Basic Concepts 1

Basic Accounting

BASIC ACCOUNTING

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) .....................................................................................................................6 Questions!! (3) .....................................................................................................................7 Session 4 - Double Entry Book Keeping.............................................................................8 Questions!! (4) ...................................................................................................................10 Questions!! (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) .....................................................................................................................35 Questions (2) .....................................................................................................................35 Questions (3) .....................................................................................................................35 Questions (4) .....................................................................................................................35 Questions (5) .....................................................................................................................36 Questions (6) ....................................................................................................................37 Questions (7) .....................................................................................................................38 Questions (8) .....................................................................................................................38 Questions (9) .....................................................................................................................40 Questions (10) ...................................................................................................................41

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BASIC ACCOUNTING Objectives

At the end of the day, delegates should be able to understand the basics of book keeping and accountancy. This will enable accountancy orientated problems to be worked through logically 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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BASIC ACCOUNTING Session 1 - The Origin of Accounts

The book keeping method has been developed over centuries. It is most easily explained by following this development.....

Annual income: twenty pounds; annual expenditure: nineteen ninety six; result: happiness. Annual income: twenty pounds; annual expenditure: twenty pounds naught and sixpence; result: misery. (Mr Micawber in David Copperfield, Charles Dickens)

Public and private book keeping first began in ancient Egyptian, Greek and Roman times. In the public sector, the development of community organisations in these civilisations was accompanied by the need for appointed officials to account for their use of public funds. In other words, they were obliged to keep records 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 agents to present an account of activities relating to the business or property. It became the custom for the owners to hire professional examiners of accounts - auditors - to check the accounts. These accounts were often presented verbally, and the term ’auditor’ comes from the Latin audire, to hear.

These accounts were merely lists of income and expenditure, the sort of simple accounts that are still used or small organisations, such as clubs, today. However, by the fifteenth century, the larger Italian merchants had outgrown this system. Much of their wealth was tied up in stocks of merchandise, so they needed a system that could cope with valuations of assets and wealth as well as simple records of purchases and sales. A system was developed that could not only deal with different types of business transactions, but was also self-checking - the double entry system. This system, first described by Pacioli in 1494, 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?

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BASIC ACCOUNTING Session 2 - The Principles of Accounting The Purpose of Accounting In order to produce figures at all, it is necessary to keep records of all the relevant financial transactions. The transactions are summarised to give financial reports. These show either the results over a period of time: the amount saved, or the situation at a point in time (e.g. the value 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 the financial position of a business and its relationship with the owners and interested outside parties can be determined.” The basic transaction recording process is the bookkeeping method. The basic books of account 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 of transaction. Now the entries are usually entered into a computer for all but the smallest companies, but the ledger structure is maintained within the system. Within SunSystems examples 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 concerned to manage our affairs so that our normal expenditure is covered by our wages or salary. In other words, we would like to make a Profit - a surplus of income over expenditure - over a period of time (week, month, year). Life is made more complicated by the fact that, as well as income and expenditure, we may have some assets - possessions of value - or some other 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 is almost 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 Transactions

Income Take home pay Expenditure Property costs (including rates, services etc.) Other expenditure (food, clothes, car, etc.) Monthly surplus

Charlie £

John £

500

500

150 300 ----50 ===

200 300 ----===

As things stand in the average year, Charlie generates a surplus of 12 x £50 = £600, which he puts into his building society account. John on the other hand, saves nothing. Who do you think is better off? Answer:___________________________________________________________________ It certainly looks as though Charlie is the wealthier at the moment, but let’s take another look. If we inspect their relative cash positions as they exist at the moment, we discover the following:

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BASIC ACCOUNTING Current cash positions

Charlie £ 5,000

Accumulated savings

John £ -

Although they are lodged in the building society, Charlie’s savings can be classified as cash as 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 assets they own (ignoring the contents of their properties - televisions, furniture and so on - which are roughly comparable). Assets owned at the present time

Second-hand car

Charlie £ 1,000

John £ 1,000

Cash (in building society)

5,000

-

Property Value Less: Amount owing on mortgage

Total Assets

-

30,000

-

(10,000)

_____

20,000

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 cash resource. John, on the other hand, could be called the wealthiest, because, given time, he could 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 are correct. We have just looked at them from different angles.

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BASIC ACCOUNTING Session 3 - Basic Terminology Finance can mean either the management of money, as in the ‘finance department’; or a source of money; as in ‘financing’ a car purchase. The term accounts is often used interchangeably with the term finance - the finance department is often called the accounts department. Strictly speaking, the term accounts refers 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 a payment made (money spent) that will be attributable to Profit and Loss. These payments usually 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) b) c) d) e) f) g)

An electricity bill due for payment An invoice outstanding to us for sales of SunSystems A bank overdraft Components purchased for Porting and Environment An office block in Hammersmith purchased VAT owed to HM Customs and Excise 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 resources will have been supplied by the owner of the business. The total amount supplied by the owner is called capital. If some of the resources have been supplied by someone other than 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 no matter how many transactions are entered into. The actual assets, capital, and liabilities may 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 and also benefits such as debts owing by customers, and the amount of money in the bank account. Liabilities consist of money owing for goods supplied to the firm and for expenses, also for loans made to the firm. Capital is often called the owner’s equity or net worth. It is the amount of money that the business owes to the owner / shareholder.

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BASIC ACCOUNTING Wealth represents the possessions or assets of a company or individual. The amount of wealth 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 other costs 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 has made a Loss in that period.

Questions!! (3) 1. Which of the following statements is wrong? a) Assets - Capital = Liabilities b) Liabilities + Capital = Assets c) Liabilities + Assets = Capital d) Assets - Liabilities = Capital 2. Which of the following is not an asset? a) Buildings b) Cash Balance c) Debtors d) Loan from B. Treive 3. Which of the following is a liability? a) Machinery b) Creditors for goods c) Motor Vehicles d) Cash at bank

4. Which of the following is wrong?

a) b) c) d)

Assets £ 7,850 8,200 9,550 6,540

Liabilities £ 1,250 2,800 1,150 1,120

Capital £ 6,600 5,400 8,200 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 learning about double entry book keeping.

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BASIC ACCOUNTING Session 4 - Double Entry Book Keeping Double entry book keeping means that each transaction is recorded twice - as a debit and a credit. The double entry system has an account (details of transactions for that item) for every asset, liability and for capital. The advantage of each entry being made twice is that the value of credits should equal the total of debits at the end of a given period. This is a basic test of accuracy. The statement of total debits and total credits is known as the Trial Balance. From the Trial Balance we can carry on and create the Balance Sheet and the Profit 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 account specially opened for the business. B. Blake Dr. 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 of this is that the cash at bank is decreased and a new asset, buildings appears. B. Blake Balance Sheet as at 3 May 1993 -----------------------------------------------------------------------------------------------------------------------Assets £ £ Buildings 3,000 Capital 5,000 Cash 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 for them some time within the next two weeks. The effect of this is that a new asset, stock of goods is acquired, and a liability for the goods is created. A person to whom we owe money is called a creditor. B. Blake Balance Sheet as at 6 May 1993 -----------------------------------------------------------------------------------------------------------------------Assets £ Capital and Liabilities £ Buildings 3,000 Capital 5,000 Stock of goods 500 Creditor 500 Cash 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 creation of a new asset. A person who owes the firm money is known as a debtor. The balance sheet now appears as:

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BASIC ACCOUNTING B. Blake Balance Sheet as at 10 May 1993 -----------------------------------------------------------------------------------------------------------------------Assets £ Capital and Liabilities £ Buildings 3,000 Capital 5,000 Stock of goods 400 Creditor 500 Debtor 100 Cash 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. Blake Balance Sheet as at 13 May 1993 -----------------------------------------------------------------------------------------------------------------------Assets £ Capital and Liabilities £ Buildings 3,000 Capital 5,000 Stock of goods 350 Creditor 500 Debtor 100 Cash 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 amount owing. The asset of bank is therefore reduced, and the liability of the creditor is also reduced. The balance sheet now appears; B. Blake Balance Sheet as at 15 May 1993 -----------------------------------------------------------------------------------------------------------------------Assets £ Capital and Liabilities £ Buildings 3,000 Capital 5,000 Stock of goods 350 Creditor 300 Debtor 100 Cash 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 results in a balance sheet as follows: B. Blake Balance Sheet as at 31 May 1993 -----------------------------------------------------------------------------------------------------------------------Assets £ Capital and Liabilities £ Buildings 3,000 Capital 5,000 Stock of goods 350 Creditor 300 Debtor 25 Cash at bank 1,925 ------------5,300 5,300 Every transaction affects two items. Sometimes it has changed two assets by reducing one and increasing the other. Other times it has reacted differently. A summary of the effect of transactions upon assets, liabilities and capital is shown below.

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BASIC ACCOUNTING Example of Transaction 1. Buy goods on credit. 2. Buy goods by cheque. 3. Pay creditor by cheque. 4. Owner pays more capital into the bank. 5. Owner takes money out of the business bank for his own use. 6. Owner pays creditor from private money outside the firm.

Credit Increase Liability (Creditors) Decrease Asset (Bank) Decrease Asset (Bank) Increase Capital

Debit Increase Asset (Stock of goods) Increase Asset (Stock of Goods) Decrease Liability (Creditors) Increase Asset (Bank) Decrease Capital

Decrease Asset (Bank) Increase Capital

Decrease Liability (Creditors)

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

a) b) c) d)

Effect upon Assets Liabilities +Bank - Liabilities + Cash + Debtors + Bank - Loan from Hall + Stock + Capital

We paid a creditor by cheque A debtor paid us £90 in cash J Hall lends us £500 (cheque) Bought goods on credit

2. Complete the gaps in the table.

Assets Liabilities Capital ---------------------------------------------------------------------------£ £ £ a) 12,500 1,800 _____ b) 28,000 4,900 _____ c) 16,800 ____ 12,500 d) 19,600 ____ 16,450 e) _____ 6,300 19,200 f) _____ 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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BASIC ACCOUNTING Machinery Creditors Premises Motor Vehicles

5.

__ __ __ __

A. Smart sets up a new business. Before he actually sells anything he has bought Motor Vehicle £2,000, Premises £5,000, Stock of Goods £1,000. He did not pay in full for his stock of goods and still owes £400 in respect of them. He had borrowed £3,000 from D. Bevan. After the events just described, and before trading starts, he has £100 cash 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 Debtors Motor Vehicles Creditors Fixtures Stock of goods Cash at bank

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£ 23,750 4,950 5,700 2,450 5,500 8,800 1,250

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BASIC ACCOUNTING _______________________ ____________________________________________

Assets

Liabilities

£

_____________________ _____________________ _____________________ _____________________ _____________________ _____________________ _____________________

_______ _______ _______ _______ _______ _______ _______

________________________ ________________________ ________________________ ________________________ ________________________ ________________________ ________________________

=======

£ _______ _______ _______ _______ _______ _______ _______ =======

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

Accounts

To record

Entry in the accounts

Assets

an increase a decrease an increase a decrease an increase a decrease

Debit Credit Credit Debit Credit Debit

Liabilities Capital

We will be recording the entries on ‘T accounts’. T Accounts are so called because you split your page in two and put a title at the top, so it looks like a ‘T’! Who said accounting was boring?! The left hand side is called the debit side and the right hand side is called the credit side. This method is useful because you have to do both a credit and a debit entry, so you 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. 2. 3. 4. 5.

£10,000 invested by the owner Workshop rented during period £1,000 Materials purchased and used £2,000 Wages paid £2,000 Cash sales £6,000

The double entry treatment would be:

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BASIC ACCOUNTING Debit £ 10,000

Description 1.

2.

3.

4.

5.

Debit cash book with cash invested Credit owners capital account

Credit £ 10,000

Rent (Profit and Loss account) Cash book (payment out)

1,000

Material (Profit and Loss account) Cash book (payment out)

2,000

Wages (Profit and Loss account) Cash book (payment out)

2,000

1,000

2,000

2,000

Sales income (Profit and Loss account) Cash book (receipt in)

6,000 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 the opposite as those for assets. This is because assets are on the opposite side of the equation and therefore follow opposite rules. In the accounts the rule will appear as:

Any asset account ----------------------------------------------£ £ Increases Decreases + -

Any liability account -------------------------------------- £ £ 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 b) Increases the capital

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Debit the cash account Credit the capital account

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BASIC ACCOUNTING 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:

a) b) c) d) e)

Account to be credited Account to be debited Bought motor van for cash ____________________________________________ Bought office machinery on credit from J Grant and Son_____________________ Introduced capital in cash ____________________________________________ A debtor, J Beach, pays us by cheque ___________________________________ Paid a creditor, A.Barrett, in cash ______________________________________

2. Complete this table:

Account to be debited

Account to be credited

a) Bought machinery on credit from A Jackson & Son b) Returned machinery to A Jackson and Son c) A debtor, J Brown pays us in cash d) J Smith lends us money, giving it to by cheque e) Sold office machinery for cash

3.

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

1992 May 1 “ 3 “ 14 “ 31

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

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BASIC ACCOUNTING Capital -----------------------------------------------------------------------------------------------------------------------£ £

Cash -----------------------------------------------------------------------------------------------------------------------£ £

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

Motor Lorry -----------------------------------------------------------------------------------------------------------------------£ £

Office Machinery ----------------------------------------------------------------------------------------------------------------------£ £

4.

Write up the asset, liability and capital accounts to record the following transactions in the records of G Powell. Again, remember to enter the transaction details. You may find it useful to number each transaction as you go, so you can keep track of your entries. 1993 July 1 July 2 July 3 July 5 July 8 July 15 July 23 July 31

Started business with £2,500 in the bank Bought office furniture by cheque £150 Bought machinery £750 on credit from Planes LTD. Bought a motor van by cheque £600 Sold some of the office furniture for £60 on credit to J Walker and Sons Paid the amount owing to Planes Ltd £750 by cheque Received the amount due from J Walker £60 in cash Bought more machinery by cheque £280

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BASIC ACCOUNTING Bank -----------------------------------------------------------------------------------------------------------------------£ £

Capital -----------------------------------------------------------------------------------------------------------------------£ £

Office Furniture -----------------------------------------------------------------------------------------------------------------------£ £

Machinery -----------------------------------------------------------------------------------------------------------------------£ £

Planes Ltd -----------------------------------------------------------------------------------------------------------------------£ £

Motor Van -----------------------------------------------------------------------------------------------------------------------£ £

J Walker -----------------------------------------------------------------------------------------------------------------------£ £

Cash -----------------------------------------------------------------------------------------------------------------------£ £

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BASIC ACCOUNTING Session 5 - The Effect Of Profit And Loss On Capital By Profit we mean the excess of revenues over expenses for a particular period. Revenues consist 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: Liabilities:

Motor van £500, Fixtures £200, Stock £700, Debtors £300, Cash at bank £200 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 January the 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 £1,300

+ +

Profit £400

= =

New capital. £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 Profits and Losses. Accounts will be needed to collect together the expenses and revenues pending the calculation 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 be recorded. Assets involve expenditure by the firm and are shown as debit entries. Expenses also involve expenditure by the firm and are therefore also recorded on the debit side of the books. When we talk of assets in a Profit and Loss capacity, we are referring to expenses. Although this may seem confusing, the expenses are the smaller assets used up in the running of the business. Assets may therefore be seen to be expenditure of money which has been used up in the running of the business and for which there is no benefit remaining at the date of the balance sheet. Examples of running expenses can be stationery 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 bank balances are examples of these larger assets. Revenue is the opposite of expenses and therefore appears on the opposite side to expenses. Revenue accounts appear on the credit side of the books. Revenue also increases Profit, which in turn increases capital. Pending the periodical calculation of Profit,

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BASIC ACCOUNTING revenue is collected together in appropriately named accounts and until it is transferred to the 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 the asset of cash is decreased. This means crediting the bank account to show the decrease of the asset, b) The total of the expenses of rent is increased. As expense entries are shown as debits, and the expense is rent, so the action required is the debiting of the rent account.

a)

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) £21,000 b) £21,600 c) £32,400 d) None of the above 2. Which of the following is correct? a) b) c) d)

Profit does not alter capital Profit reduces capital Capital can only come from Profit Profit increases capital

3. Complete the following table:

Account to be Debited 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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Account to be Credited

__________________________________ __________________________________ __________________________________ __________________________________ __________________________________

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BASIC ACCOUNTING 5.

Enter the following transactions in the necessary accounts in double entry. Remember to enter the transaction details, and number the transactions if you feel it will help you. 1988 Jan 1 Jan 2 Jan 3 Jan 6 Jan 8

Started business with £200 in bank U Surer lent us £1,000 giving us the money by cheque Bought goods on credit £296 from T Parkin Cash sales £105 Paid wages in cash £18

Bank -----------------------------------------------------------------------------------------------------------------------£ £

Cash -----------------------------------------------------------------------------------------------------------------------£ £ Purchases -----------------------------------------------------------------------------------------------------------------------£ £

T Parkins -----------------------------------------------------------------------------------------------------------------------£ £

Wages -----------------------------------------------------------------------------------------------------------------------£ £

Capital -----------------------------------------------------------------------------------------------------------------------£ £

U Surer -----------------------------------------------------------------------------------------------------------------------£ £

Sales -----------------------------------------------------------------------------------------------------------------------£ £

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BASIC ACCOUNTING Session 6 - Balancing Off Accounts So far, all we have looked at is the entries in the books of accounts, the transactions themselves. Every now and then we will want to look at the accounts and see what they are telling us. The most obvious reason for doing this is to find out how much our customers owe us in respect 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 158 15 August 1993 Sales 206 30 August 1993 Sales 118 Knight still owes the business £206 + £118 = £324 at the end of August. The business will therefore start the next months business with this amount owing to it. To show that our firm is carrying these outstanding items from one period to the next, the ‘balance’ on each account is found. The ‘balance’ is the accounting term meaning the arithmetical difference between 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 to make 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 to enter it on the other side of the books to ensure that double-entry of the item is carried out. This entry is made on the next line under the totals. If we think in terms of SunSystems, this is where an account is a Balance forward account or an Open items account. Going back to D Knight we can see the change.

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BASIC ACCOUNTING D Knight ----------------------------------------------------------------------------------------------------------------------£ £ 1 August 1993 Sales 158 28 August 1993 Cash 158 15 August 1993 Sales 206 31 August 1993 Bal c/d 324 30 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 the entry will mean that the entry is its own total and will show that the account has been closed off for this period. Depending on which side of the account the balance brought down sits, will decide its name. If it is on the debit side, it is a debit balance and if it is on the credit side, it is a credit balance.

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 300 May 14 Sales 360 May 28 Returns 50 May 30 Sales 180 a) b) c) d) 2.

a) b) c) d)

A credit balance of £395 A debit balance of £380 A debit balance of £395 A nil balance on the account What would the balance on the account of C De Freitas be in No. 1 above on 19 May 1985? A debit balance of £265 A credit balance of £380 A credit balance of £445 A credit balance of £265

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BASIC ACCOUNTING Session 7 - The Trial Balance All items recorded in all the accounts on the debit side should equal in total all the items recorded on the credit side of the books. To see if the two sides are in balance, we periodically draw up a Trial Balance. A trial balance is a list of balances only, arranged as to whether they are debit or credit balances. For example: Trial Balance as on 31 May 1986

Dr. £ Purchases Sales Returns out Returns in A Lyon and son M Spencer Cash

Cr. £

309 255 15 16 141 29 57 ---411

---411

It may appear that the balancing of a trial balance proves that the books are correct. This is not the case, it mearly means that certain types of errors have not been made. For example, with a sales invoice, we would expect to debit the debtor account and credit the sales account. This would be in balance and correct. However, if a new clerk joined and mistakenly entered the journal (a record of a transaction and, in SunSystems, a mechanism to enter transactions into the package) the wrong way round, we would have a credit entry on the debtor account and a debit entry on the creditor account. Clearly this is wrong, but the 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 go some way to ensuring accuracy as would good in-house procedure notes within each company.

Questions!! (8) 1. Which of the following best describes a Trial Balance? a) Shows the financial position of a business b) 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 differ b) Yes, except where the trial balance is extracted at the year end c) Yes, always d) No, because it is not a Balance Sheet

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BASIC ACCOUNTING 3.

Enter up the necessary accounts for the month of May for Big Profit Ltd. from the following details and extract a trial balance as at 31 May 1993. Remember to give the transaction details on the T accounts and to number the transactions if it helps you. 1993 May 1 Started firm with capital in cash of £250 May 2 Bought goods on credit from C Mendez £87 May 4 Sold goods on credit to H Spencer £176 May 6 Paid rent by cash £12 May 15 Paid carriage by cash £23 Trial Balance of Big Profit Ltd. as at 31 May 1993

Dr. £ Cash Purchases Rent Spencer Carriage Capital Sales Mendez

Cr. £

_____________________________ _____________________________ _____________________________ _____________________________ _____________________________ _____________________________ _____________________________ _____________________________ ==========================

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BASIC ACCOUNTING Cash ------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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BASIC ACCOUNTING Sales ------------------------------------------------------------------------------------------------------------------------

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

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BASIC ACCOUNTING 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 the proprietor will want to know how much Profit has been made for various reasons. For example, he will want to be able to compare how much actual Profit he made compared to the Profit he thought he would make. He may also want to know his Profits to help obtain a bank loan or for income tax purposes. Profits are calculated by drawing up a Trading and Profit and Loss account. One of the most important uses of the Trading and Profit and Loss account is comparing the results obtained with the results expected. Many businesses attach a great deal of importance to their gross Profit percentage. This is the amount of Profit made, before deducting expenses, for every £100 of sales. So that this can be easily deduced from the Profit calculations, the account is split into two handy sections. The gross Profit is found from the Trading 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 the figure of sales less the cost of goods sold, it can be seen that the accounting custom is to calculate 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 deducted from the gross Profit and includes any other revenue other than that from sales (discounts received, interest earned for example). B Swift Trial Balance as at 31 December 1993 Dr Cr. -----------------------------------------------------------------------------------------------------------------------£ £ Sales 3,850 Purchases 2,900 Rent 240 Lighting expenses 150 General Expenses 60 Fixtures and fittings 500 Debtors 680 Creditors 910 Bank 1,510 Cash 20 Drawings 700 Capital 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, we instantly hit a problem. Purchases will only equal cost of goods sold if there is no stock remaining at the 31 December 1993. So Mr Swift would have to do a stock take at the end of 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 sales account and transfer the balance to the Trading account and credit the purchases account and transfer the balance to the Trading account. At this point you would need to open a stock account for the unsold stock and debit the asset of stock to it. The credit for the closing stock should be in the Trading account, completing the double entry. We can then carry on and draw up the Profit and Loss account.

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BASIC ACCOUNTING The Trading and Profit and Loss account will appear as follows: B Swift Trading And Profit And Loss Account For The Year Ended 31 December 1985

Purchases Less Closing Stock Cost of goods sold Gross Profit c/d

£ 2,900 300 -----2,600 1,250 -----3,850 ====

Sales

£ 3,850

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

Gross Profit b/d 1,250 240 150 60 800 -------------1,250 1,250 ==== ===== Please note that not all of the items in the trial balance have been used in the Trading and Profit and Loss account. The remaining balances are assets or liabilities or capital, they are not expenses or sales. These are used when the Balance Sheet is drawn up. Rent Lighting Expenses General Expenses Net Profit

Questions!! (9) 1. Gross Profit is: a) excess of sales over cost of goods sold b) Sales less purchases c) Cost of goods sold + opening stock d) Net Profit less expenses of the period

2. Net Profit is calculated in the: a) Trading Account b) Profit and Loss account c) Trial Balance d) Balance Sheet

Questions continue over the page…

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BASIC ACCOUNTING 3. From the following trial balance prepare a Trading and Profit and Loss Account. Trial Balance as at 31 December 1993 Dr Cr. -----------------------------------------------------------------------------------------------------------------------£ £ Sales 18,462 Purchases 14,629 Salaries 2,150 Motor Expenses 520 Rent 670 Insurance 111 General Expenses 105 Premises 1,500 Motor Vehicles 1,200 Debtors 1,950 Creditors 1,538 Cash at Bank 1,654 Cash in hand 40 Drawings 895 Capital 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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_____ _____ _____ _____ _____ _____ --------

----------

=====

======

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BASIC ACCOUNTING Session 9 - The Balance Sheet After the Trading and Profit and Loss Accounts have been completed, a statement is drawn up in which the remaining balances in the books are arranged according to whether they are asset, liability or capital balances. This statement is called a Balance Sheet. The assets are 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 Profit and Loss Account is. The Balance Sheet is a list of the balances remaining after the Trading and Profit and Loss Accounts have been prepared. So, items are not transferred from accounts to the Balance Sheet, and accordingly entries are not made in the various accounts when a Balance Sheet is drawn up. Using the example of B Swift that we worked on for the Trading and Profit and Loss Account, we can now go on and draw up the Balance Sheet. B Swift Balance Sheet as at 31 December 1993

Assets Fixtures and fittings Stock Debtors Bank Cash

£ 500 300 680 1,510 20

Liabilities Capital Less drawings

-------

£ 2,000 (700) ------1,300 800 910 -------

3,010

3,010

Profit Creditors

All of these balances still remain in the accounts, no entries were made in the accounts for the 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 balance b) A record of closing entries c) A listing of balances d) A statement of assets

2.

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

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BASIC ACCOUNTING Balance Sheet as at 31 December 1993

Assets

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£

Liabilities

£

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

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

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

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

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BASIC ACCOUNTING APPENDIX I - Glossary of Terms Account A statement showing the amount of money due by one party to another. Accruals Expenses which are known, but which are not due until the end of a specific period of time. Assets See Fixed Assets and Current Assets. Balance Sheet A statement showing, in the form of a list, the value of a company’s assets and liabilities at a particular date. The Balance Sheet of a company must give a true and fair view of the company’s financial position. Bank Reconciliation A statement used to achieve agreement between the bank statement and the bank account in the nominal ledger. Bank Statements Details issued by a bank to customers holding current accounts, showing the amounts received and paid out on their behalf. Budgets Estimates of income and expenditure which are planned by an organisation for a specified future period. Capital Initially capital is the funding that is needed to start a business. The funding is needed 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 business may 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 Expenditure Capital Expenditure is expenditure on fixed assets. Capital Reserves A capital reserve is retained Profit that has been retained because of a legal restriction on the amount of Profit that can be paid out. Cash Book A basic accounts book in which all of the cash receipts and payments are recorded. Cash Flow The regular supply of cash which is necessary to meet the weekly or monthly financial obligations of a firm. Control Account An account where a grand total is held of a number of individual ledger totals, for example, debtor accounts. It is used for checking purposes. Current Assets These 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 business If we stop our company at any moment in time, we are likely to have working capital invested in:

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BASIC ACCOUNTING •

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 to invest in the growth of fixed assets. It is important therefore to keep stocks and debtors as low as possible. Current Liabilities In the course of everyday operations, we not only invest funds as shown above, but we also create liabilities - sums of money that we owe. If we buy goods and services on credit we owe our suppliers or trade creditors. Other creditors may include sums owed to the tax man and the shareholders. Current liabilities represent 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 who owes the money is the debtor. Credit An entry which signifies payment received or money owed by us to others. Debenture A commercial loan similar to a mortgage. Debit An entry which records a sum of money owed to us or money spent (a payment made). Debtor A person or organisation that owes money. Depreciation A regular charge against income for the decline in value of assets. Dividends Profit paid out to shareholders, their equivalent to interest. Excess of income over expenditure This is the term used to describe Profit in non-Profit making organisations, such as charities. Fixed Assets Fixed assets are those assets purchased and owned by the business. They represent the means be which the company earns its Profits. The term fixed is used because they are not for sale in the normal course of business. They will include items such as land, buildings, plant and machinery, office equipment, motor vehicles and computers. Such items are tangible fixed assets because they can be seen and touched. There is another type of fixed asset called intangible fixed assets. The most common intangible fixed asset is goodwill. Goodwill Goodwill often arises on the purchase of a business. In addition to tangible fixed assets, a further sum may be paid out for the goodwill generated by the previous owner. In other words, a value is put on the efforts of the previous owner to build up trade and encourage custom, which obviously has a value to the new owner. Investments When a company is established, it may be in a position where it cannot Profitably invest more money within the business as it stands. The directors of the business will then look outside the business to invest funds generated within the business. If the money surplus is likely to be short term (that is, the money will be required by the business again in the near future) short term investments will be made which can easily be reconverted back to cash as the need arises. If the surplus is continuing and long term, the directors will want to invest for the long term to get the most 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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BASIC ACCOUNTING •

investing in government stocks.

Invoice A business document sent by the seller to the buyer, giving full details of the goods or services sold, such as quantity, quality, price and delivery. Journal A day book which is used to record transactions as soon as they occur. It is usually divided into specific areas such as sales, purchases and cash. Ledgers The principal record book used in business to summarise transactions concerning its creditors and debtors and other assets and liabilities. Liabilities Sums of money that we owe. See also current liabilities and long term liabilities. Long Term Liability This type of liability is usually required when additional funding for the business is required. If the owners do not wish to issue further shares and so divide ownership further, they can arrange commercial loans. These loans may be from banks, from mortgages on properties, or debentures. A guarantee is usually required. In a new company this may be a personal guarantee from the owner (which extends their liability beyond the limit of their share investment). In a mature company, the loans are normally secured against the company assets. These are called charges on assets and give priority to the lender in terms of recovering his loan should the business fail. Limited Liability The word ‘limited’ means that the owners of the company are only liable for the debts of the company up to the value of their share investment. In other words, the most a shareholder can lose, if a venture or business fails, is the share capital he has invested in the business. Loss An excess of expenditure over income in a period. A decrease in the wealth of a company. Net Current Assets Current assets - current liabilities = net current assets. Also called Working Capital. Order A business document ordering goods or services. It will specify the types and quantities of goods, although not necessarily the charges. Owners’ Equity This is the same as share capital. Petty Cash A 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. Prepayments Expenses that are not due until the end of the period, but have been paid early. Profit An excess of income over expenditure in a period. An increase in a company’s wealth over a period of time. Profit and Loss Account A 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 to calculate the net Profit of a business. Regulatory bodies These are organisations who set standards for accountants and accountancy bodies. They will issue documents on recommended practice for certain areas, e.g. treatment of stock. Remittance Money in any form sent from one person to another. Revenue Reserves A voluntary retention of Profit kept in the business to fund future growth. It may be held as cash or as assets. Share Capital

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BASIC ACCOUNTING Businesses that are set up as limited companies (Ltd) or as public limited companies (Plc) have owners that are called shareholders. The total value of capital provided by shareholders in a company is known as the share capital or the owners equity. Trade Creditors Suppliers to whom we owe money. Transaction An entry made through a journal into an account. Trial Balance The statement of total debits and total credits is known as the trial balance. VAT Value Added Tax. A tax which is based on the value added to a good or service by a firm or individual. The cost of materials or product purchased from another firm is deducted from the selling price of the product and the tax is based on this difference. Working Capital See Net Current Assets

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

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BASIC ACCOUNTING APPENDIX II - Answers to Exercises Questions (1) 1. 2. 3. 4.

Audire Income and expenditure lists Double entry book keeping Pacioli in 1494

The Principles of Accounting (i) (ii) (iii)

Charlie Charlie John

Questions (2) a) b) c) d) e) f) g)

C D C D D C C

Questions (3) 1. 2. 3. 4.

C D B C

Questions (4) 1. A 2. a) b) c) d) e) f)

10,700 23,100 4,300 3,150 25,500 51,400

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

A L A A L A

4. Loan from C Smith Creditors Stock of Goods

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BASIC ACCOUNTING 5. Assets:

Motor Premises Stock Bank Cash

2,000 5,000 1,000 700 100 -----8,800 ====

Liabilities:

Loan Creditors

3,000 400

-----3,400 ====

Capital = 8,000 – 3,400 = 5,400

6.

A Foster Balance Sheet as at 31December 1993

Assets Fixtures Motor Stock Debtors Bank

Liabilities Capital Creditors

5,500 5,700 8,800 4,950 1,250 -------26,200 =====

23,750 2,450

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

Questions (5) 1. a) b) c) d) e)

Dr. Motor Van Dr. Office Mch Dr. Cash Dr. Cash Dr. A. Barnett

Cr. Cash Cr. J Grant Cr. Capital Cr. J Beach Cr. Cash

2. a) b) c) d) e)

Dr. Machinery Dr. A Jack Dr. Cash Dr. Cash Dr. Cash

Cr. A Jack Cr. Machinery Cr. J Brown Cr. J Smith Cr. Office Machinery.

3. Capital

Cr.

1.5.92 Cash

£1,000.00

Cash

Dr. Cr. Cr.

1.5.92 Capital 14.5.92 Office Machinery 31.5.92 Speed & Son

£1,000.00 £ 60.00 £ 698.00

Speed & Son Dr. Cr.

31.5.92 Cash 3.5.92 Motor Lorry

£ 698.00 £ 698.00

Motor Lorry

3.5.92 Speed & Son

£ 698.00

14.5.92 Cash

£

Dr. Cr. Cr. Cr . Cr.

1.7.93 2.7.93 5.7.93 15.7.93 31.7.93

£2,500.00 £ 150.00 £ 600.00 £ 750.00 £ 280.00

Capital

Cr.

1.7.93 Bank

£2,500.00

Office Furn.

Dr.

2.7.93 Bank

£ 150.00

Dr.

Office Mach. Dr. 4. Bank

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Capital Office Furniture Motor Van Planes Ltd Machinery

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60.00

36

BASIC ACCOUNTING Cr.

8.7.93 J Walker

£

60.00

Machinery

Dr. Dr.

3.7.93 Planes Ltd 31.7.93 Bank

£ 750.00 £ 280.00

Planes Ltd

Dr. Cr.

15.7.93 Bank 3.7.93 Machinery

£ 750.00 £ 750.00

Motor Van

Dr.

5.7.93 Bank

£ 600.00

J Walker

Dr. Cr.

8.7.93 Office Furniture 23.7.93 Cash

£ £

60.00 60.00

Cash

Dr.

23.7.93 J Walker

£

60.00

Questions (6) 1.

B

2.

D

3. a) b) c) d) e)

Dr. Dr. Dr. Dr. Dr.

4. Bank

Rent Wages Bank Bank General Expnses

Cr. Cr. Cr. Cr. Cr.

Cash Cash Rent Received Insurance Cash

Dr. Dr.

1.1.88 Capital 2.1.88 U Surer

£ 200.00 £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. Cr. Dr.

6.1.88 Sales 8.1.88 Wages 8.1.88 Cash

£ 105.00 £ 18.00 £ 18.00

Wages

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BASIC ACCOUNTING

Questions (7) 1.

C

2.

A

Questions (8) 1.

D

2.

C

3. 31.5.93 Balance c/d

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

1.5.93 Cash

1.6.93 Balance b/d

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

Cash 1.5.93 Capital

£ 250.00

1.6.93 Balance b/d

------------£ 250.00 ======= £ 215.00

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6.5.93 Rent 15.5.93 Carriage 31.5.93 Balance c/d

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£ 12.00 £ 23.00 £ 215.00 -------------£ 250.00 ========

38

BASIC ACCOUNTING C Mendez 31.5.93 Balance c/d

£ 87.00 -----------£ 87.00 =======

2.5.93 Purchases

1.6.93 Balance b/d

£ 87.00 ------------£ 87.00 ======== £ 87.00

Sales 31.5.93 Balance c/d

£ 176.00

4.5.93 H Spencer

£

1.6.93 Balance b/d

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

-----------£ 176.00 =======

176.00

H Spencer 4.5.93 Sales

1.6.93 Balance b/d

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

31.5.93 Balance c/d

£ 176.00 ------------£ 176.00 =======

31.5.93 Balance c/d

£

Rent 6.5.93 Cash

£

12.00

1.6.93 Balance b/d

------------£ 12.00 ======= £ 12.00

12.00

-------------£ 12.00 ========

Carriage 15.5.93 Cash

1.6.93

Balance b/d

£ 23.00 ------------£ 23.00 ======= £ 23.00

31.5.93 Balance c/d

£ 23.00 -------------£ 23.00 ========

Purchases 15.5.93 Cash

1.6.93

Balance b/d

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£ 87.00 ------------£ 87.00 ======= £ 87.00

31.5.93 Balance c/d

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£ 87.00 -------------£ 87.00 ========

39

BASIC ACCOUNTING Trial Balance as at 31 May 1993 Debit Cash.................................................................... Purchases........................................................... Rent.................................................................... Spencer............................................................... Carriage............................................................... Capital................................................................. Sales................................................................... Mendez................................................................

Credit

215.00 87.00 12.00 176.00 23.00 250.00 176.00 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 less closing stock

14,629 ( 2,548) --------12,081

Gross Profit

6,381 ---------18,462 ======

Salaries Motor Expenses Rent Insurance General Expenses Net Profit

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2,150 520 670 111 105 2,825 ----------6,381 ======

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Sales

18,462

---------18,462 ====== Gross Profit

6,381

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

40

BASIC ACCOUNTING Questions (10) 1.

C

2. Balance Sheet as at 31 December 1993 Premises Motor Vehicles Stock Debtors Cash at bank Cash at hand

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1,500 1,200 2,548 1,950 1,654 40 -------8,892 =====

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Capital less drawings

Profit Creditors

5,424 ( 895) -------4,529 2,825 1,538 -------8,892 ====

41