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7/24/2019 Hps Poa FINAL
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BUSINESS : Business is any legal activity to earn profit.
ACCOUNTING : Accounting is an art of recording, classifying, summarizing business
transactions and interpreting their results into final accounts.
ACCOUNTING EQUATIONAssets = Capital + Liabilities
Fixed Assets + Current Assets = Capital + Current Liabilities + Long-term Liabilities
Working Capital
Fixed Assets + Currents Assets - Current Liabilities = Capital + Long-term Liabilities
Net Assets Capital Employed
The prime function of accounting is to provide the information basis for action.
In bookkeeping, posting a transaction means making the second entry of a double
entry transaction.
An accounting period is any twelve month period.
The part of accounting that is concerned with recording data is known as
bookkeeping.
DEFINITION/TERMS
Assets:Assets are resources owned by the business. There are two types of assets:
i.Non-Current Assets:Assets with normal life of more than one year are known as non-
current assets. These assets are costly and there are rare changes in
these. At the time of purchase our intention is to use them in
business, not to resell. Examples are Land, Building, Plant,
Machinery, Furniture, Fixture, Fitting, Electrical Equipments and
Vehicles etc.
ii.Current Assets : Assets with normal life of less than one year are known as current
assets. These are not very costly and there are frequent changes in
these. Examples are Inventory, Trade Receivables, Prepayments,
Cash at Bank and Cash in Hand etc.
Expenses:
Expenses are cost or value of goods and services that has been used to obtain revenue.
Expenses are charged to profit and loss account.
Drawings:
Drawings are cost or value of personal expenditures of the owner.
Liabilities:
Liability is amount owing to suppliers. There are two types of liabilities.
i.
Non-Current Liabilities : Liabilities that do not have to be paid within one year and
we have more than one year time to pay them are known asnon-current liabilities. Example is Loan.
ii Current Liabilities
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Income/Sales:
Income or sales is value of goods and services that has been supplied to customers. Sales and
operating incomes are transferred to trading account whereas non operating incomes are
transferred to profit and loss account.
Capital:
Capital is actual investment of the owner in the business.
Purchases:
Purchase is value or cost of goods purchased for reselling purpose. Purchases are transferred
to trading account.
Returns Inwards/Sales Returns:
Returns inwards are sold goods returned to us by our customers. Value of returns inwards is
deducted from sales in trading account.
Returns Outwards/Purchases Returns:Returns outwards are purchased goods returned by us to our suppliers. Value of returns
outwards is deducted from purchases in trading account.
Note: Trade Payable sends a credit note to trade receivable or trade receivable sends debit
note to supplier for confirmation of returns.
Discount Allowed:
Discount allowed is rebate given to customers when they pay us. Discount allowed is treated
as an expense and charged to profit and loss account.
Discount Received:
Discount received is rebate given by our supplier when we pay them. Discount received istreated as an income and is added to gross profit or operating profit.
Carriage Inwards:
Carriage inwards is transport cost on goods purchased. It is part of purchases and added to
purchases in trading account.
Carriage Outwards:
Carriage outwards is transport cost on goods sold. This is treated as an expense and charged
to profit and loss account.
Increase in Inventory: i) Purchase of additional goods.ii) Goods returned to the business which were previously sold.
Decrease in Inventory: i) Sale of goods.
ii) Goods returned by the business which were previously bought.
7/24/2019 Hps Poa FINAL
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Book-keeping Accounting
Transactions Recording of transactions
in books of original entry.To examine these
recorded transactions inorder to find out their
accuracy.
Posting To make posting in ledger To examine this
posting in order to
ascertain its accuracy.
Total and Balance To make total of the
amount in journal and
accounts of ledger. To
ascertain balance in all theaccounts.
To prepare trial balance
with the help of
balances of ledger
accounts.
Income Statementand Balance Sheet
Preparation of trading,Profit & loss account and
balance sheet is not book
keeping
Preparation of trading, profits and loss account
and balance sheet is
included in it.
Rectification of
errors
These are not included in
book -keeping
These are included in
accounting.
Special skill and
knowledge
It does not require any
special skill and knowledge
as in advanced countries
this work is done by
machines.
It requires special skill
and knowledge.
Liability A book-keeper is not liable
for accountancy work.
An accountant is liable
for the work of book -
k eeper.
7/24/2019 Hps Poa FINAL
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7/24/2019 Hps Poa FINAL
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General Journal
Date Particulars Folio Dr Cr
20X5 ₤ ₤
General Ledger
Date Particulars Folio Dr Date Particulars Folio Cr
20X5 ₤ 20X5 ₤
FORMATS
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Trading and Profit & Loss Account (Basic)
Particulars ₤ ₤ ₤
Sales xxx
Cost of Goods Sold
Opening Stock xxx
Purchases xxx
Carriage Inwards xxx xxx
Cost of Goods available for Sale xxx
Closing Stock (xxx) (xxx)
Gross Profit xxx
Other Expenses
Rent & Rates Expense xxx
Insurance Expense xxx
Electricity Expense xxx
Bank Charges xxx
Plant Repair xxx
Wages & Salaries xxx
Repair & Maintenance xxx
Sundry Expenses xxx (xxx)
Net Profit xxx
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Balance Sheet (Basic)
Particulars ₤ ₤ ₤
Fixed Assets
Premises xxx
Furniture & Fixtures xxx
Motor Vans xxx xxx
Current Assets
Closing Stock xxx
Debtors xxx
Prepaid Expenses xxx
Cash at Bank xxx
Cash in Hand xxx
xxx
Current Liabilities
Creditors (xxx) xxx
xxx
Financed By
Capital xxx
Net Profit xxx
xxx
Drawings (xxx) xxx
8.2 A balance sheet is a financial statement that summarises the position at the end of a period. It con-tains all the balances on the accounts held in the accounting books at that time. As it is preparedafter the Trading and Profit and Loss Account, all the accounts have already been balanced off. Allwe do with the balance sheet is lift the balances carried forward from the accounts and place themin an appropriate position in the statement.
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Trading and Profit & Loss Account (Advanced)
Particulars ₤ ₤ ₤
Sales xxx
Returns Inwards (xxx) xxx
Cost of Goods Sold
Opening Stock xxx
Purchases xxx
Carriage Inwards xxx
Damaged Goods (N-1) (xxx)
Returns Outwards (xxx)
Stock Drawings (N-2) (xxx) xxx
Cost of Goods available for Sale xxx
Closing Stock (xxx) (xxx)
Gross Profit xxx
Other Incomes
Discount Received xxx
Bad Debts Recovered xxx
Profit on Disposal of Fixed Assets xxx
Provision for Doubtful Debts (Reduction) xxx xxx
xxx
Other Expenses
Rent, Rates & Insurance xxx
Wages & Salaries xxx
Damaged Goods (N-3) xxx
Repair & Maintenance xxx
Bad Debts xxx
Provision for Doubtful Debts (Increase) xxx
Loss on Disposal of Fixed Assets xxx
Provision for Depreciation xxx
Sundry Expenses xxx (xxx)
Net Profit xxx
EXPLANATORY NOTES
N-1 : Goods damaged due to fire, flood or stolen by theft.
N-2 : Goods taken by owner for own use.
N-3 : Amount of damaged/stolen goods not covered by insurance.
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Balance Sheet (Advanced)
Particulars ₤ ₤ ₤
Fixed Assets
Premises xxxProvision for Depreciation (xxx) xxx
Furniture & Fixtures xxx
Provision for Depreciation (xxx) xxx
Motor Vans xxx
Provision for Depreciation (xxx) xxx xxx
Current Assets
Closing Stock xxxDebtors xxx
Provision for Doubtful Debts (xxx) xxx
Prepaid Expenses xxx
Insurance Claim (N-1) xxx
Cash at Bank xxx
Cash in Hand xxx
xxx
Current Liabilities
Creditors xxx
Wages Owing xxx
Bank Overdraft xxx (xxx) xxx
xxx
Financed By
Capital xxx
Net Profit xxx
xxx
Drawings (xxx) xxx
Long-Term Liabilities
Loan xxx xxx
EXPLANATORY NOTES
N-1 : Amount of damaged/stolen goods covered by insurance.
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Review questions
7.1 From the following trial balance of A Moore, extracted after one year’s trading, prepare a trad-ing and profit and loss account for the year ended 31 December 20X6. A balance sheet is not required.
Trial Balance as at 31 December 20X6
Dr Cr
£ £Sales 190,576Purchases 119,832Salaries 56,527Motor expenses 2,416Rent 1,894Insurance 372General expenses 85Premises 95,420Motor vehicles 16,594Debtors 26,740Creditors 16,524
Cash at bank 16,519Cash in hand 342Drawings 8,425Capital 138,066
345,166 345,166
Stock at 31 December 20X6 was £12,408.
(Keep your answer; it will be used later in Question 8.1)
7.2 From the following trial balance of B Lane after his first year’s trading, you are required todraw up a trading and profit and loss account for the year ended 30 June 20X8. A balance sheet isnot required.
Trial Balance as at 30 June 20X8Dr Cr
£ £Sales 265,900Purchases 154,870Rent 4,200Lighting and heating expenses 530Salaries and wages 51,400Insurance 2,100Buildings 85,000Fixtures 1,100Debtors 31,300Sundry expenses 412
Creditors 15,910Cash at bank 14,590Drawings 30,000Vans 16,400Motor running expenses 4,110Capital 114,202
396,012 396,012
Stock at 30 June 20X8 was £16,280.
(Keep your answer; it will be used later in Question 8.2)
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7.3A From the following trial balance of B Morse drawn up on conclusion of his first year in busi-ness, draw up a trading and profit and loss account for the year ended 31 December 20X8. A bal-ance sheet is not required.
Trial Balance as at 31 December 20X8
Dr Cr
£ £General expenses 305Business rates 2,400Motor expenses 910Salaries 39,560Insurance 1,240Purchases 121,040Sales 235,812Car 4,300Creditors 11,200Debtors 21,080Premises 53,000Cash at bank 2,715
Cash in hand 325Capital 23,263Drawings 23,400
270,275 270,275
Stock at 31 December 20X8 was £14,486.
(Keep your answer; it will be used later in Question 8.3A)
7.4A Extract a trading and profit and loss account for the year ended 30 June 20X8 forG Graham. The trial balance as at 30 June 20X8 after his first year of trading was as follows:
Dr Cr
£ £Equipment rental 940Insurance 1,804Lighting and heating expenses 1,990Motor expenses 2,350Salaries and wages 48,580Sales 382,420Purchases 245,950Sundry expenses 624Lorry 19,400Creditors 23,408Debtors 44,516
Fixtures 4,600Shop 174,000Cash at bank 11,346Drawings 44,000
Capital 194,272600,100 600,100
Stock at 30 June 20X8 was £29,304.
(Keep your answer; it will be used later in Question 8.4A) ‘
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‘ 7.5 Henry York is a sole trader who keeps records of his cash and bank transactions in a three-column cash book. His transactions for the month of March were as follows:
March1 Cash in hand £100, Cash at bank £5,6724 York received a cheque for £1,246 from W Abbot which was paid directly into the bank.
This represented sales.
6 Paid wages in cash £398 Sold goods for cash £15210 Received cheque from G Smart for £315, in full settlement of a debt of £344; this was
paid directly into the bank.11 Paid sundry expenses in cash £7314 Purchased goods by cheque for £80018 Paid J Sanders a cheque of £185 in full settlement of a debt of £20123 Withdrew £100 from the bank for office purposes24 Paid wages in cash £3926 Sold goods for cash £9428 Paid salaries by cheque £23031 Retained cash amounting to £150 and paid the remainder into the bank
Required:
(a) Enter the above transactions within T-accounts and bring down the balances.(b) Assuming no opening debtors, creditors or stock, prepare a trading and profit and loss
account for the month of March.
Review questions
8.1 Complete question 7.1 by drawing up a balance sheet as at 31 December 20X6.
8.2 Complete question 7.2 by drawing up a balance sheet as at 30 June 20X8.
8.3A Complete question 7.3A by drawing up a balance sheet as at 31 December 20X8.
8.4A Complete question 7.4A by drawing up a balance sheet as at 30 June 20X8.
8.5 G. Hope started in business on 1 July 20X0, with £40,000 capital in cash. During the first yearhe kept very few records of his transactions.
The assets and liabilities of the business at 30 June 20X1 were:£
Freehold premises 76,000Mortgage on the premises 50,000Stock 24,000Debtors 2,800Cash and bank balances 5,400
Creditors 7,600
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During the year, Hope withdrew £9,000 cash for his personal use but he also paid £6,000 receivedfrom the sale of his private car into the business bank account.
Required:From the above information, prepare a balance sheet showing the financial position of the busi-ness at 30 June 20X1 and indicating the net profit for the year.
8.6A The following information relates to A Trader’s business:
Assets and liabilities at 1 January 20X9 31 December 20X9£ £
Fixtures 18,000 16,200Debtors 4,800 5,800Stock 24,000 28,000Creditors 8,000 11,000Cash 760 240Balance at bank 15,600 4,600Loan from B Burton 6,000 2,000Motor vehicle – 16,000
During the year, Trader had sold private investments for £4,000 which he paid into the businessbank account, and he had drawn out £200 weekly for private use.
Required:Prepare a profit and loss account for the year ending 31 December 20X9 and a balance sheet as atthat date.