were sold to D. Daley for the same amount,Daley paying for them immediately by cheque. Here one asset, stock of goods, is reduced,while another asset, bank, is increased. The balance sheet now appears:

B. BlakeBalance Sheet as at 13 May 1993

------------------------------------------------------------------------------------------------------------------------Assets £ Capital and Liabilities £Buildings 3,000 Capital 5,000Stock of goods 350 Creditor 500Debtor 100Cash at bank 2,050

------- -------5,500 5,500

On 15 May 1993, Blake pays a cheque for £200 to D Smith in part payment of the amountowing. The asset of bank is therefore reduced, and the liability of the creditor is alsoreduced. The balance sheet now appears;

B. BlakeBalance Sheet as at 15 May 1993

------------------------------------------------------------------------------------------------------------------------Assets £ Capital and Liabilities £Buildings 3,000 Capital 5,000Stock of goods 350 Creditor 300Debtor 100Cash at bank 1,850

------- -------5,300 5,300

J. Brown, who owed Blake £100, makes a part payment of £75 by cheque on 31 May 1993.The effect is to reduce one asset, debtor, and to increase another asset, bank. This resultsin a balance sheet as follows:

B. BlakeBalance Sheet as at 31 May 1993

------------------------------------------------------------------------------------------------------------------------Assets £ Capital and Liabilities £Buildings 3,000 Capital 5,000Stock of goods 350 Creditor 300Debtor 25Cash at bank 1,925

------- -------5,300 5,300

Every transaction affects two items. Sometimes it has changed two assets by reducing oneand increasing the other. Other times it has reacted differently. A summary of the effect oftransactions upon assets, liabilities and capital is shown below.

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SUNSYSTEMS TRAINING GUIDE SU003 V1.4 10

Example of TransactionDebit Credit

1. Buy goods on credit. Increase Asset Increase Liability(Stock of goods) (Creditors)

2. Buy goods by cheque. Increase Asset Decrease Asset(Stock of Goods) (Bank)

3. Pay creditor by cheque. Decrease Liability Decrease Asset(Creditors) (Bank)

4. Owner pays more capital into the Increase Asset Increase Capital bank. (Bank)5. Owner takes money out of the Decrease Capital Decrease Asset business bank for his own use. (Bank)6. Owner pays creditor from private Decrease Liability Increase Capital money outside the firm. (Creditors)

Questions!! (4)Which of the following statements is correct?

Effect uponAssets Liabilities

a) We paid a creditor by cheque +Bank - Liabilitiesb) A debtor paid us £90 in cash + Cash + Debtorsc) J Hall lends us £500 (cheque) + Bank - Loan from Halld) Bought goods on credit + Stock + Capital

2. Complete the gaps in the table.

Assets Liabilities Capital----------------------------------------------------------------------------

£ £ £a) 12,500 1,800 _____b) 28,000 4,900 _____c) 16,800 ____ 12,500d) 19,600 ____ 16,450e) _____ 6,300 19,200f) _____ 11,650 39,750

3. Identify which items are assets (A) and which items are liabilities (L) in the following list:

a) Office Machinery __b) Loan from C. Shirley __c) Fixtures and fittings __d) Motor Vehicles __e) Owing of goods __f) Bank Balance __

4. Which of the following are shown under the wrong heading?

Assets Liabilities-----------------------------------------------------------------------------Loan from C. Smith __ Stock of goods __Cash in hand __ Money owing to bank __

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Machinery __Creditors __Premises __Motor Vehicles __

5. A. Smart sets up a new business. Before he actually sells anything he has boughtMotor Vehicle £2,000, Premises £5,000, Stock of Goods £1,000. He did not pay in fullfor his stock of goods and still owes £400 in respect of them. He had borrowed £3,000from D. Bevan. After the events just described, and before trading starts, he has £100cash in hand and £700 cash at bank. Calculate the amount of his capital.

________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

6. Draw up A. Foster’s balance sheet from the following as at 31 December 1993.

£Capita 23,750Debtors 4,950Motor Vehicles 5,700Creditors 2,450Fixtures 5,500Stock of goods 8,800Cash at bank 1,250

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SUNSYSTEMS TRAINING GUIDE SU003 V1.4 12

_______________________

____________________________________________

Assets £ Liabilities £

_____________________ _______ ________________________ ____________________________ _______ ________________________ ____________________________ _______ ________________________ ____________________________ _______ ________________________ ____________________________ _______ ________________________ ____________________________ _______ ________________________ ____________________________ _______ ________________________ _______

======= =======

Transactions will increase or decrease assets, liabilities or capital. The double entry rulesfor accounts are:

Accounts To record Entry in the accounts

Assets an increase Debita decrease Credit

Liabilities an increase Credita decrease Debit

Capital an increase Credita decrease Debit

We will be recording the entries on ‘T accounts’. T Accounts are so called because you splityour page in two and put a title at the top, so it looks like a ‘T’! Who said accounting wasboring?! The left hand side is called the debit side and the right hand side is called thecredit side. This method is useful because you have to do both a credit and a debit entry, soyou can check your accounts balance at each stage of the exercise.

Example of how double entry works .

The entries for the first period are as follows:

1. £10,000 invested by the owner2. Workshop rented during period £1,0003. Materials purchased and used £2,0004. Wages paid £2,0005. Cash sales £6,000

The double entry treatment would be:

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Description Debit Credit £ £

1. Debit cash book with cash invested 10,000Credit owners capital account 10,000

2. Rent (Profit and Loss account) 1,000Cash book (payment out) 1,000

3. Material (Profit and Loss account) 2,000Cash book (payment out) 2,000

4. Wages (Profit and Loss account) 2,000Cash book (payment out) 2,000

5. Sales income (Profit and Loss account) 6,000 Cash book (receipt in) 6,000

Referring back to the accounting equation:

Assets = Liabilities + Capital

To increase each item Debit Credit Credit

To decrease each item Credit Debit Debit

The double entry rules for liabilities and capital are the same, but they are exactly theopposite as those for assets. This is because assets are on the opposite side of theequation and therefore follow opposite rules. In the accounts the rule will appear as:

Any asset account Any liability account----------------------------------------------- -------------------------------------- -

£ £ £ £Increases Decreases Decreases Increases + - - +

Now we can enter some transactions:

The proprietor starts the firm with £1,000 in cash on 1 August 1993.

Effect Action

a) Increases the asset of cash in the firm Debit the cash account

b) Increases the capital Credit the capital account

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These are entered:

Cash------------------------------------------------------------------------------------------------------------------------

£ £1 August 1993 Capital 1,000(Transaction (Opposite (Value) Date) Entry)

Capital------------------------------------------------------------------------------------------------------------------------

£1 August 1993 Cash 1,000

Questions!! (5)1. Complete the following table:

Account to be credited Account to be debiteda) Bought motor van for cash ____________________________________________b) Bought office machinery on credit from J Grant and Son_____________________c) Introduced capital in cash ____________________________________________d) A debtor, J Beach, pays us by cheque ___________________________________e) Paid a creditor, A.Barrett, in cash ______________________________________

2. Complete this table: Account to be Account to be

debited credited

a) Bought machinery on credit from A Jackson & Sonb) Returned machinery to A Jackson and Sonc) A debtor, J Brown pays us in cashd) J Smith lends us money, giving it to by chequee) Sold office machinery for cash

3. Write up the asset and liability accounts in the records of D Coy to record thesetransactions. Remember to enter the transaction date, where the opposite entry is and,of course, the value.

1992May 1 Started business with £1,000 cash “ 3 Bought a motor lorry on credit from Speed and Sons for £698 “ 14 Bought office machinery by cash for £60 “ 31 Paid Speed & Sons the amount owing to them £698 in cash

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Capital------------------------------------------------------------------------------------------------------------------------

£ £

Cash------------------------------------------------------------------------------------------------------------------------

£ £

Speed and Sons------------------------------------------------------------------------------------------------------------------------

£ £

Motor Lorry------------------------------------------------------------------------------------------------------------------------

£ £

Office Machinery-----------------------------------------------------------------------------------------------------------------------

£ £

4. Write up the asset, liability and capital accounts to record the following transactions inthe records of G Powell. Again, remember to enter the transaction details. You mayfind it useful to number each transaction as you go, so you can keep track of yourentries.

1993July 1 Started business with £2,500 in the bankJuly 2 Bought office furniture by cheque £150July 3 Bought machinery £750 on credit from Planes LTD.July 5 Bought a motor van by cheque £600July 8 Sold some of the office furniture for £60 on credit to J Walker and SonsJuly 15 Paid the amount owing to Planes Ltd £750 by chequeJuly 23 Received the amount due from J Walker £60 in cashJuly 31 Bought more machinery by cheque £280

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Bank------------------------------------------------------------------------------------------------------------------------

£ £

Capital------------------------------------------------------------------------------------------------------------------------

£ £

Office Furniture------------------------------------------------------------------------------------------------------------------------

£ £

Machinery------------------------------------------------------------------------------------------------------------------------

£ £

Planes Ltd------------------------------------------------------------------------------------------------------------------------

£ £

Motor Van------------------------------------------------------------------------------------------------------------------------

£ £

J Walker------------------------------------------------------------------------------------------------------------------------

£ £

Cash------------------------------------------------------------------------------------------------------------------------

£ £

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Session 5 - The Effect Of Profit And Loss On Capital

By Profit we mean the excess of revenues over expenses for a particular period. Revenuesconsist of the monetary value of goods and services that have been delivered to customers.Expenses consist of the monetary value of the assets used up in obtaining these revenues.

You can see the effect of Profit on capital by this example:

1. On 1 January the assets and liabilities of a firm are:

Assets: Motor van £500, Fixtures £200, Stock £700, Debtors £300, Cash at bank£200

Liabilities: Creditors £600

The capital is found by the formula, Assets - Liabilities = Capital .

£500+£200+£700+£300+£200-£600=£1,300

Capital = £1,300

2. During January the whole of the £700 stock is sold for £1,100 cash. On the 31 Januarythe assets and liabilities have become:

Assets: Motor Van £500, Fixtures £200, Stock - , Debtors £300, Cash at Bank £1,300.Liabilities: Creditors £600

Assets - Liabilities = Capital

£500+£200+£300+£1,300-£600 = £1,700

Profit therefore affects the capital like this:

Old capital + Profit = New capital.£1,300 + £400 = £1,700

Capital = £1,700

A Loss would have reduced the capital: Old Capital - Loss = New Capital .

So to be able to change the capital account, it will have to be possible to calculate Profitsand Losses.

Accounts will be needed to collect together the expenses and revenues pending thecalculation of Profit, e.g. Rent account, wages account, postage account.

We now have to decide which side of the records revenues and expenses are to berecorded. Assets involve expenditure by the firm and are shown as debit entries. Expensesalso involve expenditure by the firm and are therefore also recorded on the debit side of thebooks. When we talk of assets in a Profit and Loss capacity, we are referring toexpenses. Although this may seem confusing, the expenses are the smaller assets used upin the running of the business. Assets may therefore be seen to be expenditure of moneywhich has been used up in the running of the business and for which there is no benefitremaining at the date of the balance sheet. Examples of running expenses can bestationery and salaries. This is unlike the balance sheet assets, which are usually larger,both in respect of physical size and of monetary value! Buildings, vehicles and bankbalances are examples of these larger assets.

Revenue is the opposite of expenses and therefore appears on the opposite side toexpenses. Revenue accounts appear on the credit side of the books. Revenue alsoincreases Profit, which in turn increases capital. Pending the periodical calculation of Profit,

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revenue is collected together in appropriately named accounts and until it is transferred tothe Profit calculations it will need to be shown as a credit.

A couple of examples will demonstrate the double entry required.

1. A rent of £20 is paid in cash

a) the asset of cash is decreased. This means crediting the bank account to show thedecrease of the asset,

b) The total of the expenses of rent is increased. As expense entries are shown asdebits , and the expense is rent, so the action required is the debiting of the rentaccount .

Summary Credit the cash account with £20 Debit the rent account with £20.

Questions!! (6)

1. Given the following, what is the amount of Capital?Assets: Premises £20,000, Stock £8,500, Cash £100. Liabilities: Credits £3,000,Loan from A. Adams £4,000

a) £21,000b) £21,600c) £32,400d) None of the above

2. Which of the following is correct?

a) Profit does not alter capitalb) Profit reduces capitalc) Capital can only come from Profitd) Profit increases capital

3. Complete the following table:Account to be Account to be Debited Credited

a) Paid rent by cash __________________________________b) Paid wages by cash __________________________________c) Rent received by cheque __________________________________d) Received by cheque refund of insurance previously paid __________________________________e) Paid general expenses by cash __________________________________

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5. Enter the following transactions in the necessary accounts in double entry. Rememberto enter the transaction details, and number the transactions if you feel it will help you.

1988Jan 1 Started business with £200 in bankJan 2 U Surer lent us £1,000 giving us the money by chequeJan 3 Bought goods on credit £296 from T ParkinJan 6 Cash sales £105Jan 8 Paid wages in cash £18

Bank------------------------------------------------------------------------------------------------------------------------

£ £

Cash------------------------------------------------------------------------------------------------------------------------

£ £

Purchases------------------------------------------------------------------------------------------------------------------------

£ £

T Parkins------------------------------------------------------------------------------------------------------------------------

£ £

Wages------------------------------------------------------------------------------------------------------------------------

£ £

Capital------------------------------------------------------------------------------------------------------------------------

£ £

U Surer------------------------------------------------------------------------------------------------------------------------

£ £

Sales------------------------------------------------------------------------------------------------------------------------

£ £

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Session 6 - Balancing Off Accounts

So far, all we have looked at is the entries in the books of accounts, the transactionsthemselves. Every now and then we will want to look at the accounts and see what they aretelling us.

The most obvious reason for doing this is to find out how much our customers owe us inrespect of goods we have sold to them. Most firms tend to do this at the end of a month.The account for Mr Knight will be a useful example here.

D Knight------------------------------------------------------------------------------------------------------------------------

£ £1 August 1993 Sales 158 28 August 1993 Cash 15815 August 1993 Sales 20630 August 1993 Sales 118

Knight still owes the business £206 + £118 = £324 at the end of August. The business willtherefore start the next months business with this amount owing to it. To show that our firmis carrying these outstanding items from one period to the next, the ‘balance’ on eachaccount is found. The ‘balance’ is the accounting term meaning the arithmetical differencebetween the two sides of an account.

To balance off an account :

1) First add up the side of the account having the greatest total.

2) Second, insert the difference (the balance) on the other side of the account so as tomake both sides equal. Make sure the totals are level on each side of the account.

3) The balance has now been entered in the period which has finished, now we have toenter it on the other side of the books to ensure that double-entry of the item is carriedout. This entry is made on the next line under the totals. If we think in terms ofSunSystems, this is where an account is a Balance forward account or an Open itemsaccount. Going back to D Knight we can see the change.

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D Knight-----------------------------------------------------------------------------------------------------------------------

£ £1 August 1993 Sales 158 28 August 1993 Cash 15815 August 1993 Sales 206 31 August 1993 Bal c/d 32430 August 1993 Sales 118 ----- -----

482 482

1 Sept. 1993 Balance b/d 324

If there is only one entry it is unnecessary to enter the total. A double line ruled under theentry will mean that the entry is its own total and will show that the account has been closedoff for this period.

Depending on which side of the account the balance brought down sits, will decide itsname. If it is on the debit side, it is a debit balance and if it is on the credit side, it is a creditbalance.

Questions!! (7)1. What is the balance on the following account on 31 May 1985?

C. De Freitas-------------------------------------------------------------------------------------------------

£ £May 1 Sales 205 May 17 Cash 300May 14 Sales 360 May 28 Returns 50May 30 Sales 180

a) A credit balance of £395b) A debit balance of £380c) A debit balance of £395d) A nil balance on the account

2. What would the balance on the account of C De Freitas be in No. 1 above on 19 May1985?

a) A debit balance of £265b) A credit balance of £380c) A credit balance of £445d) A credit balance of £265

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Session 7 - The Trial Balance

All items recorded in all the accounts on the debit side should equal in total all the itemsrecorded on the credit side of the books. To see if the two sides are in balance, weperiodically draw up a Trial Balance. A trial balance is a list of balances only , arranged asto whether they are debit or credit balances. For example:

Trial Balance as on 31 May 1986

Dr. Cr.£ £

Purchases 309Sales 255Returns out 15Returns in 16A Lyon and son 141M Spencer 29Cash 57

---- ----411 411

It may appear that the balancing of a trial balance proves that the books are correct. This isnot the case, it mearly means that certain types of errors have not been made. Forexample, with a sales invoice, we would expect to debit the debtor account and credit thesales account. This would be in balance and correct. However, if a new clerk joined andmistakenly entered the journal (a record of a transaction and, in SunSystems, a mechanismto enter transactions into the package) the wrong way round, we would have a credit entryon the debtor account and a debit entry on the creditor account. Clearly this is wrong, butthe Trial Balance would not show this because the two sides are in balance. Unfortunately,there is no easy way to get over this. The use of journal presets in SunSystems would gosome way to ensuring accuracy as would good in-house procedure notes within eachcompany.

Questions!! (8)

1. Which of the following best describes a Trial Balance?

a) Shows the financial position of a businessb) It is a special account

c) Shows all the entries in the books d) It is a list of balances on the books

2. It is true that the trial balance totals should agree?

a) No, there are sometimes good reasons why they differb) Yes, except where the trial balance is extracted at the year endc) Yes, alwaysd) No, because it is not a Balance Sheet

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3. Enter up the necessary accounts for the month of May for Big Profit Ltd. from thefollowing details and extract a trial balance as at 31 May 1993. Remember to give thetransaction details on the T accounts and to number the transactions if it helps you.

1993May 1 Started firm with capital in cash of £250May 2 Bought goods on credit from C Mendez £87May 4 Sold goods on credit to H Spencer £176May 6 Paid rent by cash £12May 15 Paid carriage by cash £23

Trial Balance of Big Profit Ltd. as at 31 May 1993

Dr. Cr. £ £

Cash _____________________________Purchases _____________________________Rent _____________________________Spencer _____________________________

Carriage _____________________________Capital _____________________________Sales _____________________________Mendez _____________________________

==========================

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Cash------------------------------------------------------------------------------------------------------------------------

Purchases------------------------------------------------------------------------------------------------------------------------

Rent------------------------------------------------------------------------------------------------------------------------

Bank-----------------------------------------------------------------------------------------------------------------------

Spencer------------------------------------------------------------------------------------------------------------------------

Carriage------------------------------------------------------------------------------------------------------------------------

Capital------------------------------------------------------------------------------------------------------------------------

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Sales------------------------------------------------------------------------------------------------------------------------

Mendez------------------------------------------------------------------------------------------------------------------------

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Session 8 - Trading And Profit And Loss Accounts

The earning of Profit is usually one of the main reasons for setting up a business and theproprietor will want to know how much Profit has been made for various reasons. Forexample, he will want to be able to compare how much actual Profit he made compared tothe Profit he thought he would make. He may also want to know his Profits to help obtain abank loan or for income tax purposes.

Profits are calculated by drawing up a Trading and Profit and Loss account. One of themost important uses of the Trading and Profit and Loss account is comparing the resultsobtained with the results expected. Many businesses attach a great deal of importance totheir gross Profit percentage. This is the amount of Profit made, before deductingexpenses, for every £100 of sales. So that this can be easily deduced from the Profitcalculations, the account is split into two handy sections. The gross Profit is found from theTrading account and the net Profit is found when the Profit and Loss account is prepared.

Gross Profit is the excess of sales over the cost of goods sold in the period. By taking thefigure of sales less the cost of goods sold, it can be seen that the accounting custom is tocalculate a trader’s Profits only when the goods have been disposed of and not before.

Net Profit is what remains after all other costs used up in the period have been deductedfrom the gross Profit and includes any other revenue other than that from sales (discountsreceived, interest earned for example).

B SwiftTrial Balance as at 31 December 1993

Dr Cr.------------------------------------------------------------------------------------------------------------------------

£ £Sales 3,850Purchases 2,900Rent 240Lighting expenses 150General Expenses 60Fixtures and fittings 500Debtors 680Creditors 910Bank 1,510Cash 20Drawings 700Capital 2,000

--------- ---------6,760 6,760

How do we do it ?

The first task is to draw up the Trading account using the above information. However, weinstantly hit a problem. Purchases will only equal cost of goods sold if there is no stockremaining at the 31 December 1993. So Mr Swift would have to do a stock take at the endof the day on the 31 December 1993 and calculate their value.

Cost of Goods sold = Purchases - Unsold stock.

Mr Swift finds he has £300 of unsold stock. The double entry would be to debit the salesaccount and transfer the balance to the Trading account and credit the purchases accountand transfer the balance to the Trading account. At this point you would need to open astock account for the unsold stock and debit the asset of stock to it. The credit for theclosing stock should be in the Trading account, completing the double entry. We can thencarry on and draw up the Profit and Loss account.

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The Trading and Profit and Loss account will appear as follows:

B SwiftTrading And Profit And Loss Account For The Year Ended 31 December 1985

£ £Purchases 2,900 Sales 3,850Less Closing Stock 300

------Cost of goods sold 2,600Gross Profit c/d 1,250

------ -------3,850 3,850==== ====

Gross Profit b/d 1,250Rent 240Lighting Expenses 150General Expenses 60Net Profit 800

------- --------1,250 1,250==== =====

Please note that not all of the items in the trial balance have been used in the Trading andProfit and Loss account. The remaining balances are assets or liabilities or capital, they arenot expenses or sales. These are used when the Balance Sheet is drawn up.

Questions!! (9)

1. Gross Profit is:a) excess of sales over cost of goods soldb) Sales less purchasesc) Cost of goods sold + opening stockd) Net Profit less expenses of the period

2. Net Profit is calculated in the:

a) Trading Accountb) Profit and Loss accountc) Trial Balanced) Balance Sheet

Questions continue over the page…

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3. From the following trial balance prepare a Trading and Profit and Loss Account.

Trial Balance as at 31 December 1993Dr Cr.

------------------------------------------------------------------------------------------------------------------------£ £

Sales 18,462Purchases 14,629Salaries 2,150Motor Expenses 520Rent 670Insurance 111General Expenses 105Premises 1,500Motor Vehicles 1,200Debtors 1,950Creditors 1,538Cash at Bank 1,654Cash in hand 40Drawings 895Capital 5,424

------- --------25,424 25,424

Stock at 31 December 1993 was £2,548.

Trading and Profit and Loss Account for the period ending 31 December 1993

£ £_____ ___________--------__________-------- ----------

===== ======

___________________________________-------- ----------

===== ======

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Session 9 - The Balance Sheet

After the Trading and Profit and Loss Accounts have been completed, a statement is drawnup in which the remaining balances in the books are arranged according to whether they areasset, liability or capital balances. This statement is called a Balance Sheet. The assetsare shown on the left hand side and the liabilities on the right hand side.

The Balance Sheet is not part of the double entry system, whereas the Trading and Profitand Loss Account is. The Balance Sheet is a list of the balances remaining after theTrading and Profit and Loss Accounts have been prepared. So, items are not transferredfrom accounts to the Balance Sheet, and accordingly entries are not made in the variousaccounts when a Balance Sheet is drawn up.

Using the example of B Swift that we worked on for the Trading and Profit and LossAccount, we can now go on and draw up the Balance Sheet.

B SwiftBalance Sheet as at 31 December 1993

Assets £ Liabilities £Fixtures and fittings 500 Capital 2,000Stock 300 Less drawings (700)Debtors 680 -------Bank 1,510 1,300Cash 20 Profit 800

Creditors 910------- -------

3,010 3,010

All of these balances still remain in the accounts, no entries were made in the accounts forthe purpose of drawing up the Balance Sheet

Questions!! (10)

1. Which is the BEST definition of a Balance Sheet?

a) An account proving the books balanceb) A record of closing entriesc) A listing of balancesd) A statement of assets

2. Draw up the Balance Sheet from the Trial Balance and Trading and Profit and LossAccount used for the last series of questions.

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Balance Sheet as at 31 December 1993

Assets £ Liabilities £

------------------------ ------------------------------------------------ ----------------------------------------------- ----------------------------------------------- ----------------------------------------------- ----------------------------------------------- ------------------------

============== ==============

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APPENDIX I - Glossary of Terms

AccountA statement showing the amount of money due by one party to another.

AccrualsExpenses which are known, but which are not due until the end of a specific periodof time.

AssetsSee Fixed Assets and Current Assets.

Balance SheetA statement showing, in the form of a list, the value of a company’s assets andliabilities at a particular date. The Balance Sheet of a company must give a trueand fair view of the company’s financial position.

Bank ReconciliationA statement used to achieve agreement between the bank statement and the bankaccount in the nominal ledger.

Bank StatementsDetails issued by a bank to customers holding current accounts, showing theamounts received and paid out on their behalf.

BudgetsEstimates of income and expenditure which are planned by an organisation for aspecified future period.

CapitalInitially capital is the funding that is needed to start a business. The funding isneeded to provide for initial expenditure, such as renting or purchasing premises,paying for raw materials and wages and so on. The money to finance a businessmay come from three places:• from the owners (like own savings)• from bank loans or similar lenders• once the business is established, from Profits retained in the business

Capital ExpenditureCapital Expenditure is expenditure on fixed assets.

Capital ReservesA capital reserve is retained Profit that has been retained because of a legalrestriction on the amount of Profit that can be paid out.

Cash BookA basic accounts book in which all of the cash receipts and payments are recorded.

Cash FlowThe regular supply of cash which is necessary to meet the weekly or monthlyfinancial obligations of a firm.

Control AccountAn account where a grand total is held of a number of individual ledger totals, forexample, debtor accounts. It is used for checking purposes.

Current AssetsThese are funds used for the everyday operation of the business in terms of:• raw materials, components and packaging for the production process• goods and services purchased to maintain the fixed assets and allow the

process to run• labour to operate the process and run the businessIf we stop our company at any moment in time, we are likely to have working capitalinvested in:

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• Stocks∗ raw materials and components∗ work in progress (W.I.P) particularly with long processes such as with

aerospace projects∗ finished Goods

• Trade debtors (money owed by customers)• Bank and cash (any surplus funds).The more money we have tied up in these areas the less we have available toinvest in the growth of fixed assets. It is important therefore to keep stocks anddebtors as low as possible.

Current LiabilitiesIn the course of everyday operations, we not only invest funds as shown above, butwe also create liabilities - sums of money that we owe. If we buy goods andservices on credit we owe our suppliers or trade creditors. Other creditors mayinclude sums owed to the tax man and the shareholders. Current liabilitiesrepresent a reduction in the need for working capital.

Creditors A party to whom money is owed as a result of a credit transaction. The person whoowes the money is the debtor.

CreditAn entry which signifies payment received or money owed by us to others.

DebentureA commercial loan similar to a mortgage.

DebitAn entry which records a sum of money owed to us or money spent (a paymentmade).

DebtorA person or organisation that owes money.

DepreciationA regular charge against income for the decline in value of assets.

DividendsProfit paid out to shareholders, their equivalent to interest.

Excess of income over expenditureThis is the term used to describe Profit in non-Profit making organisations, such ascharities.

Fixed AssetsFixed assets are those assets purchased and owned by the business. Theyrepresent the means be which the company earns its Profits. The term fixed isused because they are not for sale in the normal course of business. They willinclude items such as land, buildings, plant and machinery, office equipment, motorvehicles and computers. Such items are tangible fixed assets because they can beseen and touched. There is another type of fixed asset called intangible fixedassets. The most common intangible fixed asset is goodwill.

GoodwillGoodwill often arises on the purchase of a business. In addition to tangible fixedassets, a further sum may be paid out for the goodwill generated by the previousowner. In other words, a value is put on the efforts of the previous owner to build uptrade and encourage custom, which obviously has a value to the new owner.

InvestmentsWhen a company is established, it may be in a position where it cannot Profitablyinvest more money within the business as it stands. The directors of the businesswill then look outside the business to invest funds generated within the business. Ifthe money surplus is likely to be short term (that is, the money will be required bythe business again in the near future) short term investments will be made whichcan easily be reconverted back to cash as the need arises. If the surplus iscontinuing and long term, the directors will want to invest for the long term to get themost Profitable return on investment. Investments considered might include:• buying shares in other companies• purchasing other companies outright• making long term loans

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• investing in government stocks.

InvoiceA business document sent by the seller to the buyer, giving full details of the goodsor services sold, such as quantity, quality, price and delivery.

JournalA day book which is used to record transactions as soon as they occur. It is usuallydivided into specific areas such as sales, purchases and cash.

LedgersThe principal record book used in business to summarise transactions concerningits creditors and debtors and other assets and liabilities.

LiabilitiesSums of money that we owe. See also current liabilities and long term liabilities.

Long Term LiabilityThis type of liability is usually required when additional funding for the business isrequired. If the owners do not wish to issue further shares and so divide ownershipfurther, they can arrange commercial loans. These loans may be from banks, frommortgages on properties, or debentures. A guarantee is usually required. In a newcompany this may be a personal guarantee from the owner (which extends theirliability beyond the limit of their share investment). In a mature company, the loansare normally secured against the company assets. These are called charges onassets and give priority to the lender in terms of recovering his loan should thebusiness fail.

Limited LiabilityThe word ‘limited’ means that the owners of the company are only liable for thedebts of the company up to the value of their share investment. In other words, themost a shareholder can lose, if a venture or business fails, is the share capital hehas invested in the business.

LossAn excess of expenditure over income in a period. A decrease in the wealth of acompany.

Net Current AssetsCurrent assets - current liabilities = net current assets. Also called Working Capital.

OrderA business document ordering goods or services. It will specify the types andquantities of goods, although not necessarily the charges.

Owners’ EquityThis is the same as share capital.

Petty CashA small fund which is issued to cover all the minor expenses of a business, e.g.minor travel expenses, postage stamps and small items of stationery.

PrepaymentsExpenses that are not due until the end of the period, but have been paid early.

ProfitAn excess of income over expenditure in a period. An increase in a company’swealth over a period of time.

Profit and Loss AccountA record compiled at regular intervals of all the Losses and expenses (debit side),balanced on the credit side by the items of gain or Profit, the objective being tocalculate the net Profit of a business.

Regulatory bodiesThese are organisations who set standards for accountants and accountancybodies. They will issue documents on recommended practice for certain areas, e.g.treatment of stock.

RemittanceMoney in any form sent from one person to another.

Revenue ReservesA voluntary retention of Profit kept in the business to fund future growth. It may beheld as cash or as assets.

Share Capital

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Businesses that are set up as limited companies (Ltd) or as public limitedcompanies (Plc) have owners that are called shareholders. The total value ofcapital provided by shareholders in a company is known as the share capital or theowners equity.

Trade CreditorsSuppliers to whom we owe money.

TransactionAn entry made through a journal into an account.

Trial BalanceThe statement of total debits and total credits is known as the trial balance.

VATValue Added Tax. A tax which is based on the value added to a good or service bya firm or individual. The cost of materials or product purchased from another firm isdeducted from the selling price of the product and the tax is based on thisdifference.

Working CapitalSee Net Current Assets

Sources: Frank Wood - Business Accounting 1 John Harrison - Finance for the Non-Financial Manager

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APPENDIX II - Answers to Exercises

Questions (1)

1. Audire2. Income and expenditure lists3. Double entry book keeping4. Pacioli in 1494

The Principles of Accounting

(i) Charlie(ii) Charlie(iii) John

Questions (2)

a) Cb) Dc) Cd) De) Df) Cg) C

Questions (3)

1. C2. D3. B4. C

Questions (4)

1. A

2. a) 10,700 b) 23,100 c) 4,300 d) 3,150 e) 25,500 f) 51,400

3. a) A b) L c) A d) A e) L f) A

4. Loan from C Smith Creditors Stock of Goods

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5. Assets: Motor 2,000 Liabilities: Loan 3,000Premises 5,000 Creditors 400Stock 1,000Bank 700Cash 100

------ ------8,800 3,400==== ====

Capital = 8,000 – 3,400 = 5,400

6. A FosterBalance Sheet as at 31December 1993

Assets LiabilitiesFixtures 5,500 Capital 23,750Motor 5,700 Creditors 2,450Stock 8,800Debtors 4,950Bank 1,250

-------- --------26,200 26,200===== =====

Questions (5)

1. a) Dr. Motor Van Cr. Cash b) Dr. Office Mch Cr. J Grant c) Dr. Cash Cr. Capital d) Dr. Cash Cr. J Beach e) Dr. A. Barnett Cr. Cash

2. a) Dr. Machinery Cr. A Jack b) Dr. A Jack Cr. Machinery c) Dr. Cash Cr. J Brown d) Dr. Cash Cr. J Smith e) Dr. Cash Cr. Office Machinery.

3. Capital Cr. 1.5.92 Cash £1,000.00

Cash Dr. 1.5.92 Capital £1,000.00Cr. 14.5.92 Office Machinery £ 60.00Cr. 31.5.92 Speed & Son £ 698.00

Speed & Son Dr. 31.5.92 Cash £ 698.00Cr. 3.5.92 Motor Lorry £ 698.00

Motor Lorry Dr. 3.5.92 Speed & Son £ 698.00

Office Mach. Dr. 14.5.92 Cash £ 60.00

4. Bank Dr. 1.7.93 Capital £2,500.00Cr. 2.7.93 Office Furniture £ 150.00Cr. 5.7.93 Motor Van £ 600.00Cr . 15.7.93 Planes Ltd £ 750.00Cr. 31.7.93 Machinery £ 280.00

Capital Cr. 1.7.93 Bank £2,500.00

Office Furn. Dr. 2.7.93 Bank £ 150.00

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Cr. 8.7.93 J Walker £ 60.00

Machinery Dr. 3.7.93 Planes Ltd £ 750.00Dr. 31.7.93 Bank £ 280.00

Planes Ltd Dr. 15.7.93 Bank £ 750.00Cr. 3.7.93 Machinery £ 750.00

Motor Van Dr. 5.7.93 Bank £ 600.00

J Walker Dr. 8.7.93 Office Furniture £ 60.00Cr. 23.7.93 Cash £ 60.00

Cash Dr. 23.7.93 J Walker £ 60.00

Questions (6)

1. B

2. D

3. a) Dr. Rent Cr. Cash b) Dr. Wages Cr. Cash c) Dr. Bank Cr. Rent Received d) Dr. Bank Cr. Insurance e) Dr. General Expnses Cr. Cash

4.Bank Dr. 1.1.88 Capital £ 200.00

Dr. 2.1.88 U Surer £1,000.00

Capital Cr. 1.1.88 Bank £ 200.00

U Surer Cr. 2.1.88 Bank £1,000.00

Purchases Dr. 3.1.88 T Parkin £ 296.00

T Parkin Cr. 3.1.88 Purchases £ 296.00

Sales Cr. 6.1.88 Cash £ 105.00

Cash Dr. 6.1.88 Sales £ 105.00Cr. 8.1.88 Wages £ 18.00

Wages Dr. 8.1.88 Cash £ 18.00

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Questions (7)

1. C

2. A

Questions (8)

1. D

2. C

3. Capital

31.5.93 Balance c/d £ 250.00 1.5.93 Cash £ 250.00-------------- --------------£ 250.00 £ 250.00======== ========

1.6.93 Balance b/d £ 250.00

Cash

1.5.93 Capital £ 250.00 6.5.93 Rent £ 12.0015.5.93 Carriage £ 23.0031.5.93 Balance c/d £ 215.00

------------- --------------£ 250.00 £ 250.00======= ========

1.6.93 Balance b/d £ 215.00

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C Mendez

31.5.93 Balance c/d £ 87.00 2.5.93 Purchases £ 87.00------------ -------------£ 87.00 £ 87.00======= ========

1.6.93 Balance b/d £ 87.00

Sales

31.5.93 Balance c/d £ 176.00 4.5.93 H Spencer £ 176.00

------------ --------------£ 176.00 £ 176.00======= ========

1.6.93 Balance b/d £ 176.00

H Spencer

4.5.93 Sales £ 176.00 31.5.93 Balance c/d £ 176.00------------- -------------£ 176.00 £ 176.00======= =======

1.6.93 Balance b/d £ 176.00

Rent

6.5.93 Cash £ 12.00 31.5.93 Balance c/d £ 12.00

------------- --------------£ 12.00 £ 12.00======= ========

1.6.93 Balance b/d £ 12.00

Carriage

15.5.93 Cash £ 23.00 31.5.93 Balance c/d £ 23.00------------- --------------£ 23.00 £ 23.00======= ========

1.6.93 Balance b/d £ 23.00

Purchases

15.5.93 Cash £ 87.00 31.5.93 Balance c/d £ 87.00------------- --------------£ 87.00 £ 87.00======= ========

1.6.93 Balance b/d £ 87.00

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Trial Balance as at 31 May 1993

Debit Credit

Cash.................................................................... 215.00Purchases........................................................... 87.00Rent.................................................................... 12.00Spencer............................................................... 176.00Carriage............................................................... 23.00Capital................................................................. 250.00Sales................................................................... 176.00Mendez................................................................ 87.00

---------- ----------513.00 513.00====== ======

Questions (9)

1. A

2. B

3.

Trading and Profit and Loss Account for the period ending 31 December 1993

Purchases 14,629 Sales 18,462less closing stock ( 2,548)

---------12,081

Gross Profit 6,381---------- ----------18,462 18,462====== ======

Salaries 2,150 Gross Profit 6,381Motor Expenses 520Rent 670Insurance 111General Expenses 105Net Profit 2,825

----------- ----------- 6,381 6,381====== ======

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Questions (10)

1. C

2.Balance Sheet as at 31 December 1993

Premises 1,500 Capital 5,424Motor Vehicles 1,200 less drawings ( 895)Stock 2,548 --------Debtors 1,950 4,529Cash at bank 1,654 Profit 2,825Cash at hand 40 Creditors 1,538

-------- -------- 8,892 8,892 ===== ====