Basics - Financial Accounting, The

Financial Accounting
Understanding the basics of financial accounting can be a tricky

task to master. This practical guidebook provides an overview of
the fundamental principles in a jargon-free and simple format.
Financial Accounting: The Basics provides concise overviews of the
key financial accounting topics supplemented by practical exam-
ples and exercises to enable readers to test their knowledge and
understanding in bite-sized chunks. In empowering students to
learn at their own pace, the book enhances course learning to
maximise chances of overall success. Topics covered include:
• The interpretation of financial statements and the accounting

equation
• Processing accounting information
• Accounting for inventories
• Non-current assets and depreciation
• Cash flow statements and analysis
With the latest coverage of International Financial Reporting Stand-

ards (IFRS) terminology, and separate chapters on cash flow state-
ments and ratio analysis, Ilias Basioudis’s text will be valuable reading
for new students of accounting.
Ilias G. Basioudis is Senior Lecturer of Financial Accounting &

Auditing at Aston Business School, Aston University, UK.
T h e B a si c s
For a full list of titles in this series, please visit

www.routledge.com/The-Basics/book-series/B
The Qur’an (second edition)

Massimo Campanini
Research Methods
Nigel Edley
Semiotics
Daniel Chandler
Special Educational Needs And Disability (third edition)

Janice Wearmouth
Sport Management
Robert Wilson and Mark Piekarz
Sports Coaching
Laura Purdy
Translation
Juliane House
Ilias G. Basioudis
The Basics
Ilias G. Basioudis
First published 2019
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
52 Vanderbilt Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2019 Ilias G. Basioudis
The right of Ilias G. Basioudis to be identified as author of this work
has been asserted by him in accordance with sections 77 and 78 of the
Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or
utilised in any form or by any electronic, mechanical, or other means, now
known or hereafter invented, including photocopying and recording, or in
any information storage or retrieval system, without permission in writing
from the publishers.
Trademark notice: Product or corporate names may be trademarks or
registered trademarks, and are used only for identification and explanation
without intent to infringe.
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Names: Basioudis, Ilias G. (Ilias Grigorios), author.
Title: Financial accounting: the basics / Ilias G. Basioudis.
Description: Abingdon, Oxon; New York, NY: Routledge, 2019. |
Series: The basics | Includes bibliographical references and index.
Identifiers: LCCN 2018040269 | ISBN 9781138605503 (hardback) |
ISBN 9781138605510 (pbk.) | ISBN 9780429468063 (ebook)
Subjects: LCSH: Accounting. | Financial statements.
Classification: LCC HF5636 .B38 2019 | DDC 657—dc23
LC record available at https://lccn.loc.gov/2018040269
ISBN: 978-1-138-60550-3 (hbk)

ISBN: 978-1-138-60551-0 (pbk)
ISBN: 978-0-429-46806-3 (ebk)
Typeset in Bembo
by codeMantra
Contents
Preface vi
1 Financial statements and the accounting

equation 1
2 Processing accounting information 33
3 Accounting for inventories 73
4 Non-current assets and depreciation 109
5 Final adjustments to accounts 143
6 Incomplete records 177
7 Partnerships 209
8 Cash flow statements and analysis 257
9 The interpretation of financial statements 274
10 General questions 309
Glossary 374
Index 386
Preface
This book is part of The Basics series published by Routledge

and primarily intends to provide an overview of the fundamental
principles of financial accounting in a jargon-free and undaunt-
ing format. It also addresses a specific gap in the current market,
namely, the shortage of a comprehensive number of examples and
numerical exercises together with fully worked answers in financial
accounting. In addition, each chapter provides brief guidance and
serves as a reminder of the key points in each topic area of financial
accounting.
As part of The Basics series, the book both introduces the es-
sentials of the financial accounting subject and provides an ideal
springboard for further study. As such, it is designed mainly as
a supplementary workbook to any key introductory textbook in
financial accounting read by students studying for a degree in
accounting or business. In general, the book would be useful to
students taking a degree course in accounting or other business
studies degrees at the undergraduate university level. It would also
be attractive to students reading towards a relevant professional
qualification offered by the professional accountancy bodies and
associations. The book could also be used at the postgraduate level
where the detailed mechanics of financial statement preparation
are taught. This book is also offered as a useful revision tool.
Learning financial accounting is like learning a different lan-
guage, and as such, lots of practice is required. Apparently, fi
nancial
accounting is not a particularly popular subject among first-year
students. Students usually find the first-year introductory financial
accounting module quite challenging and demanding. I regularly
Preface vii
remind students to do as much practice as they can at the intro-

ductory level of financial accounting, and I consistently hear stu-
dents asking me to provide them with extra numerical questions
and exercises. Hence, the book you hold in your hands, Finan-
cial Accounting: The Basics, will hopefully fulfil students’ need for
more practice and equip them with an essential study aid when
studying financial accounting or revising for exams. Attempting
a large number of accounting questions provides students with
the necessary self-assurance and familiarity required to perform
well in exams and deal with the more difficult aspects of financial
accounting.
Each chapter begins with brief notes which are designed to
refresh your memory and understanding of each specific subject
area within introductory financial accounting. The notes in each
chapter are not a substitute for a textbook; rather, they are a reminder
of the key points in each topic area and provide brief guidance on
particularly knotty points or areas which often cause problems to
students. So, imagine this book as a miniature skeleton or concise
version of the standard traditional textbook in financial account-
ing. The core material is covered by the standard textbook in more
detail, and therefore you will not find excessively lengthy expla-
nations, cases studies, or unnecessary illustrations in the notes of
this book. Each chapter focuses on specific learning outcomes that
students will need to know factual content for. It is important to
make it clear that this book complements the traditional textbook
and should be bought in addition to, not instead of it.
Financial Accounting: The Basics benefits students in many ways:
• It encourages students to learn and fulfil the learning objectives

of the subject;
• Aids learners in obtaining the necessary confidence to tackle
financial accounting issues and gradually more advanced
exercises;
• Demonstrates to students how to solve numerical exercises us-
ing the suggested answers;
• Assists learners in convincing themselves that they have under-
stood the subject material;
• Facilitates students in taking control of their own learning; and
• Supports students towards their revision requirements.
viii Preface
Educators will also find this book valuable for a number of reasons:
• They may use the book to introduce new accounting topics

at an overview level before delving into the detail typically in-
cluded in a standard-size textbook;
• Professors may use the book as an efficient means to revisit
accounting topics towards the end of an accounting course; and
• They may ask students to attempt a specific number of ques-
tions from this book at the end of each lecture/session.
Finally, this book will also benefit both educators and students of
advanced financial accounting modules who require an efficient
means of revisiting and revising the fundamental aspects of financial
accounting.
The current edition of the book by Routledge has only included
the basics of financial accounting. Like any subject, the basics
are the most important. The students must understand what they
are doing, why they are doing it, and how they should go about do-
ing it. This edition of the book includes two new chapters on cash
flow statements and financial statement analysis. If you have any
other suggestions and comments, you can contact the publishers
in the first instance.
If you are looking for the fun and challenge of self-practicing,
self-testing, or preparing for a financial accounting examination,
then this book is designed to help you. You can check your own
standard, monitor your progress, and learn things that you hadn’t
picked up from your main textbook. Assessing and revising system-
atically the knowledge gained in the subject matter is an important
and critical step in your understanding of financial accounting, and
this book will assist you in accomplishing this. Most importantly, this
book can be used to explicitly guide you in your study and to assist
you in judging your strengths and weaknesses more often than not.
One final point: Before you start reading or attempting to tackle
any questions from this book, I want you to arm yourself with
a thick pad of blank A4 paper, a pen, and possibly a calculator,
because this is a practical subject, and I want you to “doodle” as
little as possible and be “engaged” with the subject matter as much
as possible. Remember, novels are meant to be read in bed or in
front of the TV or computer screen, but not this kind of book! In
Preface ix
addition, I would encourage you to pass the temptation of looking

at the answer first and then starting to “solve” an exercise; rather,
try to work through each chapter’s notes and then concentrate on
how best you can answer each question. If you turn directly to
the solutions without doing the necessary self-practice, then the
value of the book will be lessened, and you will not be able to
spot your weaknesses. Further, you must work slowly through as
many of the questions in this book as possible, and do not resort
to the answer the moment you get stuck. Attempt seriously to get
“unstuck” by yourself, and you will find this attempt to be a very
valuable exercise in developing your ability to think clearly and
logically. Also, work with others in a group, if possible, and you
will find this an invaluable experience in the journey of under-
standing the basics of financial accounting.
A note to students and lecturers: All companies across the European
Union (EU), including the UK, that are listed on a stock exchange
in the EU are obliged today to follow the International Financial
Reporting Standards in the preparation of their final accounts.
Most other companies and business organisations in the UK have
converted to the new international accounting standards termi-
nology instead of the “old” UK accounting standards terminology.
This book has adopted the “new” terminology and rules applied
by the international accounting standards. Nonetheless, you can
find here a very simple comparative table that provides a quick
view of the key terminology changes between the UK and inter-
national standards.
Traditional UK accounting International Financial Reporting

standards terminology Standards terminology
Profit and loss account Statement of Profit or Loss

Sales/turnover Revenue
Provision for doubtful debts Allowance for doubtful debts
(or allowance for trade
receivables)
Profit and loss account (on Retained earnings
balance sheet)
(Continued)
x Preface
Exceptional item No equivalent

Extraordinary item No equivalent
Balance sheet Statement of Financial Position
Fixed assets Non-current assets
Trade debtors Trade (or accounts) receivable
Stock Inventory
Current liabilities (or creditors: Current liabilities
amounts falling due within
one year)
Trade creditors Trade (or accounts) payable
Long-term liabilities (or Non-current liabilities
creditors: amounts falling due
after more than one year)
Long-term loan/debenture Loan note
I would like to thank Terry Clague, Senior Publisher, and M atthew

Ranscombe, Editorial Assistant, at Routledge for the productive
cooperation we have had over the past few months.
Finally, this book is dedicated to my family, my wife Iliana, and
my two boys, Philippos and Nikiforos.
Winter 2018 Ilias G. Basioudis.
1
Financial statements
and the accounting
equation
This chapter covers briefly the following topics:
• Introduction to financial statements

• The accounting equation
• More about the financial statements
Introduction to financial statements
The financial statements are the end product of the accounting pro-
cess: They portray the company in financial terms, and they relate to
a specific date or cover a specific period of business activity.
F WHAT do YOU want to know about a business at the

end of a period?
1. How well has the business performed during the period?

à Then you look at the Statement of Profit and Loss (SPL)
(formerly called the Profit and Loss Account in the UK).
2. What is the business’s financial position at the end of the
period?
à Then you look at the Statement of Financial Position (SFP)
(formerly called the Balance Sheet).
2 Financial statements
3. How much cash has the business generated and spent during the
period?
à Then you look at the Cash Flow Statement.
The accounting equation

In accounting, there is an important relationship between assets,
liabilities, and owners’ equity. This relationship is captured by the
following equation, which basically states that for any business, and
at any time:
Assets – Liabilities = Owners’ Equity
Equally,
Owners’ Equity + Liabilities = Assets.
The above equation is called the accounting equation. The total

assets of the business minus the debts (liabilities) of the business (the
result of which is often referred to as the Net Assets) equals the
owners’ equity.
The owners’ equity is the amount the owners have invested in
the business, plus any additional earnings (net profit) of the busi-
ness. In the same way, the owners’ equity is the amount of money
that the business owes back to the owners, and as a result, it can be
seen as another form of debt the business is obliged to pay.
Therefore, based on the second equation above, the total assets
of a business are financed through creditors (liabilities or debts),
also known as the “outsider” claims, and/or owners (owners’ eq-
uity), also known as the “insider” claims.
Changes in the owners’ equity: Profits (P) are an addition to a
business’s opening capital or equity (OC), whilst losses (L) are
a reduction to a business’s opening capital or equity. OC may
also be increased by a new injection of funds – called new capi-
tal (NC) – introduced by the owners. OC is mainly reduced by
drawings (D), being withdrawals of funds made by the owners
(or redemption of dividends for limited companies). Therefore,
the increase or decrease in the owners’ equity (OE) of a business
over a period – also known as the closing capital – depends on
Financial statements 3
these three factors and can be calculated by applying the follow-

ing equation:
OE = OC + P ( or, − L ) + NC – D
It is usual to rearrange the above relationship to provide a formula
for calculating the profit (P) or loss (L) made by a business during
a period.
More about the financial statements
Statement of Profit or Loss:
The Statement of Profit or Loss (SPL) (or previously known as the

profit and loss account) is one of the key financial statements which
illustrates the financial effects of the profit or loss of all operating
and trading activities of a business during a specified period of time
(normally a 12-month period).
Based on the matching principle, an SPL matches the revenues
(or income) earned in a period with the costs (expenses) incurred
in earning it in the same period. It is usual to distinguish between
a gross profit (sales revenue less the cost of goods sold) and a net
profit (which is gross profit less the expenses of selling, distribu-
tion, administration, etc.).
Revenue is defined as income of the business which is earned
through the sale of goods (inventory, stock) or the performance of
services. For example, the fees an accountant earns for providing
accounting services to her clients is her revenue. It increases the
profits of a business and hence the value of OE (and, in effect,
decreases the value of liabilities and increases the value of assets).
Expenses are costs incurred in the normal course of business as
a result of the revenue-earning process: for example, salaries, rent,
advertising, telephone expenses, internet, and electricity. They re-
duce the profits of a business and hence the value of OE (and, in ef-
fect, increase the value of liabilities and decrease the value of assets).
At the end of each accounting period, profit (or loss) determi-
nation occurs in two stages: First, the gross profit or loss arising
from the sale of goods (minus the cost of goods sold) is calcu-
lated. Second, other expenses for the period are subtracted from
the gross profit for the period. The difference between gross profit
and other expenses, where gross profit exceeds expenses, is the net
profit (or net income). Where expenses exceed the gross profit, the
difference is the net loss for the period.
Profit/Loss is the net amount earned by income-producing ac-
tivities (after taking away the expenses) and kept for use in the
business.
Statement of Financial Position
A Statement of Financial Position (SFP) (previously known as the

balance sheet) is a detailed listing of the assets, liabilities, and own-
ers’ equity of a business at a given moment. The SFP is designed
to illustrate the financial position of the business at a given point
in time.
The SFP is based on the accounting equation and includes three
broad headings: assets, liabilities, and owner’s equity.
Assets are defined as the economic (or physical) resources which
are controlled by the business and are expected to produce a ben-
efit in the future. In other words, these resources are expected
to contribute to the future revenue-earning capability of the
business.
Assets are split into (1) non-current (or fixed) assets and (2) cur-
rent assets.
1. Non-current assets are assets held by a business over more than

12 months. They are depreciated over their useful lives so
as to spread their cost over the accounting periods which
benefit from their use. Examples of non-current assets: prop-
erty, plant, equipment, fixtures and fittings, motor vehicles,
building, land, patents, trademarks, franchises, copyrights, and
goodwill.
2. Current assets are cash and other short-lived assets which will
soon (normally within a year) be converted into cash in the
course of a business’s normal operations. Examples of cur-
rent assets: inventory (or stock), trade receivables (or debt-
ors), bank balance, cash balance, prepaid expenses (or, simply,
prepayments).
Liabilities are the “outsider” claims, or economic obligations (debts)

that have to be paid off to outsiders in the future.
They are split into (1) current liabilities and (2) non-current (or
long-term) liabilities.
1. Current liabilities are claims that need to be paid off within 12

months. Examples of current liabilities: trade payables (or trade
creditors), accrued expenses (or, simply, accruals), short-term
loans, and bank overdrafts.
2. Non-current liabilities are claims that are due after more than 12
months. Examples of long-term liabilities: long-term loans, de-
bentures, and mortgages.
Owners’ equity (OE), as we have seen above, represents the “insider”

claims of a business and is matched in the SFP by assets and liabili-
ties. OE includes the OC (equity), the profit or loss for the period,
any new capital introduced by the owners, and withdrawals made
by the owners (see the section “Changes in owners’ equity” above).
Statement of Cash Flows
The Statement of Cash Flows lists cash payments and receipts for a
period and shows the mechanisms within a business that generate
and absorb cash. It provides information as to the liquidity and sol-
vency of a business.
The statement is accompanied by a number of reconciliations
and a series of notes which disclose the movements of inventory,
receivables, and payables as part of a business’s normal operations.
It is published in a prescribed format.
Note that the SPL and the SFP do not provide us with any in-
formation about the source and disposition of the cash (apart from
the opening and closing cash and bank balances in the SFP).
Short questions:
Question
Ilias starts a business and introduces capital of £10,000. He also ob-
tains a loan of £6,000 to purchase non-current assets. What is the
amount of his opening net assets?
Answer:
The accounting equation states that:
Equity = Assets – Liabilities (= Net Assets )
So Ilias’s equity (capital) is £10,000 and his net assets are therefore
also £10,000.
Similarly, total assets are £16,000, and total liabilities are
£6,000, so the net assets are only £10,000.
-------------------------------
Question
A company has the following assets and liabilities on 31 December:
Premises £30,000; Trade payables £4,000; Inventory £9,000;
Amounts owed for rent on 31 December £900; Cash in hand
£2,500; Balance at bank overdrawn £3,400; Trade receivables
£3,600; Equipment £5,000.
a. How much is the company worth – i.e. what is its capital (eq-
uity) on 31 December?
b. If, six months later, the capital has increased by £4,000, what
reasons could account for this?
c. If, six months later, the capital has decreased by £2,000, what
could be the reasons for this decrease?
Answer:
a. By using the accounting equation [Equity = Assets – Liabilities],
we get £41,800.
b. Profits or introduction of new capital.
c. Losses or drawings of capital by owner(s).
-------------------------------
Question
The owner of a business introduced NC of £8,000 during the year
and withdrew £2,500 cash for his private use. The profit earned
by the business in the period was £68,500. If the net assets at the
beginning of the period were £100,000, what were the closing net
assets?
Answer:
The “changes in owners’ equity” equation states that:
OE = OC + P + NC – D
OC equals the net assets at the beginning of the period, which is
£100,000. So,
OE = £100,000 + 68,500 + 8,000 – 2,500
= £174,000
Therefore, the OE at the end of the period is £174,000, which
equals the closing net assets of the business.
-------------------------------
Question
An owner introduced NC of €15,000 during the year and with-
drew a monthly salary of €2,000. If the net assets on 1 January
and 31 December of the same year were €85,000 and €73,000,
respectively, what profit or loss was made by the business in the
period?
Answer:
OE = OC + P ( or, – L ) + NC – D, so
P ( or, – L ) = OE – OC – NC + D
= €73,000 – 85,000 – 15,000
+ 24,000 ( €2,000 × 12 months )
= – €3,000
So, the business made a loss of €3,000.
-------------------------------
Question
The SFPs of a business on 1 July 20x8 and 30 June 20x9 show net
assets of £85,000 and £105,000, respectively.The profit for the year
for this business is £15,000. The owner made regular cash drawings
of £200 per month and also withdrew goods for her own personal
use on several occasions during the year. On 1 May 20x9, she won
the national lottery and put all of her winnings into the business
as NC. What is the amount by which the cost of goods withdrawn
by the owner exceeds or falls short of the amount of her national
lottery win?
Answer:
OE = OC + P ( or, –L ) + NC – D.
Break the drawings (D) into two parts: D1 = cash drawings, and
D2 = goods withdrawals. So, the equation becomes:
OE = OC + P + NC – ( D1+ D2 ) , so
NC–D2 = OE – OC – P + D1
= £105,000 – 85,000 – 15000
+ 2400 ( £200 × 12 months )
= £7,400.
So, the goods withdrawn fall short of the national lottery winnings
by £7,400, or the NC invested into the business (national lottery
winnings) exceeds the goods withdrawn by £7,400.
-------------------------------
Question
Alan sets up a business. Before he actually sells anything, he has
bought the following:
Motor vehicles €2,000

Premises €5,000
Goods for resale €1,000
He did not pay in full for the goods for resale and still owes €400
for them. He borrowed €3,000 from a friend for the business. Af-
ter the above transactions, he has €100 cash in hand and €700 in
the bank.
Calculate the OE of the business.
Answer:
Use the accounting equation:
EQUITY= ASSETS - LIABILITIES
Assets €
Motor vehicles 2,000
Premises 5,000
Inventory 1,000
Bank account 700
Cash 100
8,800
LIABILITIES
Loan 3,000
Trade payable 400
3,400
EQUITY = €8,800 – €3,400 = €5,400.
-------------------------------
Question
The following table shows the cumulative effects of a succession of
separate transactions on the assets and liabilities of a business.
Identify clearly and as fully as you can what transaction has
taken place in each case. Do not copy out the table, but use the
reference letter for each transaction.
TRANSACTION A B C D E F
ASSETS £000 £000 £000 £000 £000 £000 £000
Buildings 80 80 80 80 80 80 80
Equipment 78 78 88 88 88 88 88
Inventory 33 38 38 36 36 36 36
Trade receivables 42 42 42 42 42 31 31
Bank 14 14 11 14 10 21 18
247 252 259 260 256 256 253
LIABILITIES
AND CAPITAL
Capital 126 126 126 127 127 127 124
Loan 75 75 82 82 82 82 82
Trade payables 46 51 51 51 47 47 47
247 252 259 260 256 256 253
Notes:
1. Notice that “Capital” is the business equity and is dealt with as a single item (any
profits or drawings will affect this balance).
2. There are two possible answers to transaction “F”; try to identify both.
Answer:
A. Purchase of inventory costing £5,000 on credit terms.
B. Purchase of new equipment costing £10,000. This was partly
financed by a loan of £7,000.
C. Inventory costing £2,000 has been sold for £3,000 cash. The
profit of £1,000 has been added to the capital.
D. Paid £4,000 to payables.
E. Received £11,000 cash from receivables.
F. Either (a) paid business expenses of £3,000 in cash, thus
reducing profit;
or (b) proprietor withdrew £3,000 from the business.
-------------------------------
QUESTIONS
Answers to most questions are at the end of this chapter.
Question 1
Red Horse and Associates, a firm of real estate agents, had the
following transactions represented during September.
1. Arranged the sale of an apartment building owned by a

client. The commission for making the sale was $5,000,
but this amount would not be received until 20 October.
2. Collected $2,000 cash from trade receivable. The receiva-

ble originated in July from services rendered to a client.
3. Borrowed $60,000 from HSBC Bank, to be repaid in
three months.
4. Collected $1,500 from a doctor to whom Red Horse and
Associates rented part of its building. This amount repre-
sented rent for the months of September, October, and
November.
5. The owners of Red Horse and Associates invested an ad-
ditional $10,000 cash in the business.
Which of these transactions represented revenue earned to the

firm during the month of September?
Question 2
A business had the following transactions, among others, during
May.
1. Paid $2,000 salary to a sales representative for time worked

during May.
2. Paid $500 for petrol purchased for the delivery van during
May.
3. Purchased a computer for $2,500 cash.
4. Paid $14,000 in settlement of a loan obtained three
months earlier.
5. The owner withdrew $400 from the business for personal use.
6. Paid $500 commission to a salesman for work performed
last March.
Which of these transactions represented expenses incurred for

May?
Question 3
Indicate the effect of each of the following transactions upon
the total assets of a business by using one of the appropriate
phrases as below:
“increase total assets”;

“decrease total assets”; or
“no change to total assets”.
a. O wner contributed a computer to the business.

b. Purchased a motor vehicle with cash.
c. Purchased a motor vehicle on credit.
d. Paid a creditor amount owing.
e. Received payment from a receivable.
f . P
urchased land for $100,000, paying $20,000 deposit and
arranging a mortgage for the balance.
g. Sold equipment for an amount of cash less than its cost.
h. Sold equipment for an amount of cash greater than its cost.
i. Received $260 from a receivable after allowing a $40 discount.
Question 4
1. The owner’s equity of Shun Connery is $150,000 and is
equal to one-quarter the amount of total assets. What is
the amount of total liabilities?
2. The assets of Pierce Brosman amounted to $60,000 on 30
June 20x7 but increased by $35,000 by 30 June 20x8. During
the same year, liabilities decreased by $5,000 and drawings
amounted to $10,000. If the owner’s equity on 30 June 20x7
was $20,000, then what was the profit for the year ended 30
June 20x8 and the owner’s equity as of 30 June 20x8?
3. On 30 June 20x8, the assets of Daniel Creg were $75,000.
One year later, the assets had increased to $100,000 and
the owner’s equity was $55,000. Liabilities were $20,000
greater on 30 June 20x9 than they had been on 30 June
20x8. What was the owner’s equity on 30 June 20x8?
Question 5
Study carefully the following SFPs and state the transactions
that resulted in each change.
LondonCarRental Ltd
as of 03 as of 04 as of 05 as of 06 as of 07 as of 08
March 20x9 March 20x9 March 20x9 March 20x9 March 20x9 March 20x9
€ € € € € € € € € € € €
Current assets
Bank 700 200 --- 4,000 2,000 1,500
Receivables 1,050 1,050 1,050 1,050 1,050 1,050
Inventory 5,900 7,650 5,900 7,150 5,900 6,950 5,900 10,950 5,900 8,950 5,900 8,450
Non-current assets
Land and
buildings 45,000 45,000 45,000 45,000 45,000 45,000
Office
equipment 3,500 48,500 3,500 48,500 4,000 49,000 4,000 49,000 8,000 53,000 8,000 53,000
13
14
Current liabilities
Bank --- --- 300 --- --- ---
Payables 1,500 1,500 1,000 1,000 1,000 1,300 1,000 1,000 3,000 3,000 3,000 3,000
Non-current liabilities
Mortgage on
land and
buildings 40,000 40,000 40,000 40,000 40,000 40,000
14,650 14,650 14,650 18,950 18,950 18,450
Owner’s equity
Capital 14,650 14,650 14,650 18,950 18,950 18,950
Less:
Drawings --- --- --- --- --- 500
14,650 14,650 14,650 18,950 18,950 18,450
Question 6
You are given the following information for a retailer, George
Mikael, as of 30 June 20x0:
Capital as of 1 July 20x9 $22,800

Cash at bank 4,000
Trade receivables 12,000
Accrued expenses 2,000
Trade payables 10,000
Inventory on hand 16,000
Buildings 16,000
Mortgage on buildings 8,000
During the past year, George Mikael has withdrawn

$2,000 cash for his own use, whilst the net profit, according
to the SPL, was $7,200.
From this information, prepare an SFP of the retailer
George Mikael as of 30 June 20x0.
Question 7
On 31 October 20x1, Mobile Centre Ltd, owned by Alex
Fergusons, had the following assets and liabilities:
Cash on hand $200; bank overdraft $12,000;

Land and buildings $100,000;
Trade receivables $19,000;
Mortgage loan $44,000; Trade payables $15,000;
Bank loan (due Dec. 20x1) $3,000;
Inventory of stationery $500;
Motor vehicles $28,000; Office equipment $4,500;
Office furniture $1,800
Prepare a classified SFP as of 31 October 20x1.

Mobile Centre Ltd

Statement of Financial Position as of 31 October 20x1
Assets $ $
Current assets
Non-current
assets
Total assets
Liabilities
Current liabilities
Non-current
liabilities

Total
liabilities
Net assets
Owner’s equity
Capital – Alex
Fergusons

Question 8
Twelve months ago, Linda Evangelischa decided that she
wanted to grow grapes and eventually produce wine. The
business is called The Model’s Vineyard Ltd, and the transac-
tions below are for the year ended 30 June 20x3.
Transactions:
20x2–20x3:
July 2 An account in the name of the business
was opened and an amount of cash
capital deposited.
Sept. 15 Purchased land and sheds for $125,000,
paying $35,000 cash as the deposit
and a mortgage from the bank for the
balance. Repayments to the bank are to
begin in one year’s time.
Nov. 21 Purchased equipment including a

tractor and farming implements for
$28,000 cash.
Mar. 14 Purchased an additional tractor, paying
$10,000 cash.
June 11 Purchased farm supplies including
fertiliser and minerals totalling $8,000
and paid with a cheque.
30 The balance of the bank account is
$49,000.
Prepare an SFP for The Model’s Vineyard Ltd as of 30

June 20x3, and figure out the amount of capital deposited
on 1 July 20x2.
Use the blank SFP provided below.
The Model’s Vineyard Ltd
as of 30 June 20x3
Assets - Liabilities
Bank
Land and sheds
Farm equipment
Farm supplies
Mortgage
NET ASSETS
Owner’s equity
Capital, Linda
Evangelischa
Question 9
Harrison Fords is the owner of Fine Artist Ltd, and during
November, the following transactions occurred:
Nov. 2 Harrison Fords started the business by

depositing £23,000 into the business bank
account.
Nov. 5 Borrowed £30,000 from the bank
to purchase shop premises. Purchased
premises the same day.
Nov. 8 Bought shop fittings for £3,000, paid by
cheque.
Nov. 10 Purchased inventory for resale for
£5,500 on credit from his major supplier.
Nov. 13 Sold £3,000 of inventory for £3,000
cash.
Nov. 16 Paid £2,500 cash into the business bank
account.
Nov. 18 Bought office equipment for £3,500 –
paid by cheque.
Nov. 21 Bought office furniture for £9,500 –
paid by cheque.
Nov. 24 Paid by cheque £4,000 to his supplier as
part settlement of the account.
Nov. 26 Repaid by cheque £15,000 of the loan
raised by the bank on 5 November.
Nov. 29 Won £5,000 in a lottery and paid this
cheque into his business bank account.
Nov. 30 Sold £800 of inventory to a customer for
£800 on credit.
Required:
Prepare an SFP for Harrison Fords as of 30 November.


Statement of Financial Position as of 30 November
£ £
Question 10
David Bowies, a sole trader, has extracted the following trial
balance as of 31 January 20x7.
Trial Balance as of 31 January 20x7

£ £
Telephone and internet 1,000
Freehold land and 29,500
buildings
Cash in hand 100

Purchases 65,000
Sales 92,000
Salaries 15,200
Motor van 12,200
Cash at bank 3,900
Capital (as of 52,700
1 January 20x7)
Rent 7,200
Insurances 600
Fixtures and fittings 3,800
146,600 146,600
Required:
1 . Prepare the SPL for the year ended 31 January 20x7, and
2. Prepare the SFP as of that date.
Question 11
The following transactions are for Drew Barrynore, who began
a business named Hollywood’s Acting Training Ltd.The business
began on 1 July 20x4 and has been operating for one month.
Transactions:
20x4
July 1 The owner opened an account in the name of
the business, depositing $67,000 in cash.
8 The owner purchased a bus to allow picking
up young students. She paid $45,000 in cash
for the vehicle.
18 Equipment was purchased on credit on 30-day
terms. The cost of equipment was $7,500.
24 A student, Alison Ford, was invoiced for

training services totalling $5,500.
A loan for $10,000 was obtained from Barclays
bank to be used for the purchase of equipment
at a later date.
31 An amount of $4,000 was received from
Alison Ford as part payment of her account.
Also, a payment of $3,000 was made on the
equipment purchased on 18 July.
Required:
Prepare an SFP for Hollywood’s Acting Training Ltd as of

31 July 20x4.
Hollywood’s Acting Training Ltd
as of 31 July 20x4
Assets – Liabilities
Bank
Motor vehicle
Equipment
Trade receivable
Loan
Trade payables
Net assets
Owner’s equity
Capital, Drew Barrymore
Question 12
The following transactions relate to Aston Products Ltd,
owned by Al Pacinhio.
20x6
June 1 Commenced business with the following: cash
$2,000; vehicle $3,000; land and buildings
$35,000; office furniture $800; shop fixture and
fittings $3,000; inventory $10,000; mortgage
on land and buildings $30,000; and loan from
Coventry Building Society $12,000.
2 Bought a van from Allen Ford – paid a deposit
of $1,000. The remaining $4,000 was financed
by HFI Finance Ltd.
3 Withdrew $100 from the business bank account
for personal use.
4 Paid $2,000 of the loan from Coventry
Building Society.
5 Purchased office furniture for $750.
6 Purchased shop fittings for $340.
7 Raised short-term bank loan of $3,000.
8 Paid payables $150.
9 Contributed another vehicle worth $5,000 and
$2,500 cash to the business.
10 Reduced the mortgage by $3,000.
Required:
Present the SFP at the completion of the above transactions.

Question 13
Enrique Inklesias, a sole trader, extracted the following trial
balance from his books at the close of business on 31 July
20x9:
Dr Cr
£ £
Purchases and sales 6,500 12,870
Capital 1 August 20x8 2,470
Bank 1,430
Cash 50
Discounts allowed and 480 330
received
Returns inwards 250
Returns outwards 190
Rent, rates, and insurance 650
Delivery van 900
Receivables and payables 3,970 2,540
Wages and salaries 3,030
General office expenses 200
19,830 19,830
Required:
1 . Prepare the SPL for the year ended 31 July 20x9.

Answers
Answer 1
Requirement 1:
Revenue of $5,000 has been earned in September.
Requirement 2:
Revenue of $2,000 was earned in July. The cash receipt in

September represents payment of that debt.
Requirement 3:
The $60,000 represents a liability.
Requirement 4:
Revenue of $500 has been earned in September. The remain-

ing $1,000 would be recorded as rent received in advance (or
unearned revenue).
Requirement 5:
The $10,000 represents additional capital to the business and

not revenue earned.
Answer 2
Requirement 1:
Expense of $2,000 has been incurred in May.
Requirement 2:
Expense of $500 has been incurred in May.

Requirement 3:
The $2,500 represents the purchase of an asset.The depreciation

expense on the computer would need to be calculated for May.
Requirement 4:
The $14,000 represents repayment of a liability. Any interest

on the loan incurred for May would be expensed.
Requirement 5:
The $400 represents a reduction in the OE.
Requirement 6:
The $500 represents the cash payment of an expense that was

incurred in March. It therefore only represents repayment of
a debt for May.
Answer 3
Requirement 1:
a Increase total assets f Increase total assets

b No change to total assets g Decrease total assets
c Increase total assets h Increase total assets
d Decrease total assets i Decrease total assets
e No change to total assets
Answer 4
Requirement 1:
Liabilities = $450,000
Requirement 2:
Profit = $50,000
Owner’s equity = $60,000
Requirement 3:
Owner’s equity = $50,000
Answer 5
Requirement 1:
20x9
March 4 Paid payables €500.
5 Bought €500 of office equipment with cash.
6 The owner(s) contributed €4,300 to the
business.
7 Bought €4,000 of office equipment, paying
€2,000 cash and the balance on credit.
8 The owner(s) withdrew €500 for personal use.
Answer 6
Requirement 1:
George Mikael
Retailer
as of 30 June 20x0
$ $ $
Assets
Cash at bank 4,000
Inventory on hand 16,000
Buildings 16,000 48,000
Less:
Liabilities
Accrued expenses 2,000
Mortgage 8,000 (20,000)
Net assets 28,000

Equity
Capital 1 July 20x9 22,800
Plus profits
1 July 20x9–30 June 20x0 7,200
30,000
Less: Drawings (2,000)
Capital/equity 30 June 20x0 28,000
Answer 7
No solution, for students to attempt.
Answer 8
Requirement 1:
The Model’s Vineyard Ltd

as of 30 June 20x3
Assets – Liabilities
Bank 49,000
Land and sheds 125,000
Farm equipment 38,000
Farm supplies 8,000
220,000
Mortgage 90,000
Net assets 130,000

Owner’s equity
Capital, Linda Evangelischa
130,000
Because you are given the balance of the bank account on

30 June, you only need to show the assets purchased and the
mortgage taken out. Capital can easily be determined as a bal-
ancing figure (i.e. $220,000 − $90,000).
Answer 9
Requirement 1:

as of 30 November
£ £
Non-current assets
Premises 30,000
Shop fittings 3,000
Office equipment 3,500
Office furniture 9,500 46,000
Current assets
Inventory 1,700
Cash 500
Trade receivables 800 3,000
Current liabilities
Bank overdraft * 4,500
Trade payables 1,500 6,000
Long-term liabilities
Loan 15,000 15,000
28,000
Equity-Capital
(23,000 + 5,000) 28,000
* Bank: 23,000 + 30,000 – 30,000 – 3,000 + 2,500 – 3,500 – 9,500 – 4,000 –
15,000 + 5,000 = (4,500).
Answer 10
Requirement 1:
Statement of Profit or Loss for month of January

£ £
Sales 92,000
Purchases (65,000)
Gross profit 27,000
Expenses:
Salaries 15,200
Rent 7,200
Insurances 600 24,000
Net profit 3,000
Requirement 2:
Statement of Financial Position as of 30 January

£ £
Non-current assets
Land and buildings 29,500
Motor vans 12,200
Fixtures and fittings 3,800 45,500
Current assets
Bank 3,900
Cash 100 12,100
Current liabilities
55,700
Equity
Capital 52,700
Profit for the year 3,000
55,700
Answer 11
No solution is given for this question. Students should attempt
to answer it themselves.
Answer 12
Answer 13
Requirement 1:
Enrique Inklesias
Statement of Profit or Loss as of July 20x9
£ £
Sales 12,870
Return inwards (250) 12,620
Purchases 6,500
Return outwards (190) (6,310)
Gross profit 6,310
Discounts received 330
Expenses:
Discounts allowed 480
Rent, rates, and 650
insurance
General expenses 200 (4,360)
Net profit 2,280
Requirement 2:
Enrique Inklesias
Statement of Financial Position as of 31 July
£ £
Non-current assets
Motor vans 900
Fixtures and fittings 3,800 4,700
Current assets
Trade receivable 3,970

Cash 50 4,020
Current liabilities
Bank 1430
4,750
Equity
Capital 2,470
4,750
2
Processing accounting
information
This chapter briefly covers the following topics:
• Double-entry bookkeeping and ledger accounts

• The debit and credit rules
• Recording transactions, the process
• Balancing off accounts
• Trial balance
Double-entry bookkeeping and ledger

accounts
Double-entry bookkeeping is a set of conventions for recording
business transactions in a book called the “Ledger”.The ledger is di-
vided into sections called Accounts. The ‘Accounts are used to show
the detailed increases and decreases in each financial statement item.
The account is abbreviated as “acc” or “a/c”.
Double-entry bookkeeping is based on the same idea as the ac-
counting equation. Every accounting transaction entered must in-
volve an equal alteration to both sides of the accounting equation.
As a result, each transaction has two equal but opposite effects,
and double-entry bookkeeping means to record the dual effects of
each business transaction.
Each account is split into two halves:
– The LEFT half is called the DEBIT (Dr) side.

– The RIGHT half is called the CREDIT (Cr) side.
34 PROCESSING ACCOUNTING INFORMATION
For this reason, identifying debits and credits is quite simple.

In a system of double-entry bookkeeping, every accounting
transaction must be entered in ledger accounts both as a debit and
as an equal but opposite credit. The principal accounts are con-
tained in a ledger called the nominal ledger.
When the total amount of money on the DEBIT side of an ac-
count is greater than that on the CREDIT side, the account is said
to have a DEBIT BALANCE. Similarly, when the total amount
of money on the CREDIT side of an account is greater than
that on the DEBIT side, the account is said to have a CREDIT
BALANCE.
An account which contains a DEBIT BALANCE represents ei-
ther an ASSET or an EXPENSE.
An account with CREDIT BALANCE represents LIABILITY,
CAPITAL, or INCOME.
The debit and credit rules

The debit and credit rules in double-entry bookkeeping are as
follows:
an entry on the DEBIT side is: an entry on the CREDIT side is:
- an increase in an ASSET, or - an increase in a LIABILITY,

EXPENSE CAPITAL, or INCOME
- or, a decrease in a - or, a decrease in an ASSET,

LIABILITY, or EXPENSE
CAPITAL, or INCOME
All individual accounts in financial accounting belong to one

of the five main categories of accounts, i.e. asset, liability, owners’
equity (or, capital), revenue (or, income), or expense.
Recording transactions: the process

Step 1: Identify the transaction and specify each account affected
by the transaction (each account belongs to either an asset, liability,
owners’ equity or capital, revenue, or expense).
PROCESSING ACCOUNTING INFORMATION 35
Step 2: Determine whether each account is increased or de-

creased by the transaction. Use the above rules of debit and credit.
Step 3: Do the double entry based on the debit and credit rules
as described above.
Balancing off the accounts

At suitable intervals, the entries in each ledger account are totalled
and a balance is struck (also known as closing off the accounts).This
process creates nil balances in all revenue and expense accounts for
the commencement of the new accounting period, whilst all ac-
counts in the Statement of Financial Position (SFP) have balances
that are carried down (c/d) at the end of the accounting period and
brought down (b/d) in the new accounting period.
Trial balance
• A trial balance lists all accounts of a business, with their balances
at the end of the period.
• It is divided between accounts with debit balances and credit
balances.
• The total of debit and credit balances must be the same (check
by entering on the trial balance the balance of each account and
then add each side).
The trial balance is used as a basis for preparing the Statement of

Profit or Loss (SPL) account and the SFP at the end of the period.
Questions
Question 1
The transactions below are for the business Consulting Ser-
vices Ltd owned by Jere Duckin. The business began on 1
September 20x8 and has been operating for one month. The
following transactions took place in the month of September:
20x8
Sept. 2 The owner’s initial investment for the
business to commence was $85,000 cash.
7 A small shop costing $50,000 was purchased
and was paid for with a cheque.
14 Office equipment costing $14,500 was
purchased and paid for with cash.
19 Shop fittings and furniture costing $5,600 were
purchased on credit from Real Furniture Ltd.
28 A loan for $15,000 was obtained from a local
branch of the NatWest Bank. The money was
used to purchase a motor vehicle. The loan
repayments begin on 1 December 20x8.
30 $3,000 was paid to Real Furniture Ltd for the
fittings and furniture purchased on the 19th.
Required:
1. For each transaction, identify the accounts that will be

involved.
2. Use the blank T-accounts supplied on the following page
to enter each transaction.You do not need to enter dates.
Accounts involved in each transaction

Transaction Account title Account title
number (DEBIT) (CREDIT)
1.
2.
3.
4.
5.
6.
BANK
Question 2
Interflow Plumbing Services Ltd began operating from its
head office in Birmingham three months ago. Transactions re-
lating to these three months have been as follows:
20x7
Sept. 5 The owner, Simon Collin, invested £155,000
of his own money for the business.
13 He purchased a small office and warehouse for
£145,000. A deposit of £35,000 was paid and
a mortgage for the balance was taken out from
HSBC Bank.
28 Office furniture costing £24,000 was
purchased from PC World Ltd on credit.
Oct. 5 Five vans were purchased from Motor Centre
Ltd. Credit of £85,000 was arranged with the
car company while the balance of the purchase
cost, £29,000, was paid for with cash.
20 A payment was made to PC World Ltd of

£12,400.
Nov. 3 One van was sold to another business for
£22,800 with an agreement for the payment
to be made within two months.
15 A bank overdraft facility for £25,000 was
arranged with the local bank.
21 Equipment was purchased for £27,000 and
paid for with cash.
29 Payment was made to PC World Ltd to settle
the outstanding balance owed on the account.
Required:
1. For each transaction, identify the accounts that will be

involved.
2. Use the blank T-accounts supplied on the following page
to enter each transaction.You do not need to enter dates.

1.
2.
3.
4.
5.
6.
7.
8.
9.
Bank
Question 3
You employ a very inexperienced bookkeeper who, since you
started in business a few days ago, has recorded the following
in your accounts:
Cash Account
£ £
Sept. 1 Capital 12,000 Sept. 3 Office 700
furniture
Sept. 7 Machinery 1,000 Sept. 16 Office 100
furniture
Sept. 25 Capital 2,000 Sept. 16 Strong 4,550
Tools Ltd.
Sept. 28 Bank 3,500
Sept. 30 Machinery 1,500
Capital Account
Sept. 1 Cash £12,000 Sept. 25 Cash £2,000
Office Furniture
Sept. 16 Cash £100 Sept. 3 Cash £700
Machinery
£
Sept. 7 Cash 1,000
Sept. 30 Cash 1,500
Tools
Sept. 12 ST Ltd. £5,000
Strong Tools Ltd.

£
Sept. 12 Tools 5,000
Sept. 16 Cash 4,550
Bank Account
Sept. 28 Cash £3,500
Required:
1. Rewrite the accounts as they should have been entered

using the following blank T-accounts, and
2. Prepare an SFP as of 30 September from the information
portrayed by the revised accounts. Use the blank SFP pro-
vided below.
Cash Account
£
Capital Account
Office Furniture
Machinery
£
Tools
Strong Tools Ltd.

£
Bank Account

as of 30 September
£
Non-current assets
Machinery
Office furniture
Tools
Current assets
Bank
Cash
Current liabilities
Trade payables
Net assets
Equity/Capital
Question 4
1. Show the accounts involved in the transactions below un-
der the five main headings of the financial statements (i.e.
assets (A), liabilities (L), equity/capital (C), revenue (R),
and expenses (E)):
Modern Decorating Services Ltd

May 1 Brian Smith started a business by investing
$10,000 in cash.
3 Purchased premises for $14,000 payable in
10 equal annual instalments.
4 Paid the first instalment from 3 May.
4 Purchased $1,500 of decorating supplies on
credit.
5 Paid wages, $2,000.
8 Received $8,000 for services sold.
8 Invested a further $3,000 in the business.
10 Bought a van for $2,000 cash.
11 Sold services on credit for $4,000.
12 Paid for the supplies from 4 May.
15 Paid registration on van, $300.
16 Received $3,000 from clients from 11 May
service.
16 Withdrew $1,000 for own use.
2. Advise what accounts would be debited and credited.
Question 5
Show the general journal entries that are needed to record
the following transactions of Johnson’s Cleaning Services Ltd.
a. The owner transferred $2,000 cash and a computer worth

$5,000 to the business.
b. Cleaning fees received, $1,283.
c. Purchased cleaning material on credit, $766.

d. Purchased cleaning tools, $240.
e. The business purchased cleaning equipment for $10,000,
paid $2,500 by cheque, and signed a one-year, 12% loan
payable for the remainder.
f. Dry cleaning of uniforms, $70.
g. Paid wages, $810.
h. Drawings of cash by owner, $200.
i. Drawings of cleaning materials by owner, $80.
j. Cleaning fees invoiced, $1,500
Question 6
Even though a business’s trial balance balanced, the following
errors have been detected.You are required to prepare the cor-
recting journal entries.
a. A payment of $550 for rent was incorrectly recorded

as $55.
b. A $210 debt to rent was incorrectly debited to insurance.
c. A receipt of $90 from an account customer was incor-
rectly recorded as a debit to trade payables and credit to
cash at bank.
d. An invoice for $200 for fees had not been recorded.
e. Cash drawings of $100 was incorrectly debited to the
bank loan account.
Question 7
The trial balance of Copying Specialist Service Ltd as of 31
July 20x8 was as follows:
Copying Specialist Service Ltd

Trial balance as of 31 July 20x8
Account name Debit Credit
($) ($)
Cash at bank 22,000
Photocopy supplies 700
Equipment 15,000
Capital 46,950
Drawings 250
Photocopying fees 43,000
Supplies used 8,200
Vehicle expenses 6,200
Wages 18,000
Office expenses 4,200
97,750 97,750
Transactions for the month of August were as follows:
20x8
August 4 Purchased photocopy supplies, $150.
7 Cash fees for photocopying, $50.
12 Receipts from debtor, $4,000.
13 Billed customers for photocopying services,
$8,000.
Paid fortnightly accounts:
Vehicle expenses $250
Wages $1,000
Office expenses $310
18 Paid $7,000 owed to payables.

21 Purchased photocopy supplies, $500.
26 Drawings by owner:
Cash $100
Supplies $40
27 Billed customers for photocopying services,
$7,800.
29 Paid fortnightly accounts:
Vehicle expenses $210
Wages $1,000
Office expenses $290
30 Purchased photocopy supplies, $600.
31 Photocopying supplies used for the month,
$710.
Required:
1 . Record the above transactions in the general journal.

2. Prepare a trial balance as of 31 August 20x8.
Question 8
Five general ledger accounts are shown below in the
T-account format. Describe the transactions that took place
following the recording of double entries as per below:
Cash at Bank Purchases

£ £

(c) 760 (a) 1000

Trade Payables Purchase Returns

£ £ £

(b) 200 (a) 1000 (b) 200
(c) 800
Discount Received
£

(c) 40

Question 9
Below is a list of transactions for July 20x6 for Painting Job
Done Ltd in its first month of operations.
20x6
July 1 Elton Johnie invested €10,000 cash to start
Painting Job Done Ltd. He also borrowed
€5,000 from his bank as an interest-only loan
for three years.
3 Rented a shop and paid €440 rent for the first
month.
5 Purchased painting equipment for €2,800 cash
and bought supplies on credit for €1,120.
6 Purchased a second-hand van as a work vehicle
for €5,500 cash.
8 Paid €550 in advance for newspaper and online
advertising.
10 Billed clients €2,400 for completed work.
13 Billed clients €900.
15 Paid €250 for telephone installation.

17 Received €500 from a client billed on 10 July.
20 Received €750 for a job completed today.
23 Paid wages of €1,180.
25 Paid payables of €720.
28 Withdrew €1,100 for his own use.
31 Found that €750 worth of supplies were still on
hand.
Required:
1 . Record all transactions in the general journal.

2. Prepare a trial balance as of 31 July 20x6.
3. Prepare an SPL for the month.
4. Prepare an SFP as of 31 July 20x6.
Question 10
Dixens Ltd, a wholesaler of electrical equipment, starts a busi-
ness on 1 January with £100,000 in cash.The following trans-
actions took place in January:
Jan. 2 Purchases warehouse for £35,000 and pays cash.

Jan. 5 Purchases inventory of electrical equipment for
£8,500 on credit from CU Supplies Ltd.
Jan. 7 Pays £25,000 cash into a business bank current
account and £5,500 into a business bank savings
account.
Jan. 9 Sells electrical equipment for £6,100 and receives
cash.
Jan. 11 Pays advertising £1,140 by cheque.
Jan. 13 Buys a second-hand motor van for £4,500 and
pays by cheque. Original cost of van was £15,000.
Jan. 14 Pays van tax £180 by cheque.

Pays insurance on van £350 by cheque.
Purchases petrol for £67 and pays cash.
Jan. 17 Pays wages of £500 in cash.
Jan. 19 Purchases packing machinery for £940 and pays
by cheque.
Jan. 21 Sells electrical equipment to Small Electrical Shop
Ltd for £3,100 on credit.
Jan. 23 Purchases on credit inventory of electrical
equipment for £1,500 from CU Supplies Ltd.
Jan. 25 Pays internet bill of £40 by cheque.
Jan. 26 Pays wages of £450 in cash.
Jan. 29 Sells all remaining inventory of electrical
equipment for £8,500 on credit to Dr X.
Jan. 30 Pays general expenses of £1,000 in cash.
Required:
1 . Record all transactions in T-accounts.

3. Prepare an SFP as of 31 January.
Question 11
A university undergraduate student has extracted the follow-
ing trial balance.
Note: The amounts are correct per the ledger accounts but
entered under the incorrect headings of debit balances or
credit balances.
Trial Balance
Dr Cr
£ £
Capital 51,000
Premises 37,000
Motor Vehicles 8,000
Office Equipment 4,000
Sales 16,400
Purchases 9,200
Rates 1,100
Wages and Salaries 4,100
Insurances 500
General Expenses 1,100
Trade Receivables 6,700
Trade Payables 5,000
Advertising 700
48,300 96,500
Required:
Redraft the above trial balance showing the amounts of the

various accounts under the correct headings of debit balances
or credit balances.
Question 12
David Becham, a sole trader, does not have any accounting
background, but he has managed to extract the following trial
balance from the books of his business as of 30 November
20x9:
Dr Cr
£ £
Purchases 4,990
General Office Expenses 990
Bank Overdraft 1,880
Sales 10,880
Cash in Hand 90
Sundry Receivables 6,100
Sundry Payables 1,990
Office Furniture 2,900
Capital Account 1st December 20x8 ???
18,830 12,870
Clearly, David is unable to ascertain the balance of the capital

account on 1 December 20x8. Also, there are obviously errors
in the above trial balance, as all the amounts are correct per
the ledger accounts, but some are entered under the incorrect
column.
Required:
Redraft the above trial balance showing the amounts of the

various accounts under the correct headings of debit balances
or credit balances, and insert the correct balance of the capital
account as of 1 December 20x8.
Answers
Answer 1
Requirement 1:

1. Bank Capital
2. Shop Bank
3. Equipment Bank
4. Fittings and Trade payables
furniture
5. Motor vehicle Loan
6. Trade payables Bank
Requirement 2:
Capital - Jere Duckin

Bank 85,000
Bank
Capital 85,000 Shop 50,000
Equipment 14,500
Shop
Bank 50,000
Office Equipment
Bank 14,500

Fittings & Furniture
Loan
Motor Vehicle 15,000
Trade Payables - Real Furniture Ltd

Bank 3,000 Fittings and 5,600
Furniture
Motor Vehicle
Loan 15,000

Answer 2
Answer 3
Requirement 1:
Cash Account
£ £
Sept. 1 Capital 12,000 Sept.3 Office furniture 700
Sept. 25 Capital 2,000 Sept.7 Machinery 1,000
Sept.16 Office furniture 100
Sept.16 Strong Tools Ltd. 4,550
Sept.28 Bank 3,500
Sept.30 Machinery 1,500
Capital Account
Office Furniture
Sept. 3 Cash £700
Sept. 16 Cash £100
Machinery
£
Sept. 7 Cash 1,000
Sept. 30 Cash 1,500
Tools
Sept 12 ST Ltd. £5,000
Strong Tools Ltd.

£
Sept. 16 Cash 4,550 Sept. 12 Tools 5,000
Bank Account
Requirement 2:

as of 30 September
£
Non-current assets
Machinery 2,500
Office furniture 800
Tools 5,000
Current assets
Bank 3,500
Cash 2,650
Current liabilities
Payables 450
Net assets 14,000
Equity/Capital 14,000
Answer 4
Requirement 1:
Current assets
Cash at bank
Trade receivables
Decorating supplies
Non- current assets
Premises
Motor vehicles
Current liabilities
Trade payables
Long -term liabilities
Loan
Owner’s equity
Capital
Drawings
Revenue
Service fees
E xpenses
Cost of supplies used

Van expenses
Wages
Requirement 2:
May 1 Cash at bank (A) Increase DR $10,000

Capital (C) Increase CR $10,000
3 Premises (A) Increase DR $14,000

Loan (L) Increase CR $14,000
4 Loan (L) Decrease DR $1,400

Cash at bank (A) Decrease CR $1,400
Decorating supplies Increase DR $1,500
(A)
Trade payables (L) Increase CR $1,500
5 Wages (E) Increase DR $2,000

8 Cash at bank (A) Increase DR $8,000

Service fees (R) Increase CR $8,000
Cash at bank (A) Increase DR $3,000
Capital (C) Increase CR $3,000
10 Motor vehicles (A) Increase DR $2,000

11 Trade receivables (A) Increase DR $4,000

Service fees (R) Increase CR $4,000
12 Trade payables (L) Decrease DR $1,500

15 Van expenses (E) Increase DR $300

Cash at bank (A) Decrease CR $300
16 Cash at bank (A) Increase DR $3,000

Trade receivables (A) Decrease CR $3,000
Drawings (C) Decrease DR $1,000
Answer 5
Requirement 1:
GENERAL JOURNAL Dr Cr
$ $
a Cash at bank 2,000
Computer equipment 5,000
Capital 7,000
b Cash at bank 1,283
Cleaning fees 1,283
c Inventory of cleaning materials 766
Trade payables 766
d Cleaning tools 240
Cash at bank 240
e Cleaning equipment 10,000
Cash at bank 2,500
Loan 7,500
f Dry cleaning 70
Cash at bank 70
g Wages 810
Cash at bank 810
h Drawings 200
Cash at bank 200
i Drawings 80
Inventory of cleaning 80
materials
j Trade receivables 1,500
Cleaning fees 1,500
Answer 6
Requirement 1:
GENERAL JOURNAL Dr Cr
($) ($)
a Rent 495
Cash at bank 495
b Rent 210
Insurance 210
c Cash at bank 180
Trade payables 90
Trade receivables 90
d Trade receivables 200
Fees revenue 200
e Drawings 100
Bank loan 100
Answer 7
Requirement 1:
No solution is given for this part of the question. Students

should attempt to answer it themselves.
Requirement 2:
Copying Specialist Service Ltd

Trial balance as of 31 August 20x8
Account name Debit Credit
($) ($)
Cash at Bank 15,930
Photocopy supplies 1,200
Equipment 15,000
Capital 46,950
Drawings 390
Photocopying fees 59,040
Supplies used 8,910
Vehicle expenses 6,660
Wages 20,000
107,890 107,890
Answer 8
Requirement a:
Goods to be placed in a shop as inventory would have been

bought on credit from a supplier. The sources document
would have been the supplier’s invoice.
Requirement b:
Some of the goods originally purchased from the supplier

have been returned, reducing the amount payable.
Requirement c:
Payment of the outstanding balance to the trade payable has

occurred, with £40 discount being allowed.
Answer 9
Requirement 1:
Painting Job Done Ltd General Journal

20x6 € €
July 1 Cash 10,000
Capital – Elton Johnie 10,000
Investment by owner
Cash 5,000
Bank loan 5,000
Interest only three-year loan
3 Rent expense 440
Cash 440
Shop rent for July
5 Equipment 2,800
Cash 2,800
Painting equipment purchased
Supplies 1,120
Supplies purchased on credit
6 Motor vehicle 5,500
Cash 5,500
Van purchased
8 Advertising expense 550
Cash 550
Newspaper and online
advertising
10 Trade receivables 2,400

Sales 2,400
Customers billed
13 Receivables 900
Sales 900
Customers billed
15 Telephone expense 250
Cash 250
Installation of telephone
17 Cash 500
Debt received
20 Cash 750
Sales 750
Cash sale
23 Wages expense 1,180
Cash 1,180
Paid wages for month
25 Trade payables 720
Cash 720
Paid supplier
28 Drawings 1,100
Cash 1,100
Monthly drawings
31 Supplies expense 370
Supplies 370
Supplies used for July
Requirement 2:
Painting Job Done Ltd

Trial balance as of 31 July 20x6
Debit Credit
€ €
Cash 3,710
Supplies 750
Equipment 2,800
Trade payables 400
Bank loan 5,000
Capital – Elton Johnie 10,000
Drawings 1,100
Sales 4,050
Advertising expense 550
Wages expense 1,180
Supplies expense 370
Telephone expense 250
Rent expense 440
€19,450 €19,450
Requirement 3:

Statement of Profit or Loss for July 20x6
€ €
Sales 4,050
Less: Expenses
Advertising 550
Wages 1,180
Supplies 370
Telephone 250
Rent 440 2,790
Net profit €1,260
Requirement 4:

Statement of Financial Position as of 31 July 20x6
€ €
Assets
Cash 3,710
Supplies 750
Equipment 2,800
Motor vehicles 5,500 15,560
Liabilities
Trade payables 400
Bank loan 5,000 5,400
Net assets 10,160
Owner’s equity
Capital – E. Johnie 10,000
Add: Net profit 1,260
11,260
Less: Drawings 1,100 10,160
Answer 10
Requirement 1:
Students are advised to attempt the T-accounts first by

themselves.
Capital
£ £
30-Jan Balance c/d 100,000 01-Jan Cash 100,000

01-Feb Balance b/d 100,000
Cash
£ £
01-Jan Capital 100,000 02-Jan Premises 35,000
09-Jan Sales 6,100 07-Jan Bank 25,000
07-Jan Bank 5,500
savings
14-Jan Van 67
expenses
17-Jan Wages 500
26-Jan Wages 450
30-Jan General 1,000
expenses
30-Jan Balance c/d 38,583
106,100 106,100

Premises
£
02-Jan Cash 35,000 30-Jan Balance c/d 35,000
Trade Payables - CU Supplies Ltd.

£ £
30-Jan Balance c/d 10,000 05-Jan Purchases 8,500
23-Jan Purchases 1,500
10,000 10,000

Bank Savings
07-Jan Cash 5,500 30-Jan Balance c/d 5,500

Bank
£ £
11-Jan Cash 25,000 11-Jan Advertising 1,140
13-Jan Motor van 4,500
14-Jan Van expenses 180
14-Jan Van expenses 350
19-Jan Machinery 940
25-Jan Internet 40
30-Jan Balance c/d 17,850
25,000 25,000

Motor Vans
13-Jan Bank 4,500 30-Jan Balance c/d 4,500

Machinery
19-Jan Bank 940 30-Jan Balance c/d 940

01-Feb Balance b/d 940
Trade Receivables - Small Electrical Shop Ltd.
21-Jan Sales 3,100 30-Jan Balance c/d 3,100

Trade Receivables - Dr X
29-Jan Sales 8,500 30-Jan Balance c/d 8,500

Purchases
£
05-Jan CU 8,500 30-Jan SPL* 10,000
Supplies
23-Jan CU 1,500
Supplies
10,000 10,000
Sales
£ £
30-Jan SPL 17,700 09-Jan Cash 6,100
21-Jan Small 3,100
electrical
Shop Ltd.
29-Jan Dr X 8,500
17,700 17,700
Advertising
£ £
11-Jan Bank 1,140 30-Jan SPL 1,140
Van Expenses
£ £
14-Jan Cash 180 30-Jan SPL 597
14-Jan Bank 350
14-Jan Bank 67
597 597
Wages
£ £
17-Jan Cash 500 30-Jan SPL 950
26-Jan Cash 450
950 950
Internet
£ £
25-Jan Bank 40 30-Jan SPL 40
General Expenses
£ £
30-Jan Cash 1,000 30-Jan SPL 1,000
* SPL = Statement of Profit or Loss
Requirement 2:
Statement of Profit or Loss

for month of January
£ £
Sales 17,700
Purchases 10,000
Gross Profit 7,700
Expenses:
Advertising 1,140
Van Expenses 597
Wages 950
Telephone 40
General Expenses 1,000 3,727
Net Profit 3,973
Requirement 3:

as of 31st January
Non-current Assets £ £
Premises 35,000
Machinery 940
Motor vans 4,500 40,440
Current Assets
Bank 17,850
Bank savings 5,500
Cash 38,583 73,533
Current Liabilities
103,973
Equity
Capital 100,000
103,973
Answer 11
Requirement 1:
Trial Balance
Dr Cr
£ £
Capital 51,000
Premises 37,000
Sales 16,400
Purchases 9,200
Rates 1,100
Insurances 500
General expenses 1,100
Advertising 700
72,400 72,400
Answer 12
Requirement 1:

3
Accounting for
inventories
• The principles of inventory valuation

• Lower-of-cost-or-market-value (LCM) method
• Inventory valuation methods
• An overview of accounting for inventories
The principles of inventory (or stock)

valuation
The need to value closing inventories arises from the accruals/
matching concept. The cost of purchasing such inventories or
goods arises in period 1, but if these inventories are not sold by
the end of accounting period 1, then they will not produce reve-
nue until these goods are sold in period 2. As a result, the cost of
purchasing these inventories/goods in period 1 must be carried
forward and charged against the revenue/profits in the later period
(when they are sold).
The amount carried forward in this way should normally be
the cost of the inventories. However, there are circumstances in
which the net realisable value (NRV) of the goods will be lower
than the cost, and in such cases, the lower of the two is conserva-
tively selected as the basis for the valuation of inventory. In these
instances, the lower-of-cost-or-market-value (LCM) method is
used.
74 Accounting for inventories
Lower-of-cost-or-market-value
(LCM) method
Having identified the cost of closing inventory at the end of the pe-
riod, based on one of the inventory valuation methods, the account-
ant has to undertake two further principal investigations which are
concerned with the “saleability” of the items contained in the clos-
ing inventory figure. These are:
i. An examination of inventory which is damaged, obsolete, or

slow-moving; and
ii. An examination of what needs to be done (if anything) to make
some of the inventory saleable.
Under the LCM method (or rule), a market-price test is run where
the current market price (NRV – what it could be sold for) is com-
pared with the historical cost derived under one of the three inven-
tory valuation methods (i.e. the figure currently shown in closing
inventory).
Under the LCM method, the lower of the two is conservatively
selected as the basis for the valuation of inventory.
Thus, if the NRV is lower than the cost, then the accountant
needs to adjust the inventory downwards, and the NRV must be
the amount shown in the accounts for that inventory.
Reminder: Accounting standards assert that “Provision is made
for all known liabilities (expenses or losses), whether the amount
of these is known with certainty, or is a best estimate in the light
of the information available”.
So, the adjustments made will take the form of an allowance
(or, a provision) – in the interests of prudence and conservatism.
In order to achieve the desired value of inventory, an estimate of
the amount of inventory must be written off.
The bookkeeping is as follows:
Journal entries:
Allowance for damaged (obsolete) inventory xxx

Inventory xxx
Accounting for inventories 75
The LCM is an example of conservatism (prudence). Conserva-

tism means selecting methods of measurement that yield lower net
income, lower assets, and lower shareholders’ equity.
Ex ample:
Based on the historical cost and NRV figures of the following in-
ventory items, what will be the amount of closing inventory shown
in the Statement of Financial Position (SFP)?
Inventory item Cost NRV
A 1,200 1,000
B 1,000 1,100
C 850 600
£3,050 £2,700
Answer:
Inventory item Cost NRV LCM method
A 1,200 1,000 1,000
B 1,000 1,100 1,000
C 850 600 600
£3,050 £2,700 £2,600
So, the amount of closing inventory shown in the SFP would
be £2,600.
Inventory valuation methods

There are two systems for keeping inventory records: (1) the
perpetual inventory system, and (2) the periodic inventory
system.
The perpetual inventory system is a system that keeps a running,
continuous record that tracks inventories and the cost of goods
sold on a day-to-day basis. Thus, in the perpetual inventory sys-
tem, the sale of an item and the accompanying inventory/stock
reduction are simultaneous.
The periodic inventory system is a system in which the cost of
goods sold is computed periodically by relying solely on physical
counts without keeping day-to-day records of units sold or on

hand. The following formula is used:
Opening inventory (A) + Purchases (B) – Closing inventory (C)

= Cost of goods sold
where:
A + B = goods available for sale; and
C = inventory left over at the end of accounting year.
The amount of inventory or goods sold during the year becomes

an expense, labelled “Cost of goods sold” or “Cost of sales”, and
determines the gross profit in the Statement of Profit or Loss
(SPL).
The remaining (closing) inventory held at the end of the ac-
counting year, i.e. the inventory or goods not sold by the end of
the year, appears under the current assets in the SFP, and as such,
the remaining (closing) inventory affects the financial position of
a business.
Hence, it is very important that inventories be counted and val-
ued correctly at the end of the accounting year.
Businesses do purchase inventory items or goods for resale fre-
quently. When the inventory is stored, different consignments
that have arrived at different times during the same accounting
year mingle together. Also, if the various consignments have been
purchased at different unit prices, then it is not always possible to
uniquely identify each inventory/stock item held at the end of an
accounting period and to ascertain the cost of each item without
difficulty. Therefore, the question that is posed here is “How do
we know then which inventories were sold and which remain”?
There are three standard inventory valuation methods used for
determining:
– the cost of any inventory sold or used during an accounting

period; and
– the cost of the closing inventory held at the end of the
accounting period.
These are as follows:
1. First In, First Out (FIFO): Using this method, we assume that
components of inventory or goods for resale are used in the
order in which they are received from suppliers, i.e. we assume
that the earlier inventories held are the first to be sold.
2. Last In, First Out (LIFO): This involves the opposite assumption,
so using this method, we assume that the latest inventories held
are the first to be sold.
3. Weighted Average Cost (WAC): Using this method, we assume
that purchase prices change with each new delivery of goods,
and as a result, the average price of the inventories held is con-
stantly changed too. Under this method, each batch of inventory
at any moment is assumed to have been purchased at the average
price of all inventories held at that moment.
Overview of accounting for inventories

1. When the goods (products) are sold, the costs of the inventory
become an expense labelled “Cost of goods sold” or “Cost of
sales” in the SPL. This expense is deducted from net sales to de-
termine gross profit, and additional expenses are deducted from
gross profit to determine net income (net profit or loss).
2. If unit prices and costs did not fluctuate, all inventory valuation
methods would show identical results.
3. But prices do change, and these changes raise central issues re-
garding the cost of goods sold (income measurement) and the
closing inventory (asset measurement).
4. Inventories of goods purchased for resale are accounted for
through the matching/accruals principle: The cost of an item
should be deducted from the revenue it generates, so the costs
of goods not sold in the year – i.e. closing inventory – must be
separated from the cost of goods sold in the year.
5. The higher the closing inventory (and hence, the lower the cost
of goods sold), the higher the gross profit and vice versa.
6. The closing inventory of year 1 will be the opening inventory
for year 2, so year 2’s profit will also be affected by the valuation
of closing inventory in year 1.
7. The effect of the opening inventory on gross profit is the op-

posite of the effect of closing inventory on gross profit, since
opening inventory is added to the cost of goods sold.
8. So, the higher the opening inventory, the lower the profit and
vice versa (compare with point 5 above).
9. Bear in mind the following formula which can be used to cal-
culate the net purchases made in the year. The net purchases ap-
pear in the “cost of goods sold” account in the SPL:
Purchases + Carriage Inwards (or Freight-in) (CR) – Purchase

Returns (PR) – Purchase Allowances (PA) – Purchase Discounts
(PD) = Net Purchases
where:
CR = transportation (delivery) costs to move the goods from
the supplier (seller) to the buyer;
PR = unsuitable purchases (goods) returned to the supplier (seller);
PA = when the buyer receives a deduction (an allowance) from
the amount owed to the supplier; and
PD = when the buyer receives a deduction from the amount owed
to the supplier by making an early payment to the supplier.
10. Carriage outwards (or freight-out) is paid by the seller and is not
part of the cost of the inventory. Instead, carriage outwards is the
expense of delivering goods to customers, and as such it appears
in the operating (other) expenses in the SPL.
11. Also bear in mind the following formula, which computes net sales
(see also the “Credit Sales and Discounts” section in Chapter 5):
Sales Revenue - Sales Returns (or Inwards) and (any) Allowances

– Sales (Trade) Discounts = Net Sales
Short questions:
Question
Aston Ltd’s inventory valuation excludes a number of free samples
from potential customers. They would normally cost £100 and
could probably be sold to Aston Ltd’s customers for £150. What
is the effect on the company’s profit of excluding this inventory?
Answer:
The profit is stated correctly, as it is correct to exclude free samples
from the inventory valuation. Besides, applying the LCM method, it
is clear that the lower of cost and NRV is nil.
---------------------------
Question
Madona’s inventory valuation includes certain damaged goods
(clothes) at their original cost of £11,655. These could be repaired
at a cost of £1,570 and sold for £12,150. What is the effect on
Madona’s profit of including these clothes at cost?
Answer:
The NRV of that inventory is £10,580 (£12,150 − £1,570),
and since the NRV is lower than the cost, the inventory should
be adjusted downwards and valued at £10,580 instead of £11,655.
Hence, the effect of error is to overstate profit by that amount.
---------------------------
Question
The following details are taken from the books of Harison Fords Ltd:
¥ ¥
Purchases 35,610 Opening inventory 2,100
Returns inwards 990 Carriage outwards 2,990
Closing inventory 4,870 Carriage inwards 1,430
Calculate the business’s cost of goods sold.
Answer:
The calculation is:
Cost of goods sold = Opening inventory + (Purchases + Carriage
Inwards) – Closing inventory = 2,100 + (35,610 + 1,430) - 4,870 =
¥34,270
Note: Returns inwards are sales returns and as such a reduction
in sales, and thus they do not affect the cost of goods sold. Carriage
outwards is a distribution expense in the SPL and is therefore un-
related to the above calculation.
---------------------------
Questions
Question 1
Suppose a division of a computer manufacturing company has
these inventory records for January 20x6
Date Item Quantity (units) Unit cost

Jan. 1 Opening inventory 100 £8
6 Purchase 60 9
21 Purchase 150 9
27 Purchase 90 10
Company accounting records reveal that operating expenses
for January were £2,900, and sales of 310 units have generated
sales revenue of £9,000.
Required:
1. Prepare the January SPL, showing amounts for FIFO,

LIFO, and WAC. Label the bottom line “Operating
income”.
2. Suppose you are the financial accountant of that company.
Which inventory valuation method will you use if your mo-
tive is to:
a. Minimise income taxes?
b. Report the highest operating income?
c. eport operating income between the extremes of
R
FIFO and LIFO?
d. R
eport inventory on the SFP at the most current
cost?
e. Achieve the best measure of net income for the SPL?
State the reason for each of your answers.

Question 2
ABC Hardware Company began 20x4 with 60,000 units of

inventory that cost £36,000. During 20x4, ABC purchased
goods on credit for £352,500 as follows:
Purchase 1 (100,000 units costing) £65,000

Purchase 2 (270,000 units costing) 175,500
Purchase 3 (160,000 units costing) 112,000
Cash payments to suppliers totalled £330,000 during the

year.
ABC’s sales during 20x4 consisted of 520,000 units of in-
ventory for £660,000, all on credit. The company uses the
FIFO inventory valuation method.
Cash collections from customers were £650,000. Op-
erating expenses totalled £240,500, of which ABC paid
£211,000 in cash by the end of the accounting year. As of 31
December, ABC had accrued income tax expense at the rate
of 35% of income before tax.
Required
1. Make summary journal entries to record ABC hardware’s

transactions for the year, assuming the company uses a
perpetual inventory system.
2. Determine the FIFO cost of ABC’s closing inventory as of
31 December 20x4 in two ways:
a. Using a T-account.
b. Multiplying the number of units on hand by the unit
cost.
3. Show how ABC would compute the cost of goods sold
for 20x4.
4. Prepare ABC Hardware’s SPL for 20x4, including the cal-
culation of the tax for the period.
Question 3
Calculate the missing SPL amounts for each of the following
companies (amounts adapted, and in millions):
Company Net Opening Purchases Closing Cost of Gross

sales inventory inventory goods profit
sold
Reinburry £21,456 £ (a) £6,254 £1,399 £6,546 £ (b)

Tasco 31,329 9,876 (c) 1,482 (d) 10,474
Safeone 18,726 768 3,453 241 (e) 10,063
Asta (f ) 433 1,325 (g) 997 2,995
Prepare the SPL for Asta, showing the computation of cost

of goods sold. Asta’s operating expenses for the year were
£1,256, and its income tax rate was 31%.
Question 4
X Ltd, maker of DVDs and computer consumables, reported the
following comparative SPL for the years ended 30 September
20x5 and 20x4:
X Ltd
Years ended 30 September 20x5 and 20x4
20x5 20x4
Sales revenue.............. £249,000 £222,000
Cost of goods sold:
O pening
inventory................ £18,000 £11,000
Purchases................ 75,000 64,000
Cost of goods
available.................. 93,000 75,000
Closing inventory..... (19,000) (18,000)
C ost of goods sold.... 74,000 57,000
Gross profit................. 175,000 165,000
Operating expenses..... 130,000 123,000
Net profit................... £45,000 £42,000
X Ltd’s directors and shareholders are pleased by the com-

pany’s increase in sales and net profit during 20x5. Then
they discover that the closing inventory of 20x4 was under-
stated by £6,000. Prepare the corrected comparative SPL for
the two-year period. How well did X Ltd really perform in
20x5 as compared with 20x4? What caused the evaluation of
20x5 to change so dramatically? Discuss in detail.
Question 5
Babycare’s accounting year ends each 31 January. Assume you
are dealing with a single Babycare store in Leamington Spa,
Warwickshire, and that the following transactions need to be
recorded: opening inventory in 20x5 of 20,000 units that cost
a total of £1,200,000. During the year, the store purchased
goods on credit as follows:
April (30,000 units @ £65)........................ £ 1,950,000

August (50,000 units @ £65)..................... 3,250,000
November (90,000 units @ £70)................ 6,300,000
Total purchases............................................ £ 11,500,000
Cash payments to suppliers during the year totalled
£11,190,000.
During fiscal year 20x5, the store sold 180,000 units of
goods for £16,400,000, of which £5,300,000 was in cash and
the remaining was on credit. Babycare uses the LIFO inven-
tory valuation method.
Operating expenses for the year were £3,500,000, and the
store paid 75% in cash and accrued the rest. Also, the store
accrued income tax at the rate of 30%.
Required
1. Make summary journal entries to record the store’s trans-

actions for the year ended 31 January 20x6. Babycare uses
the perpetual inventory method to record inventories.
2. Determine the closing inventory based on the LIFO in-
ventory valuation method using a T-account.
3. Prepare the store’s SPL for the year ended 31 January 20x6.
Question 6
Silect Ltd, a fabric manufacturer, began March with 73 metres
of fabric that cost €23 per yard. During the month, Silect
made the following purchases:
Mar. 4 113 metres @ €27

12 81 metres @ 29
19 167 metres @ 32
25 44 metres @ 35
On 31 March, the closing inventory consists of 60 metres
of fabric.
Required
1. Determine the closing inventory and cost-of-goods-sold

amounts for March under (1) WAC, (2) FIFO, and (3) LIFO.
2. Explain why cost of goods sold is highest under LIFO. Be
specific.
3. How much income tax would Silect save during the month
by using LIFO versus FIFO? The income tax rate is 40%.
Question 7
Pizza Hat’s records include the following accounts with regard to
purchases of plastic glasses as of 31 December of the current year:
Jan. 1 Opening balance (800 units @ $6.99) $5,592

Jan. 9 Purchase 300 units @ $7.05 $2,115
Mar. 23 Purchase 1,100 units @ $7.35 $8,085
June 12 Purchase 8,400 units @ $7.50 $63,000
Oct. 7 Purchase 500 units @ $8.50 $4,250
By 31 December, the company had sold 10,000 units for
£154,876.
Required:
1. Prepare a partial SPL through gross profit under the WAC,

FIFO, and LIFO methods. Use the periodic inventory system.
2. Which inventory valuation method would you use to

minimise income tax? Explain why this method causes
the income tax to be the lowest.
Question 8
Dexons Ltd reported these data (adapted; amounts in billions):
20x8 20x7 20x6

Net sales revenue................ € 37 € 34 €31
Cost of goods sold:
Opening inventory......... € 4 € 3 € 2
Purchases........................ 25 24 22
Cost of goods available.... 29 27 24
Less closing inventory..... (4) (4) (3)
Cost of goods sold.......... 25 23 21
Gross profit......................... 12 11 10
Total operating expenses..... 10 9 8
Net profit........................... € 2 € 2 € 2
Assume that in early 20x9, an error was discovered which

involved the closing inventory for 20x6 being overstated by €1
billion and the closing inventory for 20x7 being understated by
€1 billion. The closing inventory at year-end 20x8 was correct.
Required:
1. Incorporate the above information and show corrected

statements of profit or loss for the three years.
2. Discuss whether each year’s net profit as reported above
and the related owners’ equity amounts at the end of the
year were understated or overstated. For each incorrect
figure, indicate the amount of the understatement or
overstatement.
3. How much did these assumed corrections add or take away
from the Dexons total net profit over the three-year period?
How did the corrections affect the trend of net profit?
Question 9
The House of Frazer Department Stores Ltd operates a
number of department stores in the United Kingdom. Let’s as-
sume that the company’s accounting year ends each 31 January.
The store in London had an opening inventory in year
20x1 of 55,000 units that cost £1,650,000. During the year,
the store purchased goods on credit as follows:
March (50,000 units @ £38)......................... £1,900,000

August (40,000 units @ £34.5)..................... 1,380,000
October (180,000 units @ £35).................... 6,300,000
Total purchases............................................... £9,580,000
Cash payments on credit during the year totalled £9,110,000.
During fiscal year 20x1, the store sold 285,000 units
of merchandise for £14,000,000, of which £4,100,000
was in cash and the remaining was on account (credit).
Assume that House of Frazer uses the LIFO inventory
valuation method.
Operating expenses for the year were £3,180,000. House
of Frazer paid two-thirds in cash and accrued the rest. The
store accrued income tax at the rate of 32%.
Required
1. Make summary journal entries to record the store’s transac-

tions for the year ended 31 January 20x1. House of Frazer
uses a perpetual inventory system to record inventories.
2. Determine the closing inventory based on the LIFO
inventory valuation method using a T-account.
3. Prepare the store’s SPL for the year ended 31 January 20x1.
Question 10
Assume the Harrots store in London began in July with 50
(thousand) goods that cost £19.00 each.The sale price of each
of these goods was £36.00. During July, Harrots completed
these inventory-relevant transactions:
Units Unit Unit sale

(in £’000s) cost price
July 2 Purchase......... 12 £20.00
10 Sale................ 27 19.00 36.00
13 Sale................ 23 19.00 36.00
Sale................ 1 20.00 37.00
17 Purchase.......... 24 20.00
22 Sale................. 25 20.00 38.00
29 Purchase.......... 24 21.00
Required:
1. The above information is taken from the store’s inventory

records. Which inventory valuation method does Harrots
use? How can you tell?
2. Determine the store’s cost of goods sold for July. Also cal-
culate the gross profit for July.
3. What is the cost of closing inventory for the store as of 31
July?
Question 11
Trade Cars Ltd had opening inventory in February of 150 car
wheels that cost £77.00 each. During February, the garage
made the following purchases:
Feb. 2 222 @ £79.50

14 95 @ £82.00
19 210 @ £84.00
27 248 @ £87.00
Trade Cars Ltd’s closing balance consists of 214 wheels.
Required:
1. Calculate the closing inventory and cost of goods sold

amounts under the WAC, FIFO, and LIFO inventory val-
uation methods.
2. Discuss why cost of goods sold is highest under LIFO. Be
specific.
3. How much income tax would Trade Cars Ltd save during
February by using LIFO versus FIFO? The income tax
rate is 31%.
Question 12
The records of Fordie Car Manufacturer Ltd include the follow-
ing for a line of car exhausts on 31 March of the current year:
Apr. 1 Balance 300 units @ €3.00 = 900

100 units @ €3.15 = 315
June 9 Purchase 800 units @ 3.15 = 2,520
Aug. 21 Purchase 600 units @ 3.35 = 2,010
Oct. 15 Purchase 400 units @ 3.50 = 1,400
Dec. 8 Purchase 700 units @ 3.70 = 2,590
The closing inventory consists of 400 units. The sales rev-
enue generated during the year is £11,200.
Required:
1. Prepare a partial SPL through gross profit under the WAC,

FIFO, and LIFO inventory valuation methods. Use the cost-
of-goods-sold model. Use the periodic inventory system.
2. Which inventory valuation method would you use to re-
port the highest net income? Explain why this method
produces the highest reported income.
Question 13
The extract SPL of Air Control Specialists Ltd is as follows
(in millions):
(Amounts in millions) 20x8 20x7 20x6

Net sales revenue.... €1,517 1,319 1,238
Cost of goods sold:
Opening € 269 €259 €234
inventory............
Purchases............ 859 729 663
C
ost of goods
available.............. 1,128 988 897
Closing (311) (269) (259)

inventory............
Cost of goods 817 719 638
sold.....................
Gross profit............. 700 600 600
Total operating
expenses................. 500 450 420
Net profit............... € 200 € 150 € 180
Assume that in early 20x9, it was discovered that the clos-

ing inventory for 20x6 was understated by €50 million and
that the closing inventory for 20x7 was overstated by €20
million. The closing inventory as of 31 December 31 20x8
was stated correctly.
Required:
1. Incorporate the above information and show corrected

statements of profit or loss for the three years.
2. Discuss whether each year’s net income as reported above
and the related owners’ equity amounts at the end of the year
are understated or overstated. For each incorrect figure, in-
dicate the amount of the understatement or overstatement.
3. How much did these assumed corrections add to or take
away from Air Control Specialists Ltd’s total net profit over
the three-year period? How did the corrections affect the
trend of net profit?
Question 14
UK Airways Ltd is nearing the end of its first year of opera-
tions. The company made inventory purchases of €745,000
during the year as follows:
February 1,000 units @ €100.00 = €100,000

May 4,000 €121.25 = €485,000
August 1,000 €160.00 = €160,000

Totals 6,000 €745,000
Sales for the year are 5,500 units for €1,500,000 of sales
revenue. Expenses other than cost of goods sold and in-
come taxes are €185,000. The directors of the company
are undecided about whether to adopt the FIFO or the
LIFO inventory valuation method (assuming there is a
choice).
The company has storage capacity for 5,000 additional
units of inventory. Inventory/stock prices are expected to
stay at €160.00 per unit for the next few months. The di-
rectors are considering purchasing 1,000 additional units
of inventory at €160.00 each before the end of the year.
They wish to know how the purchase would affect net
income under both FIFO and LIFO. The income tax rate
is 31%.
Required:
1. To aid company decision-making, prepare statements of

profit or loss under FIFO and under LIFO, both without
and with the year-end purchase of 1,000 units of inventory
at €160.00 per unit.
2. Compare net profits under FIFO without and with the
year-end purchase. Make the same comparison under
LIFO. Under which method does the year-end purchase
have a greater effect on net profits?
3. Under which method can a year-end purchase be made in
order to manage net profits?
Question 15
Assume a Parda factory outlet store began in August 20x9
with 65 units of goods that cost £140 each. The sale price
of these units was £270. During August, the store completed
these inventory transactions.
Units Unit Unit sale

cost price
August 2 Sale................... 16 £140 £270
10 Purchase............ 80 141
13 Sale................... 34 140 270
18 Sale................... 9 141 272
22 Sale................... 35 141 272
29 Purchase............ 18 142
31 Sale................... 10 141 272
Required:
1. Determine the store’s cost of goods sold for August under

the periodic inventory system. Assume the FIFO inven-
tory valuation method.
2. Compute gross profit for August.
Question 16
Accounting records for The Best Pie Ltd include the following
information for the year ended 31 December 20x8 (amounts
in thousands):
Closing inventory, 31 December 20x7.................. £ 390
Purchases of goods (on credit).............................. 3,100
Sales of goods – 80% on credit; 20% in cash......... 4,500
Closing inventory at the lower of FIFO cost or
market value, 31 December 20x8 610
Required:
1. Journalise The Best Pie Ltd’s inventory transactions for

the year under the periodic inventory system. (Show all
amounts in thousands.)
2. Report closing inventory, sales, cost of goods sold, and gross
profit on the appropriate financial statement (amounts in
thousands). Show the calculation of cost of goods sold.
Question 17
You have found a source which can supply you with popular
movies in DVDs at £2.50 each (normal retail price £7.99
plus). As a student, and being inexperienced, you see an oppor-
tunity to make some extra spending money by buying these
DVDs and then reselling them to your own family, friends, and
colleagues and to their friends. After some deliberation, you
decide to purchase a supply of DVDs (at £2.50 each) and sell
them at £4.50.
Over the next two weeks, the following purchases and
sales take place:
Week 1 No. of DVDs bought No. of DVDs sold
Monday 20
Tuesday 6
Wednesday 8 2
Thursday 3
Friday 7
Week 2
Monday 10
Tuesday 15 4
Wednesday 19
Thursday 6
Friday 4
Required:
Calculate the profit or loss you have made in week 1 and

week 2.
Answers
Answer 1
Requirement 1:
Statement of Profit or Loss for component

Month Ended 31 January 20x6
FIFO LIFO WAC
Sales revenue £9,000 £9,000 £9,000
Cost of goods
sold:
Opening
inventory £800 £800 £800
Purchases 2,790 2,790 2,790
Cost of
goods
available for
sale 3,590 3,590 3,590
Closing
inventory (900) (720) (808)
Cost of
goods sold 2,690 2,870 2,782
Gross profit 6,310 6,310 6,218
Operating
expenses 2,900 2,900 2,900
Operating
income: £3,410 £3,230 £3,318
Computations:
Opening 100 × £8 = £800
inventory:
Purchases (60 × £9) + (150 × £9) + (90 × £10)= £2,790
Closing inventory
FIFO: 90* × £10 = £900
LIFO: 90 × £8 = £720
WAC: 90 × £8.975** = £808 (rounded from £807.75)
*Number of units in closing inventory = 100 + 60 + 150 + 90 − 90 − 310 = 90.
**£3,590/400 units† = £8.975 per unit.
†Number of units available = 100 + 60 + 150 + 90 = 400.
Requirement 2:
a. If allowed by accounting standards, use LIFO to minimise

income taxes. Operating income under LIFO is lowest
when inventory unit costs are increasing, as they are in this
case (from £8 to £10). (If inventory costs were decreasing,
income under FIFO would be lowest).
b. Use FIFO to report the highest operating income. Income
under FIFO is highest when inventory unit costs are in-
creasing, as in this situation.
c. Use WAC to report an operating income amount between
the FIFO and LIFO extremes. This is true in this situation
and in others when inventory unit costs are increasing or
decreasing.
d. Use FIFO to report closing inventory on the SFP at the
most current cost.The oldest inventory costs are expensed
as cost of goods sold, leaving in closing inventory the most
recent (most current) costs of the period.
e. If allowed by accounting standards, use LIFO to achieve
the best measure of net income. LIFO produces the best
matching of current expense with current revenue. The
most recent (most current) inventory costs are expensed
as cost of goods sold.
Answer 2
Requirement 1:
Stock (£65,000 + £175,500 +

£112,000)........................................................ 352,500
Trade payables........................................ 352,500
Trade payables................................................. 330,000
Cash.......................................................... 330,000
Sales revenue. . ........................................ 660,000
Cost of goods sold......................................... 339,500
Stock.. .................................................. 339,500
[£36,000 + £65,000 + £175,500
+ £63,000 (90,000 units × £0.70)]
(£112,000 ÷ 160,000 units =
£0.70 per unit)
Cash. . .................................................................. 650,000
Operating expenses....................................... 240,500
Cash.......................................................... 211,000
Accrued expenses................................. 29,500
Income tax expense...................................... 28,000
Income tax payable. . ............................ 28,000
(£660,000 − £339,500 −
£240,500) × 0.35 = £28,000
Requirement 2:
a.
Inventory
Balance b/d 36,000 339,500 Cost of goods sold (COGS)
Trade payables 352,500 49,000 Balance c/d

b. Number of units in closing inventory:

(60,000 + 100,000 + 270,000 + 160,000 –
520,000).............................. 70,000
Unit cost of closing inventory at FIFO
(£112,000 ÷ 160,000)................ × £0.70
FIFO cost of closing inventory....................... £49,000
Requirement 3:
Cost of goods sold:

Opening inventory................................ £36,000
Purchases.............................................. 352,500
Cost of goods available for sale.............. 388,500
Closing inventory.................................. (49,000)
Cost of goods sold................................. £339,500
Requirement 4:
ABC Hardware Company

Year ended 31 December 20x4
Sales revenue......................................... £660,000
Cost of goods sold................................. 339,500
Gross profit........................................... 320,500
Operating expenses............................... 240,500
Income before tax................................. 80,000
Income tax expense ....(80,000 × 35%)...... 28,000
Net income (profit).................................... £52,000
Answer 3
a. £1,691 (Let a = opening inventory;
a + £6,254 – £1,399 = £6,546, so
a = £1,691)
b. £14,910 (£21,456 – £6,546)
d. £20,855 (£31,329 – £10,474)
Note: Must solve for d before determining c.
c. £12,461 (Let c = Net purchases;
£9,876 + c – £1,482 = £20,855, so
c = £12,461)
e. £8,663 (£18,726 – £10,063)
f. £3,992 (£997 + £2,995)
g. £761 (Let g = Closing inventory;
£433 + £1,325 – g = 997, so
g = £761)
ASTA
Year ended 31 December 20xx
(Millions)
Net sales £3,992
Cost of goods sold:
Opening inventory £ 433
Net purchases 1,325
Cost of goods available 1,758
Closing inventory (761)
Cost of goods sold (997)
Gross profit 2,995
Operating expenses (1,256)
Income before tax 1,739
Income tax expense (£1,739 × 0.31) (539)
Net income (profit) £1,200
Answer 4
After the adjustment and correction in the SPL, X Ltd actu-
ally has not performed as well in 20x5 as in 20x4, with net
profits down from £48,000 to £39,000. The understatement
of inventory at the end of 20x4 caused 20x4 net profit to be
understated.Then this same error caused 20x5 net profit to be
overstated, giving the false impression that profits were higher
in 20x5. In reality, net profit was down in 20x5 by £9,000
(despite the increase in the sales revenue).
X Ltd
Years ended 30 September 20x5 and 20x4
20x5 20x4
Sales revenue £249,000 £222,000
Cost of goods sold:
Opening
inventory £24,000 £11,000
Net
purchases 75,000 64,000
Cost of goods
available 99,000 75,000
Closing
inventory (19,000) (24,000)*
C ost of goods
sold 80,000 51,000
Gross
profit 169,000 171,000
Operating
expenses 130,000 123,000
Net profit £ 39,000 £ 48,000
*£18,000 + £6,000 = £24,000.
Answer 5
Requirement 1:
Inventory.................................... 11,500,000
Trade payables..................... 11,500,000
Trade payables............................. 11,190,000
Cash................................... 11,190,000
Cash........................................... 5,300,000
Trade receivables......................... 11,100,000
Sales revenue....................... 16,400,000
Cost of goods sold...................... 12,100,000
Inventory............................ 12,100,000
[£6,300,000 + £3,250,000 +
£1,950,000 + (10,000 units ×
£60*)]
Operating expenses..................... 3,500,000
Cash (£3,500,000 × 0.75)....... 2,625,000
Accrued expenses
(£3,500,000 × 0.25). 875,000
Income tax expense.................... 240,000
Accrued income tax................ 240,000
(£16,400,000 – £12,100,000
– £3,500,000) × 0.30 =
£240,000
*£1,200,000 / 20,000 units = £60 per unit
Requirement 2:
Inventory
Balance b/d 1,200,000 COGS 12,100,000
Purchases 11,500,000 Balance c/d 600,000
Balance b/d 600,000
Requirement 3:
Babycare Leamington Spa Store

Year ended 31 January 20x6
Sales revenue.............................................. £ 16,400,000
Cost of goods sold...................................... 12,100,000
Gross profit................................................. 4,300,000
Operating expenses..................................... 3,500,000
Income before tax....................................... 800,000
Income tax expense (30%).......................... 240,000
Net income (profit).................................... £ 560,000
Answer 6
Requirement 1:
Goods available for sale:

Opening inventory..... 73 @ €23 = € 1,679
Purchases:
Mar. 4..................... 113 @ 27 = 3,051
12................... 81 @ 29 = 2,349
19................... 167 @ 32 = 5,344
25................... 44 @ 35 = 1,540
Goods available........... 478 € 13,963
1. W
AC:
Closing inventory: €13,963 / 478 = €29.21 per unit;
60 × €29.21 = €1,753
Cost of goods sold: €13,963 − €1,753 = €12,210
2. FIFO cost:
Closing inventory: (44 × €35) + (16 × €32) = €2,052
3. LIFO cost:
Closing inventory: (60 × €23) = €1,380
Requirement 2:
The cost of goods sold for Silect Ltd is highest under LIFO
because (a) the company’s prices are not falling, and (b) LIFO
assigns to the cost of goods sold the cost of the latest inventory
purchases. When unit prices are rising, the latest inventory
prices are the highest, and that makes the cost of goods sold
the highest under LIFO.
Requirement 3:
Cost of goods sold at LIFO................................ €12,583

Cost of goods sold at FIFO................................ 11,911
Difference in cost of goods sold,.........................
gross profit, and income before tax................. € 672
Income tax rate.................................................. × .40
Income tax savings by using LIFO
versus FIFO.................................................. € 269
102
Answer 7
Requirement 1:
Pizza Hat
Year ended 31 December 20xx
WAC FIFO LIFO
Accounting for inventories
Sales revenue $154,876 $154,876 $154,876

Cost of goods sold:
Opening inventory $5,592 $5,592 $5,592
Purchases 77,450* 77,450* 77,450*
Cost of goods available 83,042 83,042 83,042
Closing inventory (8,228) (8,750) (7,707)
Cost of goods sold 74,814 74,292 75,335
Gross profit $80,062 $80,584 $79,541
*Total purchases = $77,450 ($2,115 + $8,085 + $63,000 + $4,250).
Computations of ending inventory:
WAC: $83,042 / 11,100 units = $7.48 per unit;
1,100 units @ $7.48 = $8,228
FIFO: (500 @ $8.50) + (600 @ $7.50) = $8,750
LIFO: (800 @ $6.99) + (300 @ $7.05) = $7,707
Requirement 2:
When inventory unit prices are not falling, then using the
LIFO method minimises income tax, as the cost of goods sold
is highest (gross profit is lowest).
Answer 8
Requirement 1:
Dexons Ltd
Statement of Profit or Loss (amounts in billions)
Years ended 20x8, 20x7, and 20x6
20x8 20x7 20x6
Net sales revenue................ € 37 € 34 € 31
Cost of goods sold:
Opening inventory......... € 5 €2 €2
Purchases........................ 25 24 22
Cost of goods available.... 30 26 24
Closing inventory........... (4) (5) (2)
Cost of goods sold.......... 26 21 22
Gross profit......................... 11 13 9
Operating expenses............. 10 9 8
Net profit........................... € 1 €4 €1
Requirement 2:
Net income and owner’s equity effects of inventory-counting

errors:
Prior to correction
of the error: 20x8 20x7 20x6
Net profit for the Over by €1 Under by €2 Over by
year was billion billion €1 billion
Ending owner Correct Under by €1 Over by
equity was* billion €1 billion
*The profits are accumulated and carried forward each year.
Requirement 3:
The corrections did not change total (accumulated) net profit

over the three-year period. However, the corrections drasti-
cally altered the trend of net profit — from a smooth pattern
(of €2 billion in profit every year) to a sharp increase in 20x7
(by €3 billion) followed by a sharp drop in 20x8 (by €3 billion).
Answer 9
Answer 10
Answer 11
Answer 12
Answer 13
Answer 14
Requirements 1 and 2:
Statements of profit or loss without year-end purchase of

1,000 units at €160.00:
UK Airways Ltd
Statements of Profit or Loss
FIFO LIFO
Sales revenue € 1,500,000 € 1,500,000
Cost of goods sold
Opening
inventory € 0 € 0
Purchases
(6,000 units) 745,000 745,000
Cost of goods
available 745,000 745,000
Closing inventory
(1,000 units) (80,000)* (50,000)*
Cost of goods
sold 665,000 695,000
Gross profit 835,000 805,000
Operating
expenses 185,000 185,000
Profit before tax
expense 650,000 620,000
Tax expense
(€650,000 × .31) 201,500
(€620,000 × .31) 192,200
Net profit for the
year € 448,500 € 427,800
*Computations: Closing inventory: FIFO 500 units at €160.00 = €80,000; LIFO
500 units at €100.00 = €50,000.
Statements of profit or loss with year-end purchase of 1,000 units at

€160:
UK Airways Ltd
Statements of Profit or Loss
FIFO LIFO
Sales revenue €1,500,000 €1,500,000
Cost of goods sold:
Opening inventory € 0 € 0
Purchases(7,000 units) 905,000* 905,000*
Cost of goods available 905,000 905,000
Closing inventory (240,000)* (160,625)*
(1,500 units)
Cost of goods sold 665,000 749,375
Gross profit 835,000 750,625
Operating expenses 185,000 185,000
Profit before tax 650,000 565,625
expense
Tax expense
(€650,000 × .31) 201,500
(€565,625 × .31) 175,344
Net profit for the year € 448,500 € 390,281
*Computations: Purchases: €745,000 + (1,000 units at €160.00) = €905,000. Closing inventory:
FIFO (1,000 units at €160.00) + (500 units at €160.00) = €240,000. LIFO (1,000 units at
€100) + (500 units at €121.25) = €160,625.
As expected, the proposed year-end purchase of inventory of 1,000

units at €160.00 has no effect on net income under the FIFO inventory
valuation method, because the cost of the units purchased at year end
appear in the closing inventory and not into the cost of goods sold.
On the other hand, under LIFO, the year-end purchase of

inventory directly affects the net profits of the year, because
the cost of units purchased at year end appears directly in the
cost of goods sold.
If the company uses LIFO and purchases the goods at the year
end, the net profit will decrease from €427,800 to €390,281.
Requirement 3:
Under LIFO, a year-end purchase can be made in order to

manage the net profits of the year, as under FIFO the net
profits are not affected.
Answer 15
Requirements 1 and 2:
Periodic system
Cost of goods sold:
Opening inventory (65 × £140)............. £9,100
Purchases: 80 × £141 = £11,280
18 × £142 = 2,556 13,836
Cost of goods available............................ 22,936
Closing inventory (FIFO)
41 × £141 = £5,781
18 × £142 = 2,556 (8,337)
Cost of goods sold.................................. £14,599
Therefore, the gross profit is:

Sales 16 + 34 = 50 units × £270 = £13,500
9 + 35 + 10 = 54 units × £272 = 14,688 £28,188
Cost of goods sold.................................. 14,599
Gross profit............................................ £13,589
Answer 16
Answer 17
Requirement 1
Statement of Profit or Loss for weeks 1 and 2

Week 1 Week 2
Workings: £ £ £ £
Sales week 1 18 × £4.50 = 81
week 2 24 × £4.50 = 108
Opening
inventory -- 25
Purchases week 1 28 × £2.50 = 70
week 2 34 × £2.50 = 85
70 110
Less: closing
inventory week 1 (28 − 18) × £2.50 = 25
week 2 (44 − 24) × £2.50 = 50
Cost of
goods sold 45 60
Gross profit 36 48
4
Non-current assets and
depreciation
• Depreciation of non-current assets

• The difference between capital and revenue expenditure
• Disposal of non-current assets
Depreciation of non-current (fixed)

assets
For some current assets (e.g. inventory), their costs are matched to
the single period in which the associated revenues are recognised.
But what about assets that are not used up quickly (i.e. within a year)?
The cost of purchasing a non-current (fixed) asset (e.g. machinery,

buildings, etc) usually consists of a single, large payment. But
non-current assets produce revenues in numerous future periods,
not just the one in which they are acquired. Hence, their (acquisi-
tion) costs must be spread across all those periods.
In other words, non-current assets are used up, worn out, or
become obsolete (i.e. expire over time), and a process of allocating
their costs of purchasing over time is applied.
The allocation is called depreciation for tangible non-current

assets (except natural resources).
The allocation is called depletion for natural resources.
The allocation is called amortisation for intangibles non-current assets.
110 NON-CURRENT ASSETS AND DEPRECIATION
No allocation (depreciation) is provided for LAND.

Therefore, depreciation (depletion, or amortisation) is the pro-
cess of spreading the original cost of a non-current asset over the
accounting periods in which its benefit will be felt. Alternatively,
depreciation is simply a system for cost allocation, or a systematic
allocation of historical costs over the useful life of an asset. Or,
differently, depreciation is the amount of a particular asset which
has been used up over time as a result of being employed by the
business.
Depreciation appears as an expense in the Statement of Profit
or Loss (SPL), and the annual charges are also accumulated in
an a llowance (provision) account and taken in the Statement of
Financial Position (SFP) (previously known as the Balance Sheet).
The credit balance on this (allowance or provision for deprecia-
tion) account reflects the amount of the asset’s original cost which
has so far been written off.
In the SFP, the accumulated (or, aggregated) depreciation on a
non-current asset is deducted from its historical cost. The figure
remaining is called the net book value (NBV) of the asset or
the written-down value (WDV) of the asset and represents the
amount of its original cost which has not yet been written off (or,
it represents that portion of the cost of the asset which has not been
treated as an expense yet).
When the purchase or sale of a non-current asset takes place in
the middle of an accounting period, then the business accounting
policy is normally applied with regard to the amount of deprecia-
tion expense to be charged in the accounts, which is usually:
• full year’s depreciation in the year of purchase, and none in the

year of sale,
• depreciation of the asset from the month of purchase to the
month of sale, or
• any other possible combination of the above.
The annual depreciation charge on a non-current asset is based on

three factors:
• The depreciable value (or amount) of the asset.This is the amount

of the acquisition cost to be allocated as depreciation over the
NON-CURRENT ASSETS AND DEPRECIATION 111
entire life of the asset. It is the difference between the total ac-
quisition cost and the predicted residual value.
• The estimated useful life of the asset. This is the number of years
before an asset wears out or becomes obsolete, whichever comes
first (also known as the economic life of the asset). This is nor-
mally measured in terms of years or in terms of units of service
provided by the asset.
• The residual value of the asset. This is the amount predicted to
be received from sale or disposal of a non-current asset at the
end of its useful life (also known as disposal value, scrap value,
salvage value, or terminal value).
The most common methods of depreciation are:
• The straight line method. This method spreads the depreciable

value evenly over the total useful life of an asset.
The annual depreciation expense appearing on the SPL is as
follows:
Acquisition cost − Residual value
Depreciation expense =
Years of useful life
Under this method, an equal amount of depreciation is charged

for each year the asset is held, i.e. the depreciable value is spread
evenly over the total useful life of an asset.
• The reducing balance method.This method applies a fixed percent-
age rate of depreciation to the NBV of an asset each year. To
calculate the fixed percentage charge to be applied, we use the
following formula:
 S
p = 1− n × 100
 C 
where:
P = the fixed depreciation percentage (%)
n = the useful life of the asset (in years)
S = the residual value of the asset
C = the cost of the asset
The annual amount of depreciation is calculated by applying
the above fixed percentage rate to the cost of the asset minus the
accumulated depreciation of all previous years (i.e. the NBV at

the start of each year).
Because the NBV is continually falling, the depreciation charge
becomes less each year under the reducing balance method.
The bookkeeping for non-current assets is as follows:
Journal entries:
Dr Non-current asset account

Cr Bank (cash or creditors)
Dr Depreciation expense
Cr Allowance (or provision) for depreciation
The difference between capital and

revenue expenditure
Asset-related expenditures (e.g. purchases of non-current assets,
goods, or services, whether for cash or on credit) can be capitalised
(added to a non-current asset account) and taken to the SFP or ex-
pensed and taken to the SPL.
The general rule is as follows:
Expenditure with benefits extending beyond the current year
should be capitalised and transferred to the SFP – all other expendi-
ture (i.e. those that provide a benefit lasting one year or less) should
be expensed and taken to the SPL.
In other words, capital expenditure is expenditure on non-current
assets and is included in the SFP of the business.
One the other hand, revenue expenditure is charged in the SPL
and relates to the running costs of the business.
In this way, the accrual/matching accounting concept is applied,
whereas expenditures (costs) are initially capitalised and then allo-
cated in the form of depreciation (depletion or amortisation) over
the periods the asset is used. This matches expenses with the rev-
enues produced. In other words, it is an attempt to match the cost
of the assets against the stream of revenues which the non-current
assets help to generate.
Disposal of non-current (fixed) assets

Non-current assets are not purchased by a business with the inten-
tion of reselling them in the normal course of trade. However, the
business will naturally dispose of them when their useful life is over
and may do so before then.
When an asset is disposed of, profits or losses on disposal are
inevitable. But how are they measured? By taking the difference
between the cash received (proceeds of sale) and the NBV of the
asset given up.
• If sales proceeds are greater than the NBV, a profit on disposal

is made.
• If sales proceeds are less than the NBV, a loss on disposal is
made.
The profit or loss on disposal is taken in the SPL.

The bookkeeping for the disposal of a non-current asset is as
follows:
Journal entries:
A disposal-of-non-current-asset account is opened:
Dr Cash (or bank or receivables)
Cr Disposal of non-current assets
Dr Disposal of non-current assets

Cr Cost of non-current assets
Dr Allowance (or provision) for depreciation

Cr Disposal of non-current assets
Finally, close down the disposal of non-current assets account

by debiting (or crediting) the account. The balance on disposal ac-
count now represents the profit or loss on disposal. If the disposal
of non-current assets account is on credit balance, then a profit on
disposal is made; if the disposal of non-current assets account is on
debit balance, then a loss on disposal is made.
Short questions:
Question
Indicate whether the following payments are “capital expenditure”
or “revenue expenditure”.
1. Purchase of delivery van

2. Payment of rent
3. Payment of telephone bill
4. Tax and insurance for van
5. Repairs to machinery
6. Decoration of office
7. Purchase of machinery
Answer:
Capital expenditure: 1 and 7
Revenue expenditure: 2, 3, 4, 5, and 6
-----------------------------
Question
Classify the following items as “capital expenditure” or “revenue
expenditure”.
a. Wages paid to machine operators.

b. Installation costs of new production machine.
c. Rent paid for the factory.
d. Payment for computer time to operate a new store control system.
Answer:
Capital expenditure: b*
Revenue expenditure: a, c, and d
*(b) Installation costs (and legal fees) are usually regarded as part of
the cost of the asset.
-----------------------------
Question
An asset costs ¥15,000, has a residual value of ¥1,000, and an es-
timated useful life of five years. Using the straight line method of
depreciation, what is the asset’s NBV after one year?
Answer:
Depreciable amount: ¥15,000 − ¥1,000 = ¥14,000
Annual depreciation charge: ¥14,000 / 5 = ¥2,800
NBV after one year: 15,000 − 2,800 = ¥12,200
-----------------------------
Question
An asset costs £15,000, has a residual value of £1,000, and an es-
timated useful life of five years. Using the straight line method of
depreciation, what is the asset’s NBV after three years?
Answer:
Depreciable amount: £15,000 − £1,000 = £14,000
Annual depreciation charge: £14,000 / 5 = £2,800
NBV after three years: 15,000 − (2,800 × 3) = £6,600
-----------------------------
Question
An asset costs €15,000, has a residual value of €1,000, and an esti-
mated useful life of five years. Using the reducing balance method
and a 40% rate per annum, what is the asset’s NBV after one year?
Answer:
Depreciation charge in the first year: €15,000 × 40% = €6,000
NBV after one year: 15,000 − 6,000 = €9,000
-----------------------------
Question
An asset costs $15,000, has a residual value of $1,000, and an esti-
and a 40% rate per annum, what is the asset’s NBV after three
years?
Answer:
Depreciation charge in the first year: $15,000 × 40% = $6,000
NBV after one year: $15,000 − $6,000 = $9,000
Depreciation charge in the second year: $9,000 × 40% = $3,600

NBV after two years: $9,000 − $3,600 = $5,400
Depreciation charge in the third year: $5,400 × 40% = $2,160
NBV after three years: $5,400 − $2,160 = $3,240
-----------------------------
Question
An asset costs $15,000, has a residual value of $1,000, and an esti-
and a 40% rate per annum, what is the profit or loss made in the
second year if the asset is disposed of for $5,000?
Answer:
NBV after two years (see above): $5,400
So, loss on disposal of $400 is made.
-----------------------------
Question
A small business has the following balances, appearing in the books
as of 1 April 20x7:
Motor vehicles (at cost) £43,800

Allowance for depreciation £15,300
On 30 September 20x7, one of the old vehicles, which was pur-
chased for £12,000 (at cost) on 1 August 20x5, was accepted in part
exchange for a new vehicle costing £14,000.The remaining balance
of the cost on the new vehicle was settled through the cash account
for £8,500.
The business’s depreciation policy is 20% per annum using the
straight line method, with a full year’s depreciation in the year of
purchase and none in the year of sale.
What is the SFP figure for the cost of motor vehicles and accu-
mulated depreciation on motor vehicles on 31 March 20x8?
Answer:
Motor vehicles (at cost)
£ £
Balance b/d 43,800 12,000 Disposal account
Bank 8,500
Trade-in 5,500 45,800 Balance c/d
57,800 57,800

So, the SFP figure for the cost of motor vehicles is £45,800 on 31
March 20x8.
Motor vehicles
Allowance for depreciation
£ £
Disposal account 15,300 Balance b/d
(2 × 20% × £12,000) 4,800 9,160 Charge for the year
Balance c/d 19,660 - (£45,800 × 20%)
24,460 24,460

So, the SFP figure for the accumulated depreciation on motor v ehicles
is £19,660 on 31 March 20x8.
-----------------------------
Question
The balance in the buildings account is €400,000, whilst the SFP
shows the book value of the buildings at €217,600. The notes to the
financial statements indicate that straight line depreciation is used
for all plant assets and that residual values are estimated at 5% of cost.
The estimated life of the buildings is 25 years.What is the age of the
asset in question, providing all assets were acquired at the beginning
of the year?
Answer:
€400,000 × 0.95 = €380,000 depreciable amount
€380,000 / 25 = €15,200 annual depreciation
€400,000 − €217,600 = €182,400 balance in accumulated depreciation
€182,400 / €15,200 = 12 years old
-----------------------------
Question
The following balances appeared in the SFP of Addax Limited on
31 March 20x1.
£
Plant and equipment – cost 840,000
Accumulated depreciation 370,000
In the year ended 31 March 20x2, the following transactions took

place:
1. Plant which cost £100,000 with a WDV of £40,000 was sold

for £45,000 on 10 December.
2. New plant was purchased for £180,000 on 1 October 20x1.
It is the policy of the company to charge depreciation at 10% per

year on a straight line basis, with a proportionate charge in the year
of acquisition and no charge in the year of sale. None of the plant
was over ten years old on 31 March 20x1.
Prepare ledger accounts recording these transactions. A cash
account is not required.
Answer:
Plant and equipment – cost
20x1 £ 20x1 £
1-Apr Balance b/d 840,000 10-Dec Disposal 100,000
20x2 20x2
1-Oct Cash or bank 180,000 31-Mar Balance c/d 920,000

Plant and equipment – depreciation

20x1 £ 20x1 £
10-Dec Disposal 60,000 1-Apr Balance b/d 370,000
20x2 20x2
31-Mar Balance c/d 393,000 31-Mar SPL 83,000
(74,000+9,000)

Plant and equipment – disposal
20x1 £ 20x1 £
10-Dec Plant and 10-Dec Depreciation 60,000
equipment -
cost 100,000
Proceeds (cash
or bank) 45,000
20x2
31-Mar SPL 5,000
Questions
Answers to questions are at the end of this chapter.
Question 1
Kayne West’s accounting year end is on 31 December. On 1
January 20x7, he purchased a vehicle for £1,000 with an ex-
pected useful life of three years and an estimated residual value
of £343.
Required:
1. Calculate the amount of depreciation in each year of the

asset’s useful life using (i) the straight line method and
(ii) the reducing balance method.
2. Show the double-entries relating to the depreciation ex-

pense and the allowance (or provision) for depreciation in
each year (using the amounts calculated from the straight
line method).
3. Show the double-entries relating to the depreciation ex-
pense and the allowance (or provision) for depreciation in
each year (using the amounts calculated from the reducing
balance method).
4. Show the relevant SFP extract for 20x8 (using the amounts
calculated from the straight line method).
5. Show the relevant SFP extract for 20x8 (using the amounts
calculated from the reducing balance method).
Use the blank T-accounts provided below.

Requirement 2: (straight line method)
Allowance for depreciation on motor vehicles
Depreciation expense account

Requirement 3: (reducing balance method)
Question 2
Fairy Ltd commenced business on 1 January 20x6 with two
vehicles – X and Y – costing £9,000 and £12,500 respectively.
On 21 April 20x7, vehicle X was written off in an accident
and Fairy Ltd received £500 from the insurance company
later in the year. On 1 May 20x7 the business purchased an-
other vehicle (vehicle H) which cost £15,000.
The business’s policy is to charge a full year’s depreciation
in the year of acquisition and no depreciation in the year of
disposal.
Required:
Show the relevant SPL and SFP extracts for the three years up
to 31 December 20x6, 31 December 20x7, and 31 December
20x8 assuming that:
1. The vehicles are depreciated at 20% on the straight line

method; and
2. The vehicles are depreciated at 20% on the reducing bal-
ance method.
Question 3
Northeast Drycleaning Service Ltd has the following accounts
on 31 May 20x8.
£
Machinery and plant 500,000
Allowance for depreciation on motor vehicles 400,000
On 31 December 20x7, half the machinery and plant was

sold for £190,000 cash. The disposed machinery and plant
was originally purchased on 1 January 20x2. New machinery
was purchased for cash on 20 April 20x8 for £900,000. The
machinery and plant are depreciated at 10% on the straight
line method. The business’s policy is to charge a full year’s de-
preciation in the year of acquisition and in the year of disposal,
i.e. no allowance is made for parts of the year.
Required:
1. Show the double-entries in Northeast Drycleaning Ser-

vice Ltd relating to machinery and plant, depreciation ex-
pense, allowance for depreciation, and disposal accounts.
2. Show the relevant SFP extract on 31 May 20x8.
Machinery and plant
Machinery disposals

Depreciation expense
Question 4
Mr Flo Rida owns a small factory and uses the reducing bal-
ance method of depreciation for plant with a 60% write off
each year, and maintains a plant account to record all entries
concerning the plant.
An extract from the SFP as of 31 July 20x8 is as follows:
Non-current asset Cost Depreciation NBV

£ £ £
Plant 456,000 181,110 274,890
The plant T-account is as follows:
Plant A/c
20x7 £ 20x7 £
01 Aug. Cost 01 Aug. Allowance
balance for depre
b/d 391,000 ciation b/d 137,500
20x8 20x8
30 Apr. Allowance 30 Apr. Cost of
for depre plant sold 45,000
ciation on
plant
sold 28,200
09 May Assets 31 July Depreciation
purchased for the year 71,810
(at cost) 110,000
31 July Balance 31 July Balance
c/d 181,110 c/d 456,000
710,310 710,310
Plant purchased on 19 February 20x5 for £80,000 was sold

for £1,250 on 10 November 20x8. New plant was purchased
for cash on 16 June 20x9 for £110,000.
The business’s policy is to charge a full year’s depreciation

in the year of acquisition but none in the year of sale.
Required:
1. Show the double entries relating to plant, depreciation ex-

pense, allowance for depreciation, and disposal accounts for
the year up to 31 July 20x9.
Plant account

Plant disposals account
Allowance for depreciation of plant

Question 5
Britney Speers’s accounting year end is on 31 December. On
31 December 20x8, her business had the following balances:
£
Allowance for depreciation on motor vehicles 24,500
Motor vehicles are depreciated using the straight line method

at a rate of 20% per annum and using the proportionate
method of calculating the depreciation charge.
The following transactions occurred during 20x9:
• On 31 March, the business traded in car A in part ex-

change for another car. The part exchange allowance on
car A was £3,750, and the balance of £5,250 was paid
by cheque for the new car (car Z). Car A was originally
bought on 1 April 20x7 for £10,000 (at cost).
• On 1 May, the business purchased a van for £7,500.
• On 30 September, the business sold vehicle B for £5,100.
It was originally bought on 30 June 20x7 for £8,000
(at cost).
Required:
Show the double-entries relating to the motor vehicles, de-

preciation expense, allowance for depreciation, and disposal
accounts for 20x9. Use the blank T-accounts provided below.
Vehicles – cost
Vehicles – Allowance for depreciation
Vehicles – Depreciation expense
Vehicles – Disposal
Question 6
The accounting year end of Phillipps Ltd is on 31 May. On
31 May 20x8, the business had the following balances on the
motor vehicles account:
£
Motor vehicles at cost 30,300
Less: depreciation 7,100
NBV 23,200
Motor vehicles are depreciated using the straight line method

at a rate of 20% per annum and using the proportionate
method of calculating the depreciation charge in the year of
acquisition, but no charge is made in the year of disposal. The
profits or losses on the disposal account are written up on the
last day of each accounting year.
The following transactions occurred during 20x8–x9:
• On 31 August, the business purchased a delivery truck for

£10,300.
• On 30 September, the business purchased an estate car for
a salesman for £11,100. Also, the business sold a saloon
car for £750 which was originally bought on 1 June 20x4
for £3,150 (at cost).
• On 30 November, the business sold a minibus for £1,290
which was originally bought on 30 November 20x5 for
£9,800 (at cost).
• On 31 January, the business purchased a van for £9,900.
The van was second-hand and originally cost £14,900.
• On 28 February, the business sold a pickup truck for
£1,680 which was originally bought on 1 March 20x6
for £4,900 (at cost).
Required:
Show the double-entries relating to the motor vehicles, depreci-

ation expense, allowance for depreciation, and disposal accounts.
Answers
Answer 1
Requirement 1:
i. The straight line method:

Annual depreciation: (£1,000 − £343) / 3 = £219 per annum
ii. The reducing balance method:
 343 
Fixed percentage rate:  1 − 3 × 100
 1,000 
= (1 − 0.70) × 100 = 30%
Annual depreciation:
For 20x7: 30% of £1,000 = £300
For 20x8: 30% of (£1,000 − £300) = £210
For 20x9: 30% of [£1,000 − (£300 + £210)] = £147
Requirement 2: (straight line method)

20x7 20x7
31 Dec. Balance c/d 219 31 Dec. Depreciation
expense
account 219
20x8 20x8
31 Dec. Balance c/d 438 1 Jan. Balance b/d 219
31 Dec. Depreciation
expense
account 219
438 438
20x9 20x9
expense
account 219
657 657
20x0
1 Jan. Balance b/d 657

20x7 20x7
31 Dec. Depreciation 219 31 Dec. SPL 219
on plant
20x8 20x8
on plant
20x9 20x9
on plant
Requirement 3: (reducing balance method)

20x7 20x7
31 Dec. Balance c/d 300 31 Dec. Depreciation
expense
account 300
20x8 20x8
expense
account 210
510 510
20x9 20x9
expense
account 147
657 657
20x0

20x7 20x7
31 Dec. Depreciation 31 Dec. Profit or
on plant 300 loss stat 300
20x8 20x8
20x9 20x9
Requirement 4:
Statement of Financial Position as of 31 December

20x8 (using the straight line method)
Non-current assets £
Less: accumulate depreciation 438
NBV 562
Requirement 5:

20x8 (using the reducing balance method)
Less: accumulate depreciation 510
NBV 490
Answer 2
Requirement 1:
Depreciation expense a/c:

20x6
Vehicle X: 20% × £9,000 = £1,800
Vehicle Y: 20% × £12,500 = £2,500 £4,300
20x7
Vehicle Y: 20% × £12,500 = £2,500
Vehicle H: 20% × £15,000 = £3,000 £5,500
20x8
Vehicle Y: 20% × £12,500 = £2,500
Vehicle H: 20% × £15,000 = £3,000 £5,500
Loss on disposal of X:
20x7 (£9,000 − £1,800) − £500 = £6,700
Accumulated depreciation:
20x6 £4,300
20x7 £4,300 − 1,800 + £5,500 = £8,000
20x8 £8,000 + £5,500 = £13,500
Fairy Ltd
Statement of Profit or Loss as of 31 December
20x6 20x7 20x8
£ £ £
Depreciation expense 4,300 5,500 5,500
Loss on disposal of
vehicle X – 6,700 –
Fairy Ltd
20x6 20x7 20x8
£ £ £
Non-current assets
Motor vehicles at cost 21,500 27,500 27,500
Less: accumulated
depreciation 4,300 8,000 13,500
NBV 17,200 19,500 14,000
Requirement 2:
Depreciation expense a/c:

20x6
Vehicle X: 20% × £9,000 = £1,800
Vehicle Y: 20% × £12,500 = £2,500 £4,300
20x7
Vehicle Y: 20% × (£12,500 − £2500) = £2,000
Vehicle H: 20% × £15,000 = £3,000 £5,000
20x8
Vehicle Y: 20% × (£12,500 − £2,500 −
£2,000) = £1,600
Vehicle H:20% × (£15,000 − £3,000) = £2,400 £4,000
Loss on disposal of X:
20x7 (£9,000 − £1,800) − £500 = £6,700
20x6 £4,300
20x7 £4,300 − 1,800 + £5,000 = £7,500
20x8 £7,500 + £4,000 = £11,500
Fairy Ltd
Statement of Profit or Loss as of 31 December
20x6 20x7 20x8
£ £ £
Depreciation expense 4,300 5,000 4,000
Loss on disposal of
vehicle X – 6,700 –
Fairy Ltd
20x6 20x7 20x8
£ £ £
Non-current assets
Motor vehicles at cost 21,500 27,500 27,500
Less: accumulated
depreciation 4,300 7,500 11,500
NBV 17,200 20,500 16,000
Answer 3
Requirement 1:
Machinery and plant

20x7 £ 20x7 £
1 June Balance 500,000 31 Dec. Disposals 250,000
b/d
20x8 20x8
20 Apr. Cash 900,000 31 May Balance c/d 1,150,000
1,400,000 1,400,000

June 1 Balance 1,150,000
b/d
Machinery disposals
20x7 £ 20x7 £
31 Dec. Machinery 31 Dec. Cash
and plant 250,000 190,000
31 Dec. Profit on 31 Dec. Allowance
sale 115,000 for
depreciation 175,000
365,000 365,000

20x7 £ 20x7 £
31 Dec. Disposals 175,000 1 June Balance b/d 400,000
20x8 20x8
31 May Balance 31 May Depreciation
b/d 340,000 expense 115,000
515,000 515,000

1 June Balance b/d 340,000
20x8 £ 20x8 £
31 May Allowance 31 May SPL 115,000
for
depreciation 115,000
Requirement 2:
Statement of Financial Position as of 31 May 20x8

Machinery and plant (cost) 1,150,000
Less: accumulated depreciation 340,000
NBV 810,000
Answer 4
Requirement 1:
Plant account
20x8 £ 20x8 £
01 Aug. Balance b/d 456,000 10 Nov. Disposals a/c 80,000
20x9 20x9
16 June Bank 110,000 31 July Balance c/d 486,000

566,000 566,000

01 Aug. Balance b/d 486,000
Plant disposals account

20x8 £ 20x8 £
10 Nov. Plant 80,000 10 Nov. Bank 1,250
10 Nov. Allowance for
depreciation 77,952
10 Nov. Loss on sale 798
80,000 80,000
Allowance for depreciation of plant

20x8 £ 20x8 £
04 Dec. Disposals 77,952 01 Aug. Balance b/d 181,110
20x9 20x9
30 Sept. Balance c/d 332,863 31 July Depreciation
expense* 229,705
410,815 410,815

01 Aug. Balance b/d 332,863
20x9 £ 20x9 £
31 July Allowance 31 July SPL 229,705
for
depreciation* 229,705
* Depreciation expense for the year:
(274,890 − 2,048) × 60% = 163,705
110,000 × 60% = 66,000
£229,705
Answer 5
Requirement 1:
Vehicle A – Depreciation on disposal:

For year ended 31 December 20x7:
20% × 10,000 × 9/12 = 1,500
20% × 10,000 × 12/12 = 2,000
20% × 10,000 × 3/12 = 500 £4,000
Loss on sale of vehicle A: (£10,000 − £4,000) − £3,750
= £2,250
Vehicle B - Depreciation on disposal:

20% × 8,000 × 6/12 = 800
20% × 8,000 × 12/12 = 1,600
20% × 8,000 × 9/12 = 1,200 £3,600
Profit on sale of vehicle B: (£8,000 − £3,600) − £5,100
= £700
Depreciation expense a/c for 20x9:
Depreciation on
disposals:
31 March 20% × 10,000 × 3/12 = 500
20x9 − Vehicle A:
30 September 20% × 8,000 × 9/12 = 1,200
20x9 − Vehicle B:
Depreciation on
acquisitions:
31 March 20% × (3,750 + 5,250) × 9/12 = 1,350
20x9 − Car Z:
1 May 20x9 − Van: 20% × 7,500 × 8/12 = 1,000
Depreciation on
remainder:
20% × (50,000 – 10,000 – 8,000) = 6,400 £10,450
Vehicles – cost
20x9 £ 20x9 £
01 Jan. Balance b/d 50,000
31 Mar. Bank 5,250 31Mar.
Disposal of
car A 10,000
31 Mar. Part exchange 30 Sept. Disposal of
3,750 car B 8,000
01 May Bank 7,500 31 Dec. Balance c/d 48,500
66,500 25,800
20x0

20x9 £ 20x9 £
31 Mar. Disposal of 01 Jan. Balance b/d
car A 4,000 24,500
30 Sept. Disposal of 31 Dec. Depreciation
car B 3,600 expense 10,450
31 Dec. Balance c/d 27,350
34,950 34,950
20x0

20x9 £ 20x9 £
31 Dec. Allowance for 31 Dec. SPL 10,450
depreciation 10,450
20x9 £ 20x9 £
31 Mar. Vehicle A - 31 Mar. Proceeds –
cost 10,000 part exchange 3,750
30 Sept. Vehicle B - 31 Mar. Allowance for
cost 8,000 depreciation 4,000
30 Sept. Proceeds -
bank 5,100
30 Sept. Allowance for
depreciation 3,600
30 Sept. Profit on 30 Sept. Loss on
disposal disposal
(car B) 700 (car A) 2,250
18,700 18,700
Answer 6
Requirement 1:
Accumulate depreciation on disposals: £

Saloon car 20% × £3,150 × 4 years = 2,520
Minibus 20% × £9,800 × 2 years 6 months = 4,900
Pickup truck 20% × £4,900 × 2 years 3 months = 2,205
9,625
Profit on sale of saloon car: (3,150 − 2,520) − 750 = £120

Loss on sale of minibus: (9,800 − 4,900) − 1,290 = £3,610
Loss on sale of pickup truck: (4,900 − 2,205) − 1,680 = £1,015
Depreciation expense a/c for 20x9:

Depreciation on acquisitions:
31 August Delivery 20% × £10,300 × 9/12 =
20x8 truck 1,545
30 September Estate Car 20% × £11,100 × 8/12 =
20x8 1,480
31 January Van 20% × £9,900 × 4/12 =
20x9 660
Depreciation on remainder:
20% × (£30,300 − £3,150 − £9,800 − £4,900) 2,490
6,175
Vehicles – cost
20x8 £ 20x8 £
01 June Balance b/d 30,300 30 Sept. Disposal
of saloon
car 3,150
31 Aug. Bank 10,300 30 Nov. Disposal
of mini-bus 9,800
30 Sept. Bank 11,100
20x9 20x9
31 Jan. Bank 9,900 28 Feb. Disposal
of pick-up
truck 4,900
31 May Balance c/d 43,750
61,600 61,600

20x8 £ 20x8 £
30 Sept. Disposal of 01 June Balance b/d 7,100
saloon car 2,520
30 Nov. Disposal of
4,900
mini-bus
20x9 20x9
28 Feb. Disposal of 31 May Depreciation
pick-up truck 2,205 expense 6,175
31 May Balance c/d 3,650
13,275 13,275


20x9 £ 20x9 £
31 May Allowance for 31 May SPL
depreciation 6,175 6,175
Vehicles – Disposal account

20x8 £ 20x8 £
30 Sept. Saloon 3,150 30 Sept. Proceeds -
car - cost bank 750
30 Nov. Mini-bus - 9,800 30 Sept. Allowance
cost for
depreciation 2,520
30 Nov. Proceeds -
bank 1,290
30 Nov. Allowance
for
depreciation 4,900
20x9 £ 20x9 £
28 Feb. Pick-up 28 Feb. Proceeds -
truck - cost 4,900 bank 1,680
28 Feb. Allowance
for
depreciation 2,205
31 May Profit on 31 May Loss on
sale (saloon disposal
car) 120 (mini-bus) 3,610
31 May Loss on
disposal
(pick-up
truck) 1,015
17,970 17,970
5
Final adjustments to
accounts
• Accruals and prepayments

• Combined rules for accruals and prepayments
• Credit sales and discounts
• Bad debts and allowance for doubtful debts
• Suspense accounts
Final adjustments are entered in the books of a business at the end

of the accounting period in order to update or modify account
balances. This is done so that the accounts are up to date when the
financial statements are prepared.The adjustments being made at the
end of the accounting period refer usually to accruals, prepayments,
allowance (or provision) for doubtful debts, and depreciation (see
Chapter 4). We will also talk briefly about credit sales and discounts,
and suspense accounts in this chapter.
Accruals and prepayments

The accruals concept or method recognises that revenues and costs
are accrued (that is, recognised as they are earned or incurred, in-
dependent of the time when money/cash is paid or received). The
accrual concept is aligned with the matching principle, which at-
tempts to match the revenue earned in a particular period with the
expenses incurred in earning that revenue for that period. In other
words, revenues and costs are matched with one another so far as
their relationship can be established and dealt with in the statement
of profit or loss (SPL) of the period to which they relate.
144 Final adjustments to accounts
The matching process would normally be a simple process if we

could rely on the date of payment to indicate the date on which
an expense is incurred. Unfortunately, there is often a difference
between the date when an expense is incurred and the date it is
paid. There are two main reasons for this and two main systems
that deal with it:
• Goods and services may be provided by suppliers on credit

terms. Although the benefits may be enjoyed in period 1, pay-
ment may not be due until period 2. This difficulty is dealt
with by the system of trade receivables (trade debtors) and trade
payables (trade creditors) accounts in the books of a business.
• Many expenses (such as an electricity bill) relate to services pro-
vided over an extended period (say, three months).The expend-
iture must be spread over the period during which the service
was enjoyed, even though payment of course takes place on a
single day. This difficulty is dealt with by the system of accruals
and prepayments.
An accrual or an accrued expense refers to an expense that has

been incurred in the accounting period, but no cash has been paid
for it by the end of the accounting period. This expense needs to be
recorded in the period it is incurred, as does the business’s liability
for payment. In other words, an accrual is an expense which has not
yet been entered into an expense account because no invoice has yet
been received at the year-end, and hence it is an expense that needs
to be charged in the current year’s SPL. It is also a current liability
at the year end (i.e. a creditor in the statement of financial position,
or SFP), and hence it is a current liability in the SFP.
For an accrual or an accrued expense, the double entry in a
business’s books is as follows:
Debit the relevant expense account with the amount owing at
the end of the accounting period.
Credit the accrual (or relevant accrued expense) account.
In the next period, when the accrued amount owed is due and
paid, post the amount to the debit of the accrual account, i.e. clear
your current liability of accrual.
A prepayment or a prepaid expense refers to expenditure
which is made in one accounting period covering a term which
extends beyond the end of that period, i.e. cash is paid in advance
before expenses have been incurred. In other words, a prepay-
ment is an expense which has already been entered in an expense
Final adjustments to accounts 145
account (because an invoice has been received) but which is not

a part of expenditure relating to the current year, and hence the
amount paid must not be charged as expense in the SPL. Instead, it
is a current asset at the year end, similar to a receivable, and hence
it is a current asset in the SFP.
When the invoice is received, the double entry in a business’s
books is as follows:
Debit the relevant expense account.
Credit the bank or cash account.
For a prepayment or a prepaid expense, the double entry in a
business’s books is as follows:
Debit the prepayment (or relevant prepaid expense) account.
Credit the relevant expense account with the amount of prepay-
ment at the end of the accounting period.
In the next period, when the prepaid expense is earned, charge
the relevant expense account in the SPL with the amount of the
prepayment brought forward from the last accounting period (by
crediting the prepayment account).
Combined rules for accruals and

prepayments
Instead of keeping separate accounts for accruals and prepayments,
another approach brings together the expense accounts and the ac-
cruals and prepayments under one account.
The accrual rule of the double entry is as follows:
Debit the amount owing at the end of the year to the relevant
expense account as a balance carried down.
Credit the same amount as a balance brought down.
Thus, note: The amount transferred to the SPL is the difference
between the two sides of the combined expense (and accrual) ac-
count after entering the accrual at the end of the year (i.e. after en-
tering the balance carried down on the debit side of the account).
Similarly, the prepayment rule of the double entry is as follows:
Credit the amount of the prepayment to the expense account as
a balance carried down.
Debit the same amount as a balance brought down.
Thus, note: The amount transferred to the SPL is the difference
between the two sides of the combined expense (and prepayment)
account after entering the prepayment at the end of the year (i.e. after
entering the balance carried down on the credit side of the account).
Credit sales and discounts

There are costs associated with selling on credit: credit sales (re-
ceivables) are usually good for a business to have because they are
claims to someone else’s cash. BUT a receivable can be bad news
if the business cannot collect the receivable. Accountants label this
cost “uncollectible-account expense”, “doubtful-account expense”,
or “bad-debt expense”. This section deals with the credit sales and
the next section with bad and doubtful debts.
When credit sales take place, the double entry in a business’s
books is as follows:
Debit trade receivables (trade debtors);
Credit sales.
When a cheque or cash is received by the customers (trade re-
ceivables), the double entry in a business’s books is as follows:
Debit bank or cash;
Credit trade receivables.
When customers return goods sold to them back to the seller,
the double entry in a business’s books is as follows:
Debit sales returns (sales inwards or return inwards);
A discount given to customers is a reduction in the price of
goods or services. A business may have a list price at which it is
prepared to sell its goods or services to the majority of custom-
ers. However, there may be reasons which justify a lower price to
certain customers or categories of customers. In such a case, the
business is said to allow (or offer) a discount to these customers.
It is useful to distinguish between two classes of discount:
• Cash discount is granted to customers who are prepared to pay

immediately in cash or by cheque instead of purchasing on credit.
• Settlement discount is granted to credit customers who pay within
a specified period from the invoice date, or as an incentive to
make payment before the due date.
Cash discount and settlement discount are similar in nature.The object

of both is to improve the business’s cash flow by encouraging prompt
(or earlier) payment by customers.The cost of the discount to the busi-
ness is in the nature of a financing charge, and this should be shown as
an expense in the SPL.
For cash discount, the double entry in a business’s books is as follows:
Debit bank (or cash) and discount given (allowed);

Credit sales.
For settlement discount, the double entry in a business’s books is
as follows:
Debit discount given (allowed);
There is another class of discount, the trade discount, which is granted
to regular customers, usually those buying in bulk quantities. Trade
discount is genuinely a reduction in the selling price made in order to
attract a higher level of business. For this reason, it is accounted for as
a reduction in the value of sales turnover. There is no double entry for
trade discounts. The trade discount is deducted on the sale invoice in
arriving at the amount that the seller will sell the goods for.
Finally, a business may be offered a discount by its suppliers to
pay on time or before the due date, and this is referred to as discount
received. Discount received is revenue (income) for a business, and
the double entry in a business’s books is as follows:
Debit trade payable (trade creditor);
Credit discount received.
Bad debts and ALLOWANCE for

doubtful debts
For one reason or another, a credit customer (trade receivable) may
fail to pay his/her debt. In such a situation, the business carries an
asset that is not going to be realised.
The prudence concept states that an allowance (or provision)
is made for all known liabilities (expenses or losses), whether the
amount of these is known with certainty or is a best estimate in the
light of the information available.
With this in mind, there are two alternatives to choose from:
• write off the bad debt as irrecoverable, or

• make an allowance against a doubtful debt (specific allowance).
In addition, businesses often make a general allowance for doubtful debts.

Therefore, when a business realises that a trade receivable has de-
faulted, it makes sense to remove the debt from the books – i.e. write
off the bad debt as irrecoverable – and recognise the loss that has
been suffered. The double entry is as follows:
Debit bad debts expense account (an expense account in the SPL);
Credit trade receivables (in other words, we remove the debt from
the business’s books).
If the business receives in subsequent years an amount by the de-
faulted customer (who was already treated as bad debt previously),
then the business has managed to recover a debt previously written
off. The double entry is as follows:
Debit bank or cash account;
Credit bad debt expense account.
Even if a customer has not yet defaulted, a business may have
reasons to suspect that he or she will do so. And even in cases
where there is no specific suspicion, past experience will indicate
to a business that a certain proportion of its debts will never be
collected and the likely level of possible defaulters. To cater to this
situation, an allowance (or a provision) is made, and businesses
may open an account called “allowance for doubtful debts”.
Allowing (providing) for a debt that is doubtful is different from
writing off a debt that is definitely bad. A debt that is merely doubt-
ful should not be written out of the trade receivables account; in
other words, do not make the entry “credit trade receivables”. The
correct double entry when making or increasing an allowance for
doubtful debts is as follows:
Debit bad debts expense account;
Credit allowance for doubtful debts account.
Conversely, when the allowance for doubtful debts is decreas-
ing, the double entry is as follows:
Debit allowance for doubtful debts account;
Credit bad debts expense account (i.e. opposite of the increas-
ing allowance).
The amount entered in the above two double entries is the differ-
ence in the allowance for doubtful debts between the beginning of
the year and the end of the year. The allowance for doubtful debts
at the end of the year represents the level of provision required by
the business, and the adjustment to the existing level of the allow-
ance is done by using one of the above two double entries.
Consequently, the difference in the allowance for doubtful debts
account between the beginning of the year and the end of the year ap-
pears in the SPL as an expense (via the bad debts expense account). The
eventual balance on the allowance for doubtful debts account is shown
as a deduction from trade receivables in the current assets of the SFP.
Finally, when a business decides to write off a defaulted trade
receivable as bad debt against which allowance has already been
made (maybe in a previous year), the correct double entry is as

follows:
Debit allowance for doubtful debts account;
Credit trade receivables account.
The use of both bad debts expense account and the allowance
for doubtful debts account ensures that the trade receivables asset
in the SFP is not overvalued.
Suspense accounts
A suspense account is a temporary “holding” account into which we
place amounts in order to make the trial balance totals agree. Eventu-
ally, the business must establish the nature of the suspense balance and
make the entries necessary to clear it. Errors concerning relatively
large (“material”) amounts should be found before the SPL and the
SFP are drawn up. If a discrepancy for a smaller amount cannot be
explained, then we do not allow this to delay the preparation of the
final accounts. Instead, a suspense account is drawn up.
There are two fairly common reasons why a suspense account
could be opened:
• A bookkeeper is unsure where to post an item and enters it

into a suspense account pending instructions. An example of
this is when money is received by a business for a reason which
is not immediately clear to the accountant. In such a case,
s/he would debit the amount to cash/bank and would make the
credit entry in a temporary suspense account. (Less commonly,
the bookkeeper might be unclear about the nature of a cash
payment made by the business.)
• There is a difference in a trial balance, so that the total debits
do not equal the total credits. As a result, a suspense account is
opened with the amount of the difference, so that the trial bal-
ance agrees (pending the discovery and correction of the errors
causing the difference).This is the only time an entry is made in
the records without a corresponding entry elsewhere.
Short questions:
Question
Springsteen has paid rent of £1,200 for the period 1 January 20x9 to
31 December 20x9. His first accounts are prepared for the ten months
ended 31 October 20x9. What should his first accounts show?
Answer:
His first accounts should show a rent expense of £1,000 in the SPL,
and a prepayment of £200 as a current asset in the SFP.
-----------------------------
Question
On 1 January 20x9, the accounts of a trader show accrued rent paya-
ble of £800. During the year, she pays rent bills totalling £9,000, in-
cluding one bill for £450 in respect of the quarter ended 31 January
20x0. What is the profit and loss charge for rent for the year ended
31 December 20x9?
Answer:
There is a prepayment of £150 (1/3 × £450) on 31 December
20x9, so the SPL charge for the rent expense is £8,050.
The T-account would look like this:
Rent expense
20x9 20x9
31-Dec Bank 9,000 01-Jan Balance b/d 800
SPL 8,050
Balance c/d 150
9,000 9,000

-----------------------------
Question
A company has made the following payments in respect of electric-
ity and internet expenses:
Date paid Amount

£
Electricity:
Quarter ended 31 January 20x7 2 January 20x7 450
Quarter ended 30 April 20x7 28 January 20x7 450
Quarter ended 31 July 20x7 31 April 20x7 630
Quarter ended 31 October 20x7 30 July 20x7 630

Quarter ended 31 January 20x8 1 November 20x7 630
Date paid Amount

£
Internet:
Quarter ended 30 November 20x6 1 February 20x7 525
Quarter ended 28 February 20x7 1 April 20x7 495
Quarter ended 31 May 20x7 17 July 20x7 600
Quarter ended 31 August 20x7 12 October 20x7 570
Quarter ended 30 November 20x7 1 February 20x8 720
Quarter ended 28 February 2008 2 April 20x8 660
The company has a calendar year end.
1. What balance should have been brought down in the electricity

expense account on 1 January 20x7?
2. What balance should have been brought down in the internet
expense account on 1 January 20x7?
3. What balance should be carried down in the electricity expense
account on 31 December 20x7?
4. What balance should be carried down in the internet expense
account on 31 December 20x7?
5. What is the charge for electricity in the SPL for the year ended
31 December 20x7?
6. What is the charge for internet in the SPL for the year ended 31
December 20x7?
Answer
1. The company should have accrued an amount in respect of the
months of November and December 20x6, i.e. 2/3 × £450 =
£300 balance brought down (on the credit side).
2. The company should have accrued an amount in respect of the
month of December 20x6, i.e. 1/3 × £495 = £165, but the com-
pany also owed the quarter ended 30 November 20x6 at the end
of the accounting period (since it was paid on 1 F
ebruary 20x7),
and as a result, the accrued amount brought down was (£165 +
£525) £690 balance brought down (on the credit side).
3. The bill for the quarter ended 31 January 20x8 was paid on 1
November 20x7, but only two-thirds of this bill (i.e. November
and December 20x7) were related to 20x7. Hence, the balance is
a prepayment on 31 December 20x7, that is 1/3 × £630 = £210
balance carried down (on the credit side).
4. The company should have accrued one-third of the bill for the
quarter ended 28 February 20x8, that is, the amount for the
month December 20x7 was not paid by the end of the year;
hence, the amount is 1/3 × £660 = £220. However, the com-
pany also owed the quarter ended 30 November 20x7 at the end
of the accounting period (since it was paid on 1 February 20x8),
and as a result, the accrued amount carried down was (£220 +
720) £940 balance carried down (on the debit side).
5. It should be £150 + 450 + 630 + 630 + 420 = £2,280. The
T-account should look like this:
Electricity expense
20x7 20x7
31-Dec Bank 2,790 01-Jan. Balance b/d 300
SPL 2,280
Balance c/d 210
2,790 2,790

6. It should be £330 + 600 + 570 + 720 + 220 = £2,440. The

T-account should look like this:
Internet expense
20x7 20x7
31-Dec Bank 2,190 01-Jan. Balance b/d 690
SPL 2,440
Balance c/d 940
3,130 3,130

-----------------------------
Question
A rent accrual of €450 was treated as a prepayment in preparing
the SPL of a business. What is the effect on the profit for the
year?
Answer
We know that as a rule of thumb, the accruals at the end of the
year are added to the relevant expense accounts, whilst the pre-
payments at the end of the year are deducted from the relevant
expense accounts. With this in mind, and by classing a liability as
an asset, the business has improved the profit figure. In effect, the
business has treated the amount as a €450 increase in profit, in-
stead of a €450 deduction from profit.The net effect is to overstate
profit by €900.
-----------------------------
Question
An electricity accrual of £400 was ignored completely when pre-
paring a trader’s SPL. What is the result of the above?
Answer
Profit was overstated by £400 in the SPL, and current liabilities
understated by £400 in the SFP.
We know that as a rule of thumb, the accruals at the end of
the year are added to the relevant expense accounts. With this
in mind, and by ignoring a liability at the end of the year, the
business has improved the profit figure and reduced the amount
of liabilities.
-----------------------------
Question
Costa’s business had trade receivables of £100 on 1 February 20x7
and £90 on 31 January 20x8. Credit sales amounted to £790 and
cash received from receivables was £770; a bad debt of £10 was
written off. How much discount was allowed to customers during
the year?
Answer
The discount allowed was £20. The T-account should look like
this:
Trade receivables
01 Feb. Balance b/d 100 Bank 770
Sales 790 Bad debt 10
Discount allowed 20
31 Jan. Balance c/d 90
890 890
-----------------------------
Question
On 1 January 20x8, Scottish Castle Ltd had a balance on receivables
account and an allowance for doubtful debts as follows:
Dr balance $1,840,000
Cr balance $9,200
On 31 December 20x8, the balance on the receivables account was

$1,600,000. The company’s management then decided to write off
balances of $30,000 as bad debts and to make an allowance of 0.5%
against the remaining total receivables.
What would be the totals which appear in the SPL and SFP
following the above adjustments?
Answer
There will be total charges of $28,650 in the SPL, and the trade
receivables figure would be $1,562,150 in the SFP.
The calculations are as follows: The remaining receivables af-
ter bad debts at the end of the year is $1,570,000 ($1,600,000 −
30,000). Hence, the allowance for doubtful debts at the end of the
year will be $7,850 ($1,570,000 × 0.5%). There is a decrease in the
allowance for doubtful debts of $1,350, which is a credit entry in
the bad debts expense account. So, overall, the bad debts expense
account has already got a debit entry of $30,000, and the net effect
is a charge of $28,650 in the SPL.
Similarly, the allowance for doubtful debts at the end of the

year is deductible from the remaining receivables, which comes to
$1,562,150 in the SFP ($1,600,000 − 30,000 − 7,850).
-----------------------------
Question
A business starts its year with ¥800 in the allowance for doubtful debts
account. At the end of the year, receivables total ¥12,000, of which
¥600 are considered doubtful.What is the effect on the SPL and SFP?
Answer
¥200 is added to profit and the SFP shows trade receivables less
allowance as ¥11,400.
-----------------------------
Question
A business had a suspense account balance of £580 (debit) before
the following errors were detected and corrected:
a. £140 worth of credit sales had been entered on the sales ac-
count but not on the receivables account.
b. A payment of £165 to a payable had been entered in their ac-
count, but the cash book had not received any entry for this
transaction.
What should the double-entries be for correcting these errors?
Answer
Debit trade receivable £140, credit suspense £140; credit bank
£165, debit suspense £165.
The trade receivables account needs an entry to reflect the in-
crease in debt. This can only be achieved by debiting that account.
The bank account should have had a payment recorded from it.
This can only be achieved by crediting that account. In each case,
the suspense account receives the other half of the double entry.
-----------------------------
Question
Referring back to the information in the above question, what
would the revised balance on the suspense account be?
Answer
£605 (debit).
£580 (debit) is the opening balance. The account will receive a
credit of £140, reducing the balance to £440 debit, but then a
further debit of £165 will increase the balance to £605 debit.
-----------------------------
Questions
Question 1
A business has an accounting year ending on 31 December.
On 31 December 20x7, the records contained the following
accounts:
£
Allowance for doubtful debts 1,000
The trade receivables as of 31 December 20x8 were £18,900.

The business decided at the end of the year to write off bal-
ances of £300 as bad debts. The trade receivables figure in-
cludes amounts of £250 owed by business C, £150 owed by
business M, and £200 owed by business A, all of which are
regarded as doubtful debts.
Required:
What is going to be the allowance for doubtful debts as of

31 December 20x8, given a general allowance of 5% of trade
receivables was applied? Show the T-account entries in respect
of the above and the relevant SPL and SFP extracts.

Bad debts expense
Allowance for doubtful debts
Question 2
This is a continuation of the above question.
During the year ended 31 December 20x9, business C was
declared bankrupt, and a first payment of £150 was received
by the administrator (this payment was not the final pay-
ment). Business M was also declared bankrupt, and a first
and final payment of £30 was received by the administrator.
Business A paid its debt in full during the year. A further
debt of £350 owed by business R that is included in the re-
ceivables on 31 December 20x9 proved to be bad.
The trade receivables as of 31 December 20x9 were
£22,070. This figure is the final figure of trade receivables
before taking into account bad debts.
Required:
What is going to be the allowance for doubtful debts as of

31 December 20x9, given a general allowance of 5% of trade
receivables was applied? Show the T-account entries in respect
of the above and the relevant SPL and SFP extracts.

Business C
Business M
Business R
Bad debts expense

Question 3
A business’s allowance for doubtful debts was $900 on 31
December 20x5. During the year ended 31 December 20x6,
the business received $200 from a trade receivable towards
the settlement of a debt of $565, which had been written off
as bad debt by the business in 20x1. This payment of $200
seems to be the final payment of that trade receivable to the
business.
Trade receivables on 31 December 20x6 amounted to
$20,400, and bad debts decided to be written off at the end
of the year are as follows: business A $950, and business X
$450.
The allowance for doubtful debts continues to be 5% of
receivables at the year end.
Required:
Show the T-account entries in respect of the above and the

relevant SPL and SFP extracts.
Question 4
At the end of the calendar year 20x7, the allowance for doubt-
ful debts account is 2.5% of the trade receivables of £40,000
on that date. During the year 20x8, bad debts of £2,500 were
written off. At the end of calendar year 20x8, the allowance
for doubtful debts is required to be 2.5% against receivables
of £48,000.
In the year 20x9, bad debts of £100 are to be written
off. At the end of calendar year 20x9, an allowance of 0.8%
against receivables of £87,500 is required.
Required:
Record the above transactions using T-accounts.

Question 5
The trade receivables account as of 31 December 20x4 was
£39,800. The allowance for doubtful debts on the same date
was 3.5% of the balance outstanding from receivables.
During 20x5, the company’s sales totalled £350,000, of
which 91% in value was on credit and £318,150 was received
from credit customers in settlement of their debts totalling
£320,000. In addition, £450 was received from a trade re-
ceivable in a settlement of a debt which had been written off
as bad during 20x4.
On 31 December 20x5, the following outstanding debts
were written off as bad: business F £280 and business H
£920.
The allowance for doubtful debts continues to be 3.5% of
receivables at the year end.
Required:
1. Show the double entry for the trade receivables, bad debts,
and allowance for doubtful debts accounts for the year
ended 31 December 20x6.
2. Show the relevant SFP extract.
Question 6
Your local newsagent has an accounting year ending on 31
December. The following amounts have been paid for gas
heating:
Date paid Quarter ended £
20 March 20x4 29 February 20x4 105
28 June 20x4 31 May 20x4 74
30 September 20x4 31 August 20x4 79
5 January 20x5 30 November 20x4 89
25 March 20x5 28 February 20x5 114
Required:
You are required to show the double-entries in the light and

heat account for the year ended 31 December 20x4 and the
relevant SFP extract.
Use the blank T-account provided below.
Light and heat
Question 7
Your local fish and chip shop has an accounting year ending
on 31 December. The following amounts have been paid as
electricity:
Date paid Quarter ended €

2 December 20x6 28 February 20x7 900
1 March 20x7 31 May 20x7 930
4 June 20x7 31 August 20x7 960
5 September 20x7 30 November 20x7 990
4 December 20x7 28 February 20x8 1,020
Required:
You are required to show the double-entries in the electricity

account for the year ended 31 December 20x7 and the rele-
vant SFP extract.
Use the blank T-account provided below.
Light and heat
Question 8
Your local internet café has an accounting year ending on 31
December. The following amounts have been paid in respect
of telephone and internet:
Expense Date paid Quarter ended £

Telephone 2 November 20x7 31 January 20x8 750
Telephone 1 February 20x8 30 April 20x8 780
Telephone 1 May 20x8 31 July 20x8 795
Telephone 1 August 20x8 31 October 20x8 795
Telephone 3 November 20x8 31 January 20x9 825
Internet 3 March 20x8 28 February 20x8 840
Internet 2 June 20x8 31 May 20x8 825
Internet 1 September 20x8 31 August 20x8 855
Internet 1 December 20x8 30 November 20x8 870
Internet 2 March 20x9 28 February 20x9 885
Required:
You are required to show the double-entries in the telephone

account and internet account (create two separate accounts)
for the year ended 31 December 20x8.
Question 9
A supermarket’s financial year runs from 1 January to 31
December, and the business maintains a combined rent and
rates account. Rent is payable quarterly in advance. Rent was
£4,200 for the 12-month period ended 31 July 20x8 and
£4,440 for the 12-month period ended 31 July 20x9.
The following amounts have been paid in respect of rent:
Date paid Quarter ended £

2 August 20x7 31 October 20x7 1,050
1 November 20x7 31 January 20x8 1,050
1 February 20x8 30 April 20x8 1,050
1 May 20x8 31 July 20x8 1,050
3 August 20x8 31 October 20x8 1,110
2 November 20x8 31 January 20x9 1,110
Rates are assessed annually for the year from 1 November to

the following 31 October and are payable in one lump sum by
30 April. The rates assessment was £2,400 for the year ended
31 October 20x8 (which was paid on 30 April 20x8) and
£2,700 for the year ended 31 October 20x9 (which was paid
on 30 April 20x9).
Required:
You are required to show the double-entries in the rent and

rates account for the year ended 31 December 20x8.
Question 10
You are given the balances of the following accounts as of 1
July 20x7:
€
Vehicles (at cost) 14,850
Allowance for depreciation of vehicles 7,510
Rent and rates – accrued 3,100
– prepaid 2,890
During the financial year of the business, the following trans-

actions took place:
Traded in vehicle: – original cost 5,320
– accumulated depreciation 3,690
– part exchange allowance 1,750
Paid balance of price of new vehicle by cheque 9,200
Paid rent by cheque 6,140
Paid rates by cheque 4,120
Closing balances as of 30 June 20x8 were:
Vehicles (at cost) To be derived
Allowance for depreciation of vehicles 4,430
Rent and rates – accrued 2,990
– prepaid 2,440
Required:
You are required to show the double-entries for all the ac-
counts above for the year ended 30 June 20x8.
Note: This question requires having studied Chapter 4 of
this book first.
Answers
Answer 1
Requirement 1:
Calculation of allowance for doubtful debts as of 31 D

ecember
20x8:
£
Specific allowance – Business C 250
Business M 150
Business A 200
TOTAL specific allowance 600
General allowance – (£18,900 − £300 − £600) × 5% 900
Specific plus general allowance 1,500
Bad debts expense

20x8 £ 20x8 £
31 Dec. Bad debts 300
Allowance 500 31 Dec. SPL 800
800 800

20x8 £ 20x8 £
31 Dec. Balance c/d 1,500 01 Jan. Balance b/d 1,000
31 Dec. Bad debts
expense 500
1,500 1,500
20x9
Statement of Profit or Loss (extract) £

Bad debts 300
Allowance for doubtful debts 500
Statement of Financial Position (extract) £

Current assets
Trade receivables (18,900 − 300) 18,600
Less: allowance for doubtful debts 1,500
17,100
Answer 2
Requirement 1:
Calculation of allowance for doubtful debts on 31 December

20x9:
£
Specific allowance – business C (£250 − £150) 100
General allowance – (£22,070 − £120 − £350
− £100) × 5% 1,075
Specific plus general allowance 1,175
Business C
20x9 £ 20x9 £
01 Jan. Balance b/d 250 31 Dec. Bank 150
31 Dec. Balance c/d 100
250 250
20x0
Business M
20x9 £ 20x9 £
01 Jan. Balance b/d 150 31 Dec. Bank 30
31 Dec. Allowance 120
150 150
Business R
20x9 £ 20x9 £
01 Jan. Balance b/d 350 31 Dec. Bad debts 350
Bad debts expense

20x9 £ 20x9 £
31 Dec. Business R 350 31 Dec. SPL 145
350 350

20x9 £ 20x9 £
31 Dec. Business M 120 01 Jan. Balance b/d 1,500
31 Dec. Bad debts
expense 205
1,500 1,500
20x0

Bad debts 145
Allowance for doubtful debts (205)
Statement of financial position (extract) £

Current assets
Trade receivables (£22,070 − £120 − £350) 21,600
20,425
Answer 3
Requirement 1:

20x6:
5% × ($20,400 − $1,400) = $950
Bad debts expense
20x6 $ 20x6 $
31 Dec. Business A 950
31 Dec. Business X 450 31 Dec. Bank 200
31 Dec. Allowance 50 31 Dec. SPL 1,250
1,450 1,450
Allowance for bad debts

20x6 $ 20x6 $
Bad debts
31 Dec. Balance c/d 950 31 Dec. expense 50
950 950
20x7

Bad debts 1,250

Current assets
Trade receivables ($20,400 − $1,400) 19,000
Less: allowance for doubtful debts 950
18,050
Answer 4
Requirement 1:
Bad debts expense

20x8 £ 20x8 £
During Trade
receivables 2,500
31 Dec. Allowance 200 31 Dec. SPL 2,700
2,700 2,700

20x8 £ 20x8 £
31 Dec. Balance c/d 1,200 31 Dec. Bad debts 200
1,200 1,200
20x9
Bad debts expense

20x9 £ 20x9 £
During Trade
receivables 100 31 Dec. Allowance 500
31 Dec. SPL 400
500 500

20x9 £ 20x9 £
31 Dec. Bad debts 500 01 Jan. Balance b/d 1,200
31 Dec. Balance c/d 700
1,200 1,200
20x0
Answer 5
Requirement 1:
Determining the balance of trade receivables at the end year

end:
Trade receivables
20x5 £ 20x5 £
Balance b/d 39,800 Bank 318,150
Sales Discount allowed
(91% × 350,000) 318,500 (320,000−318,150) 1,850
Bad debts 1,200
Balance c/d 37,100
358,300 358,300

20x4:
3.5% × £39,800 = £1,393
20x5:
3.5% × £37,100 = £1,299
Bad debts expense

20x5 £ 20x5 £
Trade
31 Dec. receivables 1,200 31 Dec. Bank 450
31 Dec. SPL 656
1,200 1,200

20x5 £ 20x5 £
Bad debts 94 01 Jan. Balance b/d 1,393
1,393 1,393
20x6
Requirement 2:

Current assets
35,801
Answer 6
Requirement 1:
Accrual on 1 January 20x4:

1/3 × £105 = £35
Accrual on 31 December 20x4:
£89 + (1/3 × £114) = £127
Light and heat
20x4 £ 20x4 £
20 Mar. Bank 105 01 Jan. Accrual b/d 35
28 June Bank 74 31 Dec. SPL 350
30 Sept. Bank 79
31 Dec. Accrual c/d 127
385 385
20x5
01 Jan. Accrual b/d 127

20x4 (extract)
£
Current liabilities
Accrued expenses 127
Answer 7
Requirement 1:
Prepaid on 1 January 20x7:

2/3 × €900 = €600
Prepaid on 31 December 20x7:
2/3 × €1,020 = €680
Light and heat

20x7 € 20x7 €
01 Jan. Prepayment b/d 600 31 Dec. SPL 3,820
01 Mar. Bank 930
04 June Bank 960 31 Dec. Prepayment
c/d 680
05 Sept. Bank 990
04 Dec. Bank 1,020
4,500 4,500
20x8
01 Jan. Prepayment b/d 680

as of 31 December 20x7 (extract)
€
Current assets
Prepaid expenses 680
Answer 8
Requirement 1:
Telephone prepaid on 1 January 20x8:

1/3 × £750 = £250 [one month was paid last year]
Telephone prepaid on 31 December 20x8:
1/3 × £825 = £275 [one month prepayment for next year]
————————————————————————
Internet accrued on 1 January 20x8:
1/3 × £840 = £280 [one month owed from last year]
Internet accrued on 31 December 20x8:
1/3 × £885 = £295 [one month is owed at the end of year]
Telephone
20x8 £ 20x8 £
01 Jan. Prepayment
b/d 250
01 Feb. Bank 780 31 Dec. SPL 3,170
01 May Bank 795
01 Aug. Bank 795 31 Dec. Prepayment c/d 275
03 Nov. Bank 825
3,445 3,445
20x9
01 Jan. Prepayment
b/d 275
Internet
20x8 £ 20x8 £
03 Mar. Bank 840 01 Jan. Accrual b/d 280
02 June Bank 825 31 Dec. SPL 3,405
01 Sept. Bank 855
01 Dec. Bank 870
3,685 3,685
20x9
01 Jan. Accrual b/d 295
Answer 9
Requirement 1:
Rent prepaid on 1 January 20x8: 1/3 × £1,050 = £350

Rent prepaid on 31 December
20x8: 1/3 × £1,110 = £370
Rates accrued as of 1 January 20x8: 2/12 × £2,400 = £400
Rates accrued as of 31 December 2/12 × £2,700 = £450
20x8:
Rent and rates

20x8 £ 20x8 £
01 Jan. Prepayment 350 01 Jan. Accrual b/d 400
b/d
01 Feb. Bank 1,050 31 Dec. SPL 6,750
30 April Bank 2,400
Prepayment
01 May Bank 1,050 31 Dec. c/d 370
03 Aug. Bank 1,110
02 Nov. Bank 1,110
7,520 7,520
20x9 20x9
01 Jan Prepayment
b/d 370 01 Jan Accrual b/d 450
Answer 10
Requirement 1:
Profit on sale of vehicle: (€5,320 − €3,690) − €1,750 = €120
Rent and rates

20x7 € 20x7 €
01 July Prepayment 01 July Accrual
b/d 2,890 b/d 3,100
20x8 20x8
30 June Bank 6,140 30 June SPL 10,600
30 June Bank 4,120
30 June Accrual c/d 2,990 30 June Prepayment
c/d 2,440
16,140 16,140
20x8 20x8
01 July Prepayment 2,440 01 July Accrual b/d 2,990
b/d
Vehicles – cost
20x7 € 20x7 €
01 July Balance b/d 14,850
20x8 20x8
30 June Bank 9,200 30 June Disposal 5,320
30 June Part 30 June Balance c/d 20,480
exchange 1,750
25,800 25,800


20x7 € 20x7 €
01 July Disposal 3,690 01 July Balance b/d 7,510
20x8 20x8
30 June Balance 4,430 30 June Depreciation
c/d expense 610
8,120 8,120

20x8 € 20x8 €
30 June Allowance for 30 June SPL 610
610
depreciation
20x8 € 20x8 €
30 June Vehicles 30 June Allowance for
- cost 5,320 depreciation 3,690
30 June Profit on Proceeds (part
disposal 120 exchange) 1,750
5,440 5,440

6
Incomplete records
• Forms of incomplete records

• Ways of dealing with incomplete records
• Sales and trade receivables, purchases and trade payables
• Gross margin and markup
• Incomplete information with regard to cash
Forms of incomplete records

Many businesses (especially small) do not keep sometimes a full set
of accounting records. Even where full records are maintained, there
is a danger that they may be accidentally lost or destroyed.
The general term “incomplete records” refers to the situation
where the transactions of a business have not been recorded in
double entry form.
There are three forms of incomplete records:
1 . Incomplete records of income and expenditure

There are no basic documents or records of revenue income and
expenditure, or the records are inadequate.
This situation arises:
– when accounting books and documents have been acci-
dentally destroyed (e.g. in a fire or flood), and/or
– all necessary and relevant information is available but book-
keeping is incomplete (e.g. the owner has failed to keep
proper accounting records).
178 INCOMPLETE RECORDS
2 . Complete “single entry”

All business transactions have been entered in a book of prime
entry, usually a cash book, and not in the general ledger. In other
words, all necessary and relevant information is available but
bookkeeping is incomplete.
3. Incomplete “single entry”
This is a variation on point 2 above; there are no books of account
(or these are incomplete); but the receipts and payments can be as-
certained from the bank statements and/or supporting documents.
Ways of dealing with incomplete

records
The question posed here is how we cope with the problems of in-
complete records, as discussed briefly above, and ultimately prepare
final accounts. Well, let’s take each form of incomplete record sepa-
rately and try to provide some answers.
1 . Dealing with incomplete records of income and expenditure

When this form of incomplete records arises, then it is obvious
that a Statement of Profit or Loss (SPL) cannot be prepared.
However, providing necessary and relevant information is avail-
able relating to assets and liabilities at the start and end of the
accounting period, then the profit (or loss) for the year can be
calculated by comparing the two Statements of Financial Posi-
tion (SFP) (at the start and end of the accounting period).
In other words, we use the “changes in the owners’ equity” for-
mula that we have seen in Chapter 1 to derive the profit (or loss)
for the period.
OE = OC + P(or, – L) + NC – D
where
OE = owner’s equity or closing capital
OC = opening capital (equity)
P = profit
L = loss
NC = new capital introduced by the owners during the year
D = drawings
INCOMPLETE RECORDS 179
The next step is to rearrange the above equation to provide a

formula for calculating the profit (P) or loss (L) made by a busi-
ness during an accounting period.
2. Dealing with complete “single entry”
When this form of incomplete records arises, then the book-
keeping is completed simply by posting the transactions to the
nominal ledger, i.e. the double entry is completed. The financial
statements then can be prepared.
3. Dealing with incomplete “single entry”
This is possibly the most difficult-to-deal-with form of incom-
plete records and involves the following steps:
- Produce a cash book summary from the information given
on the bank statements.
- Calculate missing information for income or expenses as
balancing figures on assets and liability accounts.
For example: Credit sales as balancing figure on trade
receivables a/c;
credit purchases as balancing figure on
trade payables a/c;
(see also the relevant section below).
- Make estimates (if necessary).
For example: Sales from cost of goods sold (COGS) using
the gross profit percentage or the markup
cost percentage (see also the relevant section
“Gross profit and markup” below).
After having done any or all of the above, then the financial state-
ments can be prepared.
Sales and trade receivables, purchases

and trade payables
Sales and tr ade receivables
The basic trade receivables account links:
• Sales, cash receipts, and trade receivables.

If the credit sales information for the period is missing, then we

“force out” those sales as a balancing figure from the trade receiv-
ables account, using the following basic T-account formula:
Opening receivables + sales − cash receipts = closing receivables
Note 1: The above is the basic trade receivables T-account, and
other items may need to be included (for example, bad debts or
discounts given).
Note 2: Any cash sales can be ascertained from the bank statements
and/or supporting documents.
Purchases and tr ade payables
The basic trade payables account links:
• Purchases, cash payments, and trade payables.
If the credit purchases information for the period is missing, then

we “force out” those purchases as a balancing figure from the trade
payables account, using the following basic T-account formula:
Opening payables + purchases – cash payments = closing payables

Note 1: The above is the basic trade payables T-account, and other
items may need to be included (for example, discounts received).
Note 2: Any cash purchases can be ascertained from the bank state-
ments and/or supporting documents.
The above calculations to arrive at the figures for sales and purchases
can take place providing there is a record of closing trade receivables
and trade payables. Opening trade receivables and trade payables are
known from last year’s SFP, and cash movements are determined
mainly from the bank statements.
Gross margin and markup

Some problems with incomplete records concern the relationship
between sales, COGS, and gross profit (GP). To help us better un-
derstand this relationship, let’s bear in mind the following example:
Example
%
Sales 125
(-) COGS 100
GP 25
GP may be expressed either as a percentage of COGS or as a per-

centage of sales; so, in the example above:
• GP is 25% of the COGS (i.e. 25/100). The terminology is a

25% markup (cost).
• GP can also be expressed as 20% of sales (i.e. 25/125). The ter-
minology is a 20% gross profit margin or 20% gross profit percentage.
Once again, we may need to use the above concepts to calculate

an unknown figure. For example, the figure of sales or COGS
may need to be derived.
The markup formula can be analysed as follows:
è Markup cost % = GP / COGS
And by working out the above equation, we get the following:
è Sales / COGS = 1 + markup cost %
So, then solve for the unknown:
• If sales, then
Sales = COGS × (1 + markup cost %)
• If COGS, then
COGS = Sales / (1 + markup cost %)

The gross profit margin formula is analysed as follows:
GP margin % = GP / sales
And by working out the above equation, we get the following:
è COGS / sales = 1 − GP margin %
So, solve for the unknown:
• If sales, then
Sales = COGS / (1 − GP margin %)
• If COGS, then
COGS = Sales × (1 − GP margin %)
The above formulas may also help to calculate the unknown

figure for inventory. The procedure is usually to work out the
COGS using the gross margin or markup equations as done ear-
lier and then to use the formula which we have seen in Chapter 3:
opening inventory + purchases − closing inventory = COGS
The value of the missing inventory can then be calculated as a

balancing figure in the above equation.
Incomplete information with regard

to cash
Some problems with incomplete records revolve around missing in-
formation when a business owner sells mainly for cash.
The main problem may arise when a business’s expenses or pri-

vate drawings (by the owner) may be paid in cash without being
recorded in the books of the business.
Hence, there will be a missing credit in the cash account (it will
not balance).1
In essence, the business owner is breaking the rule that all tak-
ings should be banked intact2 and that cash should be drawn out
of the bank to pay expenses and drawings.
The procedure in this case is as follows:
Keep separate accounts for bank and cash.

Enter in the credit of the cash account all amounts known to
have been paid from till receipts, such as expenses, drawings,
and lodgements into bank.
Then enter in the debit of the cash account all receipts from
cash customers or other sources.
Finally, figure out if a debit or credit entry is required in order
for the cash account to balance and force out the missing
debit or credit as a balancing figure in that account:
• If the balancing figure is a large debit, then this will repre-
sent the value of cash sales (if that is the unknown figure),
• If the balancing figure is a credit entry, then this will repre-
sent the amount of cash drawings or of cash stolen.
Short questions:
Question
The following information is available in respect of a sole trader:
€
Drawings 9,500
Net profit for the year 8,000
Capital at the end of the year 25,000
1 The bank account records cheques drawn on the business bank account and
cheques received from customers and other sources. The cash account records
till receipts and any expenses or drawings paid out of till receipts before banking.
2 When cash receipts are lodged in the bank, then debit bank account and credit
cash account.
There was no new capital introduced by the owner during the

year.
What is the business’s opening capital?
Answer
Using the “changes in the owners’ equity” formula, we can derive the
opening capital for the period.
OE = OC + P + NC − D è OC = OE − P − NC + D =
25,000 − 8,000 − 0 + 9,500 = 26,500
So, the business’s opening capital is €26,500.
We can also observe that the net assets of the business (which
equals the owner’s equity) have fallen over the year by £1,500.
-----------------------------
Question
Madona does not keep full accounting records, but the following
information is available in respect of her accounting year ended 31
March 20x9:
£
Trade payables on 1 April 20x8 22,870
Trade payables on 31 March 20x9 19,530
Cash purchases during the year 52,248
Cash paid for goods supplied on credit 81,549
In her SPL for the year ended 31 March 20x9, what will be M
adona’s
figure for purchases?
Answer
We can calculate the missing information with regard to credit pur-
chases as a balancing figure on trade payables account.
In other words, using the trade payables T-account:
Trade payables
£ £
Bank 81,549 22,870 Balance b/d
Balance c/d 19,530 78,209 Purchases
(balancing figure)
101,079 101,079
Or, using the following formula:
Opening payables + purchases − cash payments = closing payables
Rearranging, we get:
credit purchases = closing payables – opening payables + cash

payments
= 19,530 − 22,870 + 81,549 = £78,209
So, Madona’s total purchases amount to cash purchases plus

credit purchases £(52,248 + 78,209) = £130,457.
-----------------------------
Question
The following information is available:
£
Sales 300,000
Opening inventory 25,000
Purchases 250,000
Closing inventory 30,000
Calculate: a) The markup (cost), and

b) The gross profit margin
Answer
a. The COGS is £245,000 and GP is therefore £55,000.
Hence, the markup cost is:
GP / COGS = (£55,000 / £245,000) × 100% = 22.45%.
b. The GP margin is:
GP / Sales = (£55,000 / £300,000) × 100% = 18⅓%
-----------------------------
Question
If sales are £20,000 and the gross profit margin is 20%, what is the
COGS?
Answer
We first solve the GP margin formula for the unknown gross profit,
as follows:
GP = GP margin × sales = 20% × £20,000 = £4,000,
and therefore,
COGS = sales − GP = £(20,000 − 4,000) = £16,000.
-----------------------------
Question
Fergie is a sole trader. The following information is available in re-
spect of her accounting year ended 31 March 20x9:
Opening Closing
Balance Balance
€ €
Inventory 5,000 1,500
Trade receivables 4,000 5,500
Fergie’s bank statements for the year show receipts from

trade receivables of €80,000 and payments to trade payables of
€55,000.
What is Fergie’s gross profit margin?
Answer
We can calculate the missing information with regard to purchases as
a balancing figure on trade payables account.
In other words, using the trade payables T-account:
Trade payables
€ €
Bank 55,000 2,500 Balance b/d
Balance c/d 4,800 57,300 Purchases
(balancing figure)
59,800 59,800
We can calculate the missing information with regard to sales as

a balancing figure on trade receivables account.
In other words, using the trade receivables T-account:
Trade receivables
€ €
Balance b/d 4,000 80,000 Bank
Sales 81,500 5,500 Balance c/d
(balancing figure)
85,500 85,500
Next, calculate the COGS:

COGS = opening inventory + purchases − closing inventory =
€(5,000 + 57,300 − 1,500) = €60,800
So, the GP is going to be:
Sales − COGS = 81,500 − 60,800 = €20,700
and, the gross profit margin is:
= €20,700 / €81,500
= 25.39%
-----------------------------
Question
Dixan’s business achieves a gross profit margin of 40% and her COGS
in 20x2 was ¥480,000. All sales are for cash, and her cash account
balance at the start and end of the accounting year were ¥10,000
and ¥8,000, respectively. Cash banked during the year amounted
to ¥610,000, and cash expenses paid directly from the cash account
were ¥22,000. Dixon cannot remember the amount of her own cash
drawings and asks for your help.
Answer:
Solving the GP margin formula, we get
Sales = COGS / (1 − GP margin %) = ¥480,000 / 0.60 = ¥800,000
Then, we can calculate the missing information with regard to

cash drawings as a balancing figure on the cash account:
Cash account
€ €
Balance b/d 10,000 22,000 Expenses
Sales 800,000 610,000 Bank
170,000 Drawings
(balancing figure)
8,000 Balance c/d
810,000 810,000
-----------------------------
Question
Your local newsagent makes sales of £52,000 and purchases of
£31,000 over the last accounting year. The owner took goods for
his own use costing £455 without paying for them. Closing inven-
tory was valued at its cost of £1,200 and the gross profit margin
achieved is 40% on sales.
What is the cost of the opening inventory?
Answer
We solve the GP margin formula for the unknown gross profit, as
follows:
GP = GP margin × sales = 40% × £52,000 = £20,800.
It follows that COGS (which is sales − GP) = £(52,000 −
20,800) = £31,200.
Hence, using the COGS formula, we derive the missing open-
ing inventory figure as follows:
COGS = opening inventory + purchases − closing inventory
è Opening inventory = COGS − purchases + closing inven-
tory = £(31,200 − (31,000 − 455) + 1,200) = £1,855.
-----------------------------
Question
Harrison Fords has opening inventory of €30,000 and makes pur-
chases during the year of €340,000. He removes goods costing
€1,500 for his own use, and the business achieves a constant markup
of 20% on cost. Sales for the period are €360,000.
What is Harrison’s closing inventory?
Answer
Using the markup cost formula (GP / COGS) and replacing the
COGS with (sales − GP), we get:
COGS = 5/6 × sales = 5/6 × €360,000 = €300,000.
Hence, using the COGS formula, we derive the missing closing
inventory figure as follows:
COGS = opening inventory + purchases − closing inventory
è Closing inventory = opening inventory + purchases −
COGS = €(30,000 + (340,000 − 1,500) − 300,000) = €68,500.
-----------------------------
Questions
Question 1
The trial balance of a business called “Whamm”, a sole trader,
on 1 January 20x7 is as follows:
Debit Credit
£’000 £’000
Inventory 300
Trade payables 150
Repayments - Telephone and internet 34
- Advertising 16
Accruals - Accountant’s fee 12
- Rent and rates 3
Non-current assets 500

Non-current assets – allowance for depreciation 150
Capital 1,000
Bank 15
1,330 1,330
During the financial year, the following transactions took

place:
£’000
Owners’ personal withdrawals 80
Depreciation 50
Receipts from customers 1,200
Bad debts written off 6
Payments to suppliers 900
Payments for: Telephone and internet 90
Advertising 30
Accountant’s fee 25
Rent and rates 13
Public relations service fee 250
On 31 December 20x7, the closing account balances are as

follows:
£000
Inventory 350
Prepayments – Telephone and internet 40
– Rent and rates 5
Trade payables 190
Accruals – Accountant’s fee 20
– Advertising 10
Required:
1. You are required to show the double entries for the fol-
lowing accounts for the year ended 31 December 20x7:
bank, trade payables, trade receivables, telephone and in-
ternet, advertising, accountant’s fee, and rent and rates.
2. Prepare Whamm’s SPL for the year.
3. Prepare Whamm’s SFP as of 31 December 20x7.
Question 2
The owner of Bodyshopp, a retailer, does not keep proper
books of accounts, but he was able to supply his accountant
with the following information on 1 April 20x8:
¥
Freehold premises 85,000
Bank 19,854
Cash 100
Inventory 25,000
The following is a summary of his bank statement for the year

ended 31 March 20x9:
¥
Takings banked 41,200
Interest from private investment received 1,220
Payments to suppliers of goods 44,800
Insurance 360
Rates 450
Advertising 1,240
Light and heat 480
Drawings 3,800
The following is a summary of his cash account for the year

ended 31 March 20x9:
Cash
¥
Receipts from goods sold 57,150
Cash paid into bank 41,200
Drawings 7,000
Wage payments 8,100
Repairs and decorations 100
Carriage outwards 250
Further information was provided on transactions during the

year ended 31 March 20x9:
a. F ixtures and fittings were to be depreciated by 10% per

annum at the beginning of the year.
b. I nsurance had been paid for the period from 1 April 20x8
to 30 September 20x9.
c. A further amount of ¥350 was still owed for wages.
d. Discounts allowed for the year were ¥450.
e. O n 31 March 20x9, the following balances were provided:
¥
Inventory 21,200
Required:
a. Prepare Bodyshopp’s SPL for the year ended 31

March 20x9.
b. Prepare Bodyshopp’s SFP as of 31 March 20x9.
Question 3
The Fotiades brothers own the SouvlakiHat, a casual Greek
restaurant, but they do not keep a full set of accounting records.
However, the following information has been produced from

the restaurant’s records:
1. Summary of the bank account for the year ended 31

August 20x9:
£ £
1 September 20x8 Purchase of
balance b/d 15,820 delivery van B 16,000
Sale of private Motor vehicle
holiday house 40,000 expenses 1,350
Sale of delivery Advertising 2,560
van A 10,000 Rent and rates 10,200
Receipts from trade Wages 25,000
receivables 121,000 Electricity 390
Payments to
suppliers 105,000
Insurances 550
Drawings 22,000
31 August 20x9
balance c/d 3,770
£186,820 £186,820
2. Assets and liabilities, other than balance at bank:
As of: 1 Sept. 20x8 31 Aug. 20x9

£ £
Delivery vans:
A − at cost 22,500 ----
Allowance for depreciation 13,500 ----
B − at cost ---- 16,000
Allowance for depreciation ---- To be
determined
Inventory in trade 2,700 2,900
Insurances prepaid 1,550 1,300

Rent and rates accruals 500 450
3. All receipts are banked and all payments are made from
the business bank account.
4. Discounts received during the year ended 31 August 20x9
from trade payables amounted to £3,100.
5. A trade debt of £540 owing by Meat Suppliers Ltd and
included in the trade receivables on 31 August 20x9 is to
be written off as irrecoverable.
6. It is SouvlakiHat’s policy to provide depreciation at the
rate of 20% per annum on the cost of delivery vans held
at the end of each accounting year; no depreciation is
provided in the year of sale of a delivery van.
Required:
a.
Prepare SouvlakiHat’s SPL for the year ended 31
August 20x9.
b. Prepare SouvlakiHat’s SFP as of 31 August 20x9.
Question 4
Mr Xo owns a retail shop in Birmingham.You prepare annu-
ally the SPL and SFP from records consisting of a bank state-
ment and a file of unpaid suppliers and outstanding receivables.
The following balances were shown on his SFP on 1
August 20x0:
£
Shop fittings (cost £1,250) at net book value 1,000
Inventory in hand 150
Cash at bank 500
Cash float in till 50
Shop trade payables 1,250
The following is a summary of his bank statement for the

year ended 31 July 20x1:
£
Takings banked 9,850
Mr Yhow − shopfitter 310
Payments to suppliers 5,440
Postage and stationery 150
Rent of shop to 31 October 20x1 1,800
Sundry expenses 80
You obtain the following additional information:
1. Takings are banked daily and all suppliers are paid by

cheque, but Mr Xo keeps £200 per week for himself and
pays his assistant £250 per week out of the cash takings.
2. The work done by Mr Yhow was for new shelving and
repairs to existing fittings in the shop. The cost of the new
shelves was £250.
3. The cash float in the till was considered insufficient and
raised to £75.
4. Mr Xo took goods for his own use without payment. The
selling price of those goods is £255.
5. Your charges as the shop’s accountant will be £100 for
preparing the accounts.
6. The outstanding accounts file shows £1,300 due to sup-
pliers, £20 due in respect of sundry expenses, and £120
outstanding receivables.
7. Depreciation on shop fittings is provided at 10% on cost,
a full year’s charge being made in year of purchase.
8. Inventory in hand on 31 July 20x1 was £550.
Required:
a. Prepare Mr Xo’s SPL for the year ended 31 July 20x1.

b. Prepare Mr Xo’s SFP as of 31 July 20x1.
Answers
Answer 1
Requirement 1:
Bank
£’000 £’000
Trade receivables 1,200 Balance b/d 15
Trade payables 900
Telephone and
internet 90
Advertising 30
Rent and rates 13
Public relations
service fee 250
Balance c/d 203 Drawings 80
1,403 1,403
Trade payables
Bank 900 Balance b/d 150
Balance c/d 190 Purchases 940
1,090 1,090
Trade receivables
Balance b/d 480 Bank 1,200
Sales 986 Discount allowed 10
Bad debts 6
Balance c/d 250
1,466 1,466
Telephone and internet

Prepayment b/d 34 SPL 84
Bank 90 Prepayment c/d 40
124 124
Advertising
Prepayment b/d 16 SPL 56
Bank 30
Accrual c/d 10
56 56
Accountant’s fee
Bank 25 Accrual b/d 12
Accrual c/d 20 SPL 33
45 45
Rent and rates

Bank 13 Accrual b/d 3
SPL 5
Prepayment c/d 5
13 13
Requirement 2:
Whamm
For the year ended 31 December 20x7
£’000 £’000
Sales 986
Less: cost of sales
Inventory on 1 Jan. 20x7 300
Add: purchases 940
1,240
Less: inventory on 31 Dec. 20x7 350 890
Gross profit 96
Less: Expenditure
Telephone and internet 84
Advertising 56
Rent and rates 5

Public relations service fee 250
Discount allowed 10
Bad debts 6
Depreciation 50 494
Net loss 398
Requirement 3:
Whamm
as of 31 December 20x7
£’000 £’000 £’000
Non-current assets 500
Less: accumulated depreciation
(150 + 50) 200 300
Current assets
Inventory 350
Prepayments (40 + 5) 45
Trade receivables 250 645
Less: Current liabilities

Bank 203
Trade payables 190
Accrued expenses (20 + 10) 30 423
Net assets 522
Owner’s equity
Capital balance on 1 Jan. 20x7 1,000
Less: net loss 398
602
Less: drawings 80
Balance on 31 Dec. 20x7 522
Answer 2
Requirement 1:
Bodyshopp
Statement of Profit or Loss for the year ended 31
March 20x9
¥ ¥
Sales 58,000
Less: cost of sales
Inventory on 1 April 20x8 25,000
Add: purchases 43,860
75,890
Less: inventory on 31 March 20x9 21,200 47,660
Gross profit 10,340
Less: expenditure
Insurance (360 − 120) 240
Rates 450
Advertising 1,240
Light and heat 480
Wages (8,100 + 350) 8,450
Repairs and decorations 100
Depreciation of fixtures (5,500 × 10%) 550 12,210
Net loss 1,870
Requirement 2:
Bodyshopp
as of 31 March 20x9
¥ ¥
Non-current assets
Premises 85,000
Less: accumulated depreciation 550
89,950
Current assets
Inventory 21,200
Prepaid insurance 120
Bank 11,144
Cash 600 39,164

Trade purchases 6,500
Accrued wages 350 6,850
Net assets 122,264
Owner’s equity
Capital balance on 1 April 20x8 133,714
New capital introduced 1,220
Less: loss for year 1,870
133,064
Less: drawings (3,800 + 7,000) 10,800
Balance on 31 March 20x9 122,264
Workings:
1.
Bodyshopp
Statement of Financial Position as of 1 April 20x8
¥
Fixtures 5,500
Premises 85,000
Bank 19,854
Cash 100
Inventory 25,000
141,154
Less: shop payables 7,440
Capital (equity) on 1 April 20x8 133,714
2.
Bank
¥’000 ¥’000
Balance b/d 19,854 Suppliers 44,800
Takings banked 41,200 Insurance 360
Interest from
private investment 1,220 Rates 450
Advertising 1,240
Light and heat 480
Drawings 3,800
Balance c/d 11,144

62,274 62,274
Cash
Takings 57,150 Drawings 7,000
Wages 8,100
Repairs and
decorations 100
Balance c/d 600

57,250 57,250

Trade Payables
Bank 44,800 Balance b/d 7,440
Balance c/d 6,500 Purchases 43,860

51,300 51,300

Trade Receivables
Sales 58,000 Discounts allowed 450
Balance c/d 6,100

63,700 63,700
Answer 3
Requirement 1:
SouvlakiHat
August 20x9
£ £
Sales 117,960
Less: cost of sales
Inventory on 1 September 20x8 2,700
75,890
Less: inventory on 31 August 20x9 2,900 107,380
Gross profit 10,580
Add: discount received 3,100
Profit on sale of van 1,000
14,680
Less: Expenditure
Rent and rates 10,150
Wages 25,000
Motor vehicle expenses 1,350
Advertising 2,560
Electricity 390
Insurances 800
Bad debts 540
Depreciation on vans 3,200 43,990
Net loss 29,310
Requirement 2:
SouvlakiHat
Statement of Financial Position as of 31 August 20x9
£ £
Non-current assets
Delivery van B at cost 16,000
Less: depreciation for year 3,200
Net book value 12,800
Current assets
Inventory 2,900
Trade receivables (9500 − 540) 8,960
Prepayments 1,300
Bank 3,770 16,930
Less: current liabilities

Accrued expenses 450 10,330

Net assets 19,400
Owner’s equity
Capital balance on 1 September 20x8 30,710
Add: capital introduced 40,000
Less: loss for year 29,310
41,400
Less: drawings 22,000
Balance on 31 August 20x9 19,400
Workings:
1.
SouvlakiHat
as of 1 September 20x8
Assets £ £
Motor vans (£22,500 − £13,500) 9,000
Inventory 2,700

Prepayments 1550
Bank 15,820
41,610
Less: Liabilities
Accrued expenses 500 10,900
Capital (equity) on 1 September 20x8 30,710

2.
Trade payables
£ £
Discount received 3,100 Purchases 107,580
Balance c/d 9,880

117,980 117,980

Trade receivables
Sales 117,960 Bad debts 540
Balance c/d 8,960
(9,500 – 540)
130,500 130,500
3 . Rent and rates £10,200 − £500 + £450 = £10,150
4. Insurances £550 + £1,550 − £1,300 = £800
5. Delivery vans:
Depreciation expense of van B: 20% × £16,000 = £3,200
Profit on sale of van A: £10,000 − (£22,500 − £13,500) =
£1,000
Answer 4
Requirement 1:
Mr Xo
July 20x1
£ £
Sales (33,045 + 255) 33,300
Less: cost of sales
Inventory on 1 August 20x0 150
75,890
Less: inventory on 31 July 20x1 550 5,090
Gross profit 28,210
Less: expenditure
Mr Yhow − Repairs to fittings (310 − 250) 60
Rent 1,440
Sundry expenses (80 + 20) 100
Wages 13,000
Depreciation on fittings 150
Accountancy charges 100 15,000
Net profit 13,210
Requirement 2:
Mr Xo
Statement of Financial Position as of 31 July 20x1
£ £
Non-current assets
Shop fittings at cost (1,250 + 250) 1,500
Less: accumulated depreciation 400
1,100
Current assets
Inventory 550

Prepaid rent 360
Bank 2,570
Cash 75 3,675

Accrued sundry expenses 20
Accrued accountant’s charges 100 1,420
Net assets 3,355
Owner’s equity
Capital balance on 1 August 20x0 800
Add: profit for year 13,210
14,010
Less: drawings (10,400 + 255) 10,655
Balance on 31 July 20x1 3,355
Workings:
1.
Mr Xo
Statement of Financial Position as of 1 August 20x0
£
Shop fittings 1,000
Inventory 150
Bank 500
Cash 50
2,050
Less: shop payables 1,250
Capital (equity) on 1 August 20x0 800
2.
Bank
£ £
Balance b/d 500 Shop fittings 310
Takings banked 9,850 Suppliers 5,440
Rent 1,800
Sundry expenses 80
Balance c/d 2,570
10,350 10,350

Cash
Takings Drawings (£200 x 52) 10,400
(balancing figure) 33,275 Wages (£250 x 52) 13,000
Balance c/d 75

33,325 33,325

Trade payables
Balance c/d 1,300 Purchases 5,490

6,740 6,740

Trade receivables
Sales 33,045 Balance c/d 120

33,395 33,395

3.
Depreciation = 10% × (£1,250 + £250) = £150
Aggregate depreciation = £1,250 − £1,000 + £150 = £400
7
Partnerships
• Partnership accounts
• Changes in the structure of a partnership
• Dissolution of partnerships
• Conversion of a partnership to a limited company
Partnership accounts
The main difference between the accounts of a partnership and
those of a sole trader is the need to keep track of the equity stake
of each of the partners. In other words, the equity side of a partner-
ship’s Statement of Financial Position (SFP) is more complicated,
and for this reason, two more accounts are introduced:
• A CURRENT account for EACH partner

• A PROFIT and LOSS APPROPRIATION account
The CAPITAL account for each partner contains only the original
capital put into the business by each partner, PLUS any further cap-
ital introduced at a later date MINUS any withdrawals of capital
made by any of the partners.
• Current account for each partner
The balance on a partner’s current account is likely to fluctu-

ate during the accounting year. The partner will draw money
(or goods) regularly from the partnership to pay for his/her living
210 PARTNERSHIPS
expenses, and maybe an interest will be charged on the partner’s

drawings. The drawings and the interest on drawings will be debited to
his/her current account.
On the other hand, the partner will be entitled to a share of the part-
nership’s profits, and this will be credited to his/her current account (note:
if a loss is made during the year, then the partner’s share of the residual
loss will be debited). Similarly, any interest given on capital invested,
partners’ salaries, and an interest charged on a loan made by a partner
to the partnership will all be credited to partners’ current accounts.
It is worth remembering that the double entry for the items in
the partners’ current accounts is on the opposite side of the profit
and loss appropriation account, as we will see below.
The T-account of the partners’ current accounts is as follows (as-
suming a partnership of A, B, & C):
Partner A, B, & C current accounts

A B C A B C
Drawings … … … Balance b/d … … …
Interest charged Interest on
on drawings … … … capital … …. …
Share of the
loss … … … Salaries … … …
Interest on loan
Balance c/d … … … to the partnership … … …
Share of the
profit … … …
Total Total
Balance b/d … … …
• Profit and Loss Appropriation Account
In preparing the partnership’s final accounts, the Statement of Profit

or Loss (SPL) contains exactly the same entries as that of a sole trader.
However, and in contrast to the sole trader, whereas a sole
trader’s retained profits earned each year are simply added to the
PARTNERSHIPS 211
capital balance of the sole trader’s business in the SFP, in the case
of a partnership, things are not as simple.
After the SPL has been prepared and the net profit (or loss)
earned by the partnership has been calculated, a Profit and Loss
Appropriation account must be prepared to determine the allocation
of that profit (or loss) between the partners.
If partners have agreed to charge themselves interest on any drawings
made from the partnership, then such interest is debited to the partner’s
current account and credited to the appropriation account, increasing in
this way the profit available for sharing between the partners.
If partners are paid a salary, then it is credited to the partner’s
current account and taken out of the “pool” available for appro-
priation (i.e. the appropriation account is debited). Similarly, if
partners are entitled to interest on their capital account balances and
interest to any loans they have made to the partnership, then each
partner is credited with the interest (on capital and loan) and again
the “pool” is reduced appropriately (i.e. the appropriation account
is debited).
Finally, the remaining amount (i.e., the residual pool of prof-
its or losses) is shared amongst the partners in the agreed profit-
sharing ratio (PSR).
It is worth remembering that the double entry for the items in
the profit and loss appropriation account is on the opposite side of
the partners’ current accounts.
The T-account of the profit and loss appropriation account is as
follows (assuming a partnership of A, B, & C):
Profit and Loss Appropriation account

Partnership A, B, & C
Loan interest Net profit b/d …
A … Interest on drawings
B … A …
C … … B …
Salaries C … …
A …
B …
C … …
212 PARTNERSHIPS
Interest on capital
A …
B …
C … …
Share of residual profit
A …
B …
C … …
xxx xxx
Changes in the structure of a

partnership
The structure of a partnership may change if new partners are ad-
mitted or existing partners retire/leave. This is likely to cause ac-
counting problems if the books of the partnership do not fully
reflect the value of the partnership. Such a situation is very common,
for example, when a retiring partner will want to withdraw his/her
share of the partnership assets but the partnership accounts prepared
under the historical cost convention are not likely to reflect the
current value of his/her share of the business.
The usual solution is to make adjustments so that partners’ cap-
ital accounts reflect the current/market value of the partnership’s
tangible and intangible assets such as goodwill. In other words,
assets and liabilities must be revalued to their current/market value,
and in effect, this means that there will be unrealised holding gains
or losses which will need to be recorded in the books.
When a new partner is admitted or an existing partner retires/
leaves, then by revaluing the assets to their current value, each
partner’s capital account is credited with their share of the unre-
alised gains (or debited with their share of the unrealised losses).
Finally, the value of goodwill needs to be recognised, as the part-
ners have created it and therefore it belongs to them. The goodwill
is recognised only when all other assets have been revalued in their
current values. As such, no goodwill exists in the partnership ac-
counts before, and the creation of goodwill has an effect directly
on the partners’ capital accounts.
PARTNERSHIPS 213
Revaluation of assets
The recognition of unrealised holding gains or losses through the

revaluation process of assets (and liabilities) is done by opening a
Revaluation account.
The double entries are as follows:
1 . _______ _______ _______ _______

Dr Asset a/c or, Dr Revaluation a/c
Cr Revaluation a/c Cr Asset a/c
___________ _______ ________ ________
2 . ________ _________
Dr Revaluation a/c
Cr Partners’ capital a/c With the net gain in the
_________ _________ partners’ old PSR
or,
_________ ___________
Dr Partners’ capital a/c
Cr Revaluation a/c With the net loss in the
_________ _________ partners’ old PSR
The revaluation T-account takes the following format (assum-

ing a partnership of A & B):
Revaluation account
Dr Partnership of A & B Cr
Decrease in assets Increase in assets
& &
Increase in liabilities Decrease in liabilities
Gain on revaluation Loss on revaluation
capital a/c of partner A capital a/c of partner A
capital a/c of partner B capital a/c of partner B
Goodwill
The accounting entries on a change in the partnership will de-

pend on whether goodwill is to remain in the accounts of the new
214 PARTNERSHIPS
partnership.There are two methods of treating goodwill on a change

in a partnership.
i. If goodwill is to be included in the accounts
Open a goodwill account by debiting goodwill and crediting

the old partners’ capital accounts in their old PSR. Goodwill is
then to be recorded as an asset in the SFP of the new partnership
and maintained in the business. The goodwill is then also amor-
tised (i.e. depreciated) over its useful economic life.
__________ __________
Dr Goodwill
__________ __________ partners’ old PSR
ii. If goodwill is not to be included in the accounts
Open a goodwill account (and immediately close it, i.e. no bal-

ance to be carried down). The process is as follows: Goodwill is to
be recorded first and credited to the old partners’ capital accounts
in their old PSR (as in the above method).
Then, the goodwill account is to be balanced off by credit-
ing the goodwill account and debiting all the partners’ capital ac-
counts in their new PSR.
1. _________ _________
Dr Goodwill
_________ _________ partners’ old PSR
(as before)
2 . _________ _________
Dr Partners’ capital a/c With share of goodwill in
Cr Goodwill the new partners’ PSR
____________ _________
To remove goodwill
from accounts
(i.e. no balance to c/d)
PARTNERSHIPS 215
Note: This method has the effect of charging the new partner with
a premium (or a bonus), in that his/her capital introduced has
been reduced by his/her share of the goodwill. This premium
represents the purchase by the new partner of his/her share of
goodwill.
Dissolution (liquidation/winding up)

of partnerships
The term dissolution of partnerships refers to a situation where all
the partners wish to leave, and thus the activities of the partnership
come to an end.
When a partnership comes to an end, the following basic steps
are to be considered:
1. Prepare a set of final accounts from the end of the previous ac-
counting year to the date of dissolution.
2. Sell the assets (or allow partners to take over some or all of the
assets) and collect money from trade receivables.
3. Pay the partnership’s liabilities in the following order: trade pay-
ables, loans, and then any partners’ loans.
4. Close current accounts and transfer to partners’ capital
accounts.
5. Finally, close the partners’ capital accounts and disburse the re-
maining cash to the partners in their PSR.
The achievement of the above steps requires the preparation of the

following three accounts:
• The realisation account

• The partners’ capital accounts
• The cash/bank account
The realisation account is similar to the revaluation account in that it

includes any profit or loss that arises from the dissolution of a part-
nership. This account takes the following form:
216 PARTNERSHIPS
Dr Realisation account Cr
Transfer of all assets (except cash Allowances for depreciation of
or bank) at book values plant assets
Payment of expenses for Allowance for doubtful debts
dissolution
Any interest paid for early Cash receipts upon dissolution
settlement of loans (e.g. from the sale of assets
and/or collection of trade
receivables)
Any loss on settlement of Any gain on settlement of
liabilities liabilities (e.g. discount received
by trade payables)
Any assets taken over by
partners at the agreed value
(debit partner’s capital account)
Gain on realisation (balancing figure) Loss on realisation (balancing figure)
The journal entries to record the realisation process are:

___________ ____________
Dr Realisation a/c Transfer of assets’
Cr S undry assets a/c book values
(except cash & bank)
___________ ____________
___________ ____________
Dr Bank a/c Receipts from sale
Cr Realisation a/c of assets
___________ ____________
___________ ____________
Dr Capital a/c Assets taken over
Cr Realisation a/c by partners
___________ ____________
___________ ____________
Dr Realisation a/c Expenses
Cr Bank a/c
___________ ____________
PARTNERSHIPS 217
___________ ____________
Dr Payable a/c Any gains
Cr Realisation a/c (e.g., discount) on
___________ ____________ settlement
___________ ____________
Dr Realisation a/c Share of profit on
Cr Capital a/c realisation
___________ ____________
___________ ____________
Dr Capital a/c Share of loss on
Cr Realisation a/c realisation
___________ ____________
Conversion of a partnership to a
limited company
There are two possibilities of converting a partnership into a limited
company: (a) when a partnership is transferred to a company, and
(b) when a partnership is sold to an existing company.
a. Transfer to a company
A partnership could be taken over by another business and con-

verted to a limited company. Upon conversion, the partnership’s
assets and liabilities are revalued, a goodwill is created and the part-
nership’s capital is to be paid off by issue of the company’s shares.
The partnership is converted to a company as a going concern.
The accounting entries for the new company are as follows:
Dr The individual assets acquired from the partnership

Cr The individual liabilities, at the agreed valuations
Cr Share capital and share premium account
b. Sale of partnership to an existing company
When a partnership is to be sold to an existing company, we

may face one of two cases:
Case 1: Fair values are given for the assets acquired and any
liabilities taken over, but the market value of shares issued in con-
sideration is unknown.
218 PARTNERSHIPS
In this case, the total fair value of net assets determines the fair
value of any shares issued as consideration. Any difference between
the nominal value of shares issued and the fair value of net assets is
credited to a share premium account.
Case 2: Fair value of shares in consideration and the fair value of
net assets acquired are given.
In this case, goodwill is the difference between the fair value
of consideration given and the total fair value of the separable net
assets acquired.
Short questions:
Question
Dang, Ding, and Dong are partners sharing residual profits in the
ratio 3:2:1. The partnership agreement provides for a salary for
Ding of £35,000 per annum and for interest on capital at the
rate of 10% per annum. The balances on partners’ capital accounts
during the year were as follows: Dang £50,000, Ding £45,000,
and Dong £40,000, and the partnership’s net profit for 20x9 was
£128,000.
1 . Calculate Dong’s share of residual profits for 20x9.

2. Calculate the total of the appropriations credited to Ding’s cur-
rent account in 20x9.
Answer
Dang Ding Dong Total

£ £ £ £
Profit for 20x9 128,000
Partner’s salary (35,000) (35,000)
Interest on capital (5,000) (4,500) (4,000) (13,500)
(5,000) (39,500) (4,000) 79,500
Residual profits
shared 3:2:1 (39,750) (26,500) (13,250) (79,500)
44,750 66,000 17,250 0
PARTNERSHIPS 219
So, from the above table, we can conclude the following:
1 . Dong’s share of residual profits for 20x9 is £13,250.

2. The total of the appropriations credited to Ding’s current ac-
count in 20x9 is £66,000.
-----------------------------
Question
Alf and Bert are partners in a newsagent business. They share resid-
ual profits in the ratio 3:2 after interest on partners’ capital of 8%
per annum and interest on partners’ drawings of 11% per annum.
Their capital balances in 20x7 were £30,000 and £25,000, respec-
tively, and the current account balances were £4,000 and £1,500,
respectively. The average balances on their drawings accounts were
£40,000 and £45,000. The partnership’s net profit for 20x7 was
£94,000.
1. Calculate the balance of residual profits available for appropria-

tion in sharing ratio.
2. Calculate the net amount of all the sums transferred from the
appropriation account to the current account of Alf.
3. Show the capital structure of the partnership.
Answer
Alf Bert Total
£ £ £
Profit for 20x7 94,000
Interest on capital (2,400) (2,000) (4,400)
Interest on drawings 4,400 4,950 9,350
2,000 2,950 98,950
Residual profits shared 3:2:1 (59,370) (39,580) (98,950)
57,370 36,630 0
So, from the above table, we can conclude the following:
1. The balance of residual profits available for appropriation in

sharing ratio is £98,950.
220 PARTNERSHIPS
2. The net amount of all the sums transferred from the appropria-
tion account to the current account of Alf is £57,370.
Dr Partners’ current accounts Cr

Alf Bert Alf Bert
£ £ £ £
Drawings 40,000 45,000 4,000 1,500 Balance b/d
Interest on Interest
drawings 4,400 4,950 2,400 2,000 on capital
59,370 39,580 Share on
profit
Balance c/d 21,370 ––– ––– 6,870 Balance c/d
65,770 49,950 65,770 49,950
Balance b/d ––– 6,870 21,370 ––– Balance b/d
3. So, the capital structure of the partnership would be as follows:
Alf Bert Total

£ £ £
Capital accounts 30,000 25,000 55,000
Current accounts 21,370 (6,870) 14,500
51,370 18,130 69,500
-----------------------------
Question
Iliana and Ilias commenced a partnership on 1 January 20x9, each
contributing capital of €25,000, and agreed to share profits equally.
The partnership’s net profit is €9,000 for the period up to 30 June
20x9, and on that date, they are joined in partnership by Iliadae,
who contributes capital of €30,000. At that time, goodwill was
valued at €15,000, and the three partners agree to share profits
equally. They do not wish to retain goodwill in the partnership’s
accounts.
What is the balance on Iliadae’s capital account on 1 July 20x9?
PARTNERSHIPS 221
Answer
Partners’ capital accounts
Ilias Iliana Iliadae Ilias Iliana Iliadae

€ € € € € €
Goodwill 5,000 5,000 5,000 25,000 25,000 ---- Bank
4,500 4,500 Profit
Balance c/d 32,000 32,000 25,000 ---- ---- 30,000 Bank
7,500 7,500 ---- Goodwill
37,000 37,000 30,000 37,000 37,000 30,000

32,000 32,000 25,000 Balance b/d
So, the balance on Iliadae’s capital account on 1 July 20x9 is

€25,000.
QUESTIONS
QUESTION 1
Stan and Stuart, partners in a manufacturing business, share
profits and losses equally. They have the following partnership
agreement:
Stan Stuart
£ £
Salaries per annum 70,000 60,000
Interest on fixed capital (per annum) 10% 10%
Their capital and current balances as of 1 June 20x8 and

their drawings by 31 May 20x9 were respectively:
Capital account 30,000 17,000
Current account (both on credit) 8,500 5,500
Drawings per month 600 500
222 PARTNERSHIPS
The following financial information is available for the

year ended 31 May 20x9, after the preparation of the profit
and loss account.
£
Net profit for year (before appropriation) 150,000
Allowance for depreciation of motor
vehicles 4,800
Bank 45,000
Cash 5,000
Shop premises at cost 90,000
Inventory 25,000
Required:
1. A profit and loss appropriation account for the year ended

31 May 20x9.
2. The current account for each partner as of 31 May 20x9.
3. An SFP as of 31 May 20x9.
Question 2
Dixon, Cowell, and Cooper are in partnership sharing profits
and losses in the ratio 2:2:1, respectively.
During the year ended 31 December 20x5, the net profit
of the firm was €30,538. You are also given the following
information:
Dixon Cowell Cooper
€ € €
Partners’ drawings 6,000 5,500 3,900
Interest on partners’ drawings 180 165 117
PARTNERSHIPS 223
Interest is allowed on partners’ capitals at the rate of 6% per

annum. Cowell is entitled to a salary of €9,000 per annum.
The partners agreed that Dixon should withdraw €10,000
from her capital on 1 July 20x5 and that Cooper should con-
tribute a similar amount as of that date.
The balances on the partners’ accounts on 1 January 20x5
were:
Capital accounts Current
(all credit balances) accounts
€ €
Dixon 45,000 1,000 credit balance
Cowell 49,000 900 debit balance
Cooper 40,000 500 debit balance
Required:
1. Prepare the partnership profit and loss appropriation

account.
2. The partners’ capital for the year ended 31 December
20x5.
3. The partners’ current accounts for the year ended 31
December 20x5.
Question 3
Harisson Fort and Al Pachino, two actors, decided to form a
partnership. They agreed that they would have their own re-
gional selling areas and be responsible for their own sales. The
partnership agreement provided that:
a. Each partner is to be credited with a commission of 10%

on his own annual sales. The commission is to be treated
as an appropriation of profits.
b. All other expenses would be treated as expenses of the
whole business.
c. Profits and losses are to be shared equally.
224 PARTNERSHIPS
Harisson (H) and Al (A) commenced joint operations on 1

January 20x8 by providing the following capitals:
H Cash £10,000
Inventory of goods for sale £4,000
Office £10,000
Motor vehicle £9,000
A Cash £10,000
inventory of goods for sale £5,000
Office equipment £5,000
Motor vehicle £9,000
For the year ended 31 December 20x8, the following

fi nancial information is available:
£
i Advertising 2,600
Purchases 91,800
Wages 14,500
Sales by H 74,300
Sales by A 56,100
Rent and rates 10,600
Carriage inwards 2,100
Heating and lighting 800
Drawings H 8,050
Drawings A 5,750
Sales returns to H 1,300
Sales returns to A 1,100
ii Telephone and internet owed on

31 December 20x8 100
Advertising paid in advance on
31 December 20x8 400
PARTNERSHIPS 225
iii Motor vehicles are to be depreciated by

20% per annum
Office equipment is to be similarly
depreciated by 10% per annum
iv Closing balances on 31 December 20x8: £

Cash 300
Bank 7,800
Inventory 25,000
Required:
1. A profit and loss and appropriation account for the year

ended 31 December 20x8.
2. The current account for each partner as of 31 December
20x8.
3. An SFP as of 31st December 20x8.
Question 4
Elisabeth and Philip are in partnership, sharing profits and
losses in the ratio 2:1.
The following trial balance was prepared as of 28 February
20x8:
Dr Cr
$ $
Inventory 1 March 20x7 5,340
Purchases and sales 11,250 28,010
Trade receivables and trade payables 5,000 2,500
Rent, rates, and insurance 650
Fixture and fittings 990
Bad debts 400
226 PARTNERSHIPS
Partners’ capital accounts as of 1 March 20x7

- Elisabeth 5,000
- Philip 3,000
Partners’ current accounts, 1 March 20x7
- Elisabeth 520
- Philip 410
Drawings: - Elisabeth 3,100
- Philip 3,900
Bank 2,950
Cash 190
Discounts 750 400
General office expenses 920
$39,840 $39,840
The following matters relate to the partnership accounts:
a. No interest is to be allowed on capital accounts.

b. Philip is entitled to a partnership salary of $5,290, but no
entries have been made regarding this.
c. The partners’ capital accounts are to remain fixed at the
figures shown in the trial balance. All other transactions
concerning partners are to be made in the partners’ cur-
rent accounts.
d. Inventory as of 28 February 20x8 is $4,340.
e. Amount of $200 for wages and salaries accrued as of 28
February 20x8.
f. No allowance/provision is to be made for depreciation.
g. Amount of $50 for rates prepaid on 28 February 20x8.
Required:
1. A profit and loss and appropriation account for the year

ended 28 February 20x8.
2. An SFP as of 28 February 20x8.
PARTNERSHIPS 227
Question 5
Chip, Dale, and Duck are partners of a trading firm and share
profits and losses in the ratio 3:2:1. The firm’s SFP on 31
December 20x6 was as follows:
£ £
Non-current assets
Motor vehicles at cost less
depreciation 19,000
44,000
Current assets
Inventory 12,000
Receivables 15,000
Balance at bank 11,000 38,000
Current liabilities
Payables 8,000 8,000
Net assets 74,000
Partners’ capital accounts £
Chip 36,000
Dale 24,000
Duck 12,000 72,000
Partners’ current accounts
Chip 2,400
Dale Dr (1,600)
Duck 1,200 2,000 74,000
Dale retired from the partnership on 1 January 20x7 and

agreed to leave half the final balance on his capital account
as a short-term loan to the firm. The remainder was paid to
him in cash immediately.
Chip and Duck agreed to continue in partnership, sharing
profits and losses in the same proportions as before. Unre-
corded goodwill on 1 January was valued at £18,000.
228 PARTNERSHIPS
Required:
1. Capital accounts of Chip, Dale and Duck as of 1 January

20x7.
2. Dale’s loan account as of 1 January 20x7.
Question 6
Bill, George, and Obama were partners with capitals of
£80,000, £100,000, and £20,000, respectively. They shared
profits and losses in proportion to their capitals. George
retired from the partnership on 31 December 20x7. The
partnership deed provided that, in the event of dissolution,
goodwill would be valued at three years’ purchase of the av-
erage partnership profits of the last four years. These profits
were £22,900, £34,100, £19,600, and £23,400. The SFP of
the partnership on 31 December 20x8, prior to dissolution,
was:
£ £
Assets
Sundry assets 90,000
Cash 150,000 240,000
Liabilities
Sundry payables 40,000 40,000
Net assets 200,000
Capital a/c – Bill 80,000

Capital a/c – George 100,000
Capital a/c – Obama 20,000 200,000
By agreement, George took out of the business immedi-

ately the car he had been using (book value £10,000), and
on 17 February 20x8, he was paid to clear his capital account
including his share of goodwill.
PARTNERSHIPS 229
Required:
1. A statement showing the calculations for the value of

goodwill.
2. A goodwill account for the old partnership.
3. An SFP for the new partnership of Bill and Obama as of
1 January 20x8.
Question 7
Farkha, Sakhira, and Sab are in partnership sharing profits and
losses: Farkha 5/12, Sakhira 1/3, and Sab 1/4. On 1 September
20x9, Sakhira retired from the partnership, and on the same
date, Nazick was admitted to the partnership, introducing cash
of €50,000. From this date, profits are to be shared equally be-
tween the three new partners, and in view of this, Sab agreed
to pay a further €12,000 into the partnership as capital.
The SFP on 31 August 20x9 is as follows:
€ €
Non-current assets
Buildings 100,000
Furniture and fixtures 45,000
145,000
Current assets
Inventory 120,000
Bank 95,000 290,000
Liabilities: Trade payables 60,000 60,000
Net assets 375,000
Capital accounts
Farkha 150,000
Sakhira 120,000
Sab 70,000 340,000
230 PARTNERSHIPS
Current accounts
Farkha 9,000
Sakhira 15,000
Sab 11,000 35,000
375,000
The following adjustments should be made before pre-

paring a revised opening balance sheet of the partnership on
1 September 20x9:
1. Goodwill of the partnership as of 31 August 20x9 is

agreed at €39,960. Goodwill is not to be included in the
accounts.
2. Property is to be revalued at €120,000, and fixtures are to
be revalued at €49,000.
3. Inventory is considered to be shown at a fair market value
in the accounts. A provision for doubtful debts of €1,708
is to be created.
4. Professional fees of €500 relating to the change in partner-
ship structure are to be regarded as an expense of the year
up to 31 August 20x9, but they were not included in the
profit and loss account of that year. They are expected to
be paid in October 20x9.
5. On retirement, Sakhira is to be paid a sum of €55,000.
Sakhira has agreed to leave any remaining amount owing
to her in the partnership as a loan. Sakhira’s loan carries
interest of 12% per annum, and is to be repaid in full after
two years.
6. All balances on current accounts are to be transferred to
capital accounts. All balances on capital accounts in excess
of €20,000 after this transfer are to be recorded in loan
accounts carrying interest of 12% per annum.
Required:
1 . Prepare the partnership’s revaluation account.

2. Prepare the partnership’s bank account.
PARTNERSHIPS 231
3 . Prepare the partners’ capital accounts.

4. Prepare an opening SFP for the partnership on 1
September 20x9, following completion of the above
arrangements.
Question 8
Marshall, Brendan, and Nick are partners and sharing prof-
its or losses in the ratio of 2:1:1, respectively. On 31 July
20x9, they agree to dissolve the partnership. Their SFP ac-
counts as of 31 July 20x9 (i.e. the date of dissolution) are
listed below:
Statement of Financial Position accounts
as of 31 July 20x9
£ £
Capital Marshall 20,000 Premises 28,500
Brendan 14,000 Machinery 16,700
Nick 11,500 Vehicles 3,640
Loan 3,100 Trade receivables 11,950
Trade payables 4,500 Inventory 11,000
Mortgage 18,500
Bank overdraft 190
71,790 71,790
The terms of the dissolution agreement are as follows:
1. Inventory is taken over by Nick at its market price of

£12,900 less 10%.
2. Marshall is to assume responsibility for the trade payables.
3. Marshall is to take over the premises at a revalued figure of
£38,000 and pay off the mortgage.
4. Marshall also takes one half of the machinery for £9,500
and the trade receivables to the extent of £8,550 for
£7,500.
232 PARTNERSHIPS
5. Brendan is to take over the vehicles at book value less

18.68% and the remaining machinery at book value less
3.53%.
6. The remaining trade receivables are sold to a debt collec-
tion agency for £2,300.
7. The loan is fully repaid.
8. Expenses amounting to £679 are paid.
9. Final balances of the partners’ capital accounts are settled
by payments of cash.
Required:
1 . Prepare the partnership’s realisation account.

3. Prepare the partners’ capital accounts.
Question 9
Bonnie and Clyde have been in partnership for several years
sharing profits equally. The partnership accounting year end is
31 December. On 20 February 20x4, they have decided to dis-
solve the partnership. After preparing the SPL for the period
from 1 January 20x4 to 20 February 20x4, the SFP as of the
latter date is as follows:
$ $ $
Assets
Less: allowance for
Inventory 5,700
Less: allowance for
doubtful debts 1,100 20,700
Prepaid expenses 290 26,690
PARTNERSHIPS 233
Less: liabilities
Bank overdraft 5,000
Bank loan 9,000
Accrued expenses 3,000 42,490
17,000
Capital - Bonnie 9,000

- Clyde 5,000 14,000
Current account - Bonnie 5,000
- Clyde
(on debit) (2,000) 3,000
17,000
One of the motor vehicles was taken over by Clyde at

an agreed valuation of $10,000. The remaining vehicles
were sold for $15,500. The inventory realised $6,500, and
$17,800 was received from trade receivables. A refund of
the full amount of prepaid expenses was also received.
Trade payables of $20,900 were paid in full settlement.
The bank loan was fully repaid, including an interest
penalty for early settlement of $250. Accrued expenses
were also fully paid off. Expenses for dissolving the part-
nership amounted to $1,500. The partnership also sold its
business name and a list of its customers to a competitor
for $3,000.
Required:
1 . Prepare the partnership’s realisation account.

3. Prepare the partners’ capital accounts.
234 PARTNERSHIPS
Question 10
Theressa and Hilary are in partnership, sharing profits and
losses in the ratio 3:2. On 1 May 20x6, they agree to sell their
business to “Save the Planet” Ltd. The partnership SFP was as
follows:
Statement of Financial Positionas of 30 April 20x6

£ £
Non-current assets
Plant and machinery 49,000
123,200
Current assets
Inventory 17,000
Sundry receivables 21,700
Balance at bank 12,300
51,000
Current liabilities
Sundry payables 13,200
13,200
NET ASSETS 161,000
Capital accounts
Theressa 96,390
Hilary 56,610
153,000
Current accounts
Theressa 3,400
Hilary 4,600
8,000
161,000
PARTNERSHIPS 235
“Save the Planet” Ltd was a new company formed to pur-

chase the above partnership business. Its authorised share
capital is £1,000,000, made up of 300,000 7% preference
shares of £1 each and 700,000 ordinary shares of £1 each.
The purchase price was to be £190,000, and the company
proposed to settle this amount by the issue at par of 160,000
£1 ordinary shares, issued as fully paid, to the partners, with
the balance of the purchase price to be settled in cash on 20
May 20x6. The ordinary share distribution was made in the
capital ratio of the partners on 30 April 20x6.
The company agreed to take over all the assets except the
bank account and also agreed to take over the responsibility
for payment of the payables. The company valued the ac-
quired assets as follows:
£
Plant and machinery 42,000
Inventory 14,500
The company also agreed to pay £18,000, included in the

purchase price, for the total trade receivables taken over.
Required:
In the books of the partnership, show the entries neces-

sary, in the following accounts, to close the business:
1 . Realisation account.
2. Bank account.
3. Partners’ capital accounts.
4. The opening SFP of the new company as of 1 May 20x6.
236 PARTNERSHIPS
Answers
Answer 1
Requirement 1:
Profit and Loss Appropriation Account for year

ended 31st May 20x9
£ £
Salaries Net Profit b/d 150,000
- Stan 70,000
- Stuart 60,000
Interest on Capital
- Stan 3,000
- Stuart 1,700
Share of Residual Profits

- Stan 7,650
- Stuart 7,650

150,000 150,000

Requirement 2:
Partners’ Current Accounts

Stan Stuart Stan Stuart
£ £ £ £
Drawings 7,200 6,000 Balance b/d 8,500 5,500
Salaries 70,000 60,000
Interest
on capital 3,000 1,700
PARTNERSHIPS 237
Share of
Balance c/d 81,950 68,850 profits 7,650 7,650
89,150 74,850 89,150 74,850

Balance b/d 81,950 68,850

Requirement 3:
Statement of Financial Position as of

31 May 20x9
Non-current assets £ £ £
Shop premises 90,000
Less: Allowance for
110,200
Current assets
Inventory 25,000
Receivables 15,800
Bank 45,000
Cash 5,000
90,800
Current liabilities
Net assets 197,800
Capital accounts £ £ £
Stan 30,000
Stuart 17,000 47,000
Current accounts
Stan 81,950
Stuart 68,850 150,800
197,800
238 PARTNERSHIPS
Answer 2
Requirement 1:
Workings:
Interest on capital
Dixon: (€35,000 × 6%) + (€10,000
× 6% × 6/12) = €2,400
Cowell: €49,000 × 6% = €2,940
Cooper: (€50,000 × 6%) – (€10,000
× 6% × 6/12) = €2,700
Profit and Loss Appropriation Account for year 20x5

Interest on Capital € €
Dixon 2,400 Net Profit 30,538
Cowell 2,940 Interest on Drawings
Cooper 2,700 Dixon 180
Salary - Cowell 9,000 Cowell 165
Cooper 117
Share of Residual Profits
Dixon 5,584
Cowell 5,584
Cooper 2,792
31,000 31,000

Requirement 2:
Partners’ Capital Accounts

Dixon Cowell Cooper Dixon Cowell Cooper
€ € € € € €
1 July Bank 10,000 1 Jan. Bal. b/d 45,000 49,000 40,000
1 July Bank 10,000
31 Dec. Bal. c/d 35,000 49,000 50,000 45,000 49,000 50,000
45,000 49,000 50,000
31 Dec. Bal. b/d 35,000 49,000 50,000

PARTNERSHIPS
239
240
PARTNERSHIPS
Requirement 3:

Dixon Cowell Cooper Dixon Cowell Cooper
€ € € € € €
1 Jan. Bal. b/d 900 500 1 Jan. Bal. b/d 1,000
Interest on Interest on
31 Dec. Drawings 180 165 117 31 Dec. capital 2,400 2,940 2,700
31 Dec. Drawings 6,000 5,500 3,900 31 Dec. Salary 9,000
Share of
31 Dec. Balance c/d 2,804 10,959 975 31 Dec. Profits 5,584 5,584 2,792
8,984 17,524 5,492 8,984 17,524 5,492

31 Dec. Bal. b/d 2,804 10,959 975

PARTNERSHIPS 241
Answer 3
Requirement 1:
Statement of Profit or Loss for year ended

31 December 20x8
£
Sales (£74,300
+ 56,100) 1,30,400
Less: returns (£1,300
+ 1,100) 2,400
1,28,000
COGS:
Opening Inventory (£4,000
+ 5,000) 9,000
Purchases 91,800
Carriage In 2,100
1,02,900
Less: Closing Inventory 25,000
77,900
Gross Profit 50,100

Expenses:
Advertising 2,200
Wages 14,500
Rent and Rates 10,600
Heating and lighting 800
Depreciation – Vehicles
[(£9,000 + 9,000) × 20%] 3,600
Depreciation – Office
equipment (£5,000 × 10%) 500
33,800
Net Profit c/d 16,300
242 PARTNERSHIPS
Profit & Loss Appropriation Account

for year ended 31 December 20x8
£ £
Commission – H 7,300 Net Profit
b/d 16,300
–A 5,500

Share of residual profits – H 1,750
–A 1,750

16,300 16,300

Requirement 2:

H A H A
£ £ £ £
Drawings 8,050 5,750 Balance b/d 0 0
Commission
on sales 7,300 5,500
Balance Share of
c/d 1,000 1,500 profits 1,750 1,750
9,050 7,250 9,050 7,250

Balance b/d 1,000 1,500
PARTNERSHIPS 243
Requirement 3:
Statement of Financial Position as of 31 December 20x8
Non-current assets £ £ £
Office 10,000
Less Allowance for
depreciation 500 4,500
Motor Vehicles 18,000
Less Allowance for
depreciation 3,600
14,400
29,900
Current assets
Inventory 25,000
Bank 7,800
Cash 300
Advertising prepaid 400 51,400
Current liabilities
Telephone and
internet accrued 100 14,800
Net assets 65,500
Capital accounts
H 34,000
A 29,000 63,000
Current accounts
H 1,000
A 1,500 2,500
65,500
244 PARTNERSHIPS
Answer 4
Requirement 1:
Profit and Loss Statement for the year ended

28 February 20x8
$ $ $
Sales 28,010
COGS
Opening Inventory 5,340
Purchases 11,250
Closing Inventory 4,340
12,250
Gross profit 15,760
Discount received 400
Expenses
Rent, Rates, Insurance 600
Bad Debts 400
General Expenses 920
7,270
Net profit c/d 8,890
Profit and Loss Appropriation Account

for year ended 28 February 20x8
$ $
Salaries – Philip 5,290 Net Profit b/d 8,890
Share of profits
Elisabeth 2,400
Philip 1,200
8,890 8,890
PARTNERSHIPS 245
Requirement 2:

as of 28 February 20x8
$ $ $
Non-current assets
Fixture and fittings 990
Current assets
Inventory 4,340
Bank 2,950
Cash 190
Rates prepaid 50 12,530
Current liabilities
Wages and salaries
accrued 200 2,700
Net assets 10,820
Capital accounts
- Elisabeth 5,000
- Philip 3,000 8,000
Current accounts
- Elisabeth
(3,100 − 520 − 2400) (180)
- Philip (3900 − 410 −
5290 − 1200) 3,000 2,820
10,820
246
ANSWER 5
REQUIREMENT 1:
PARTNERSHIPS
Capital Accounts
Chip Dale Duck Chip Dale Duck
£ £ £ £ £ £
Goodwill (out) 13,500 --- 4,500 Balance b/d 36,000 24,000 12,000
Current a/c --- 1,600 --- Goodwill (in) 9,000 6,000 3,000
Loan a/c --- 14,200 --- --- --- ---
Cash --- 14,200 --- --- --- ---
Balance c/d 31,500 --- 10,500 --- --- ---
45,000 30,000 15,000 45,000 30,000 15,000
Balance b/d 31,500 --- 10,500
REQUIREMENT 2:
Loan account - Dale

capital a/c – Dale 14,200
PARTNERSHIPS 247
Answer 6
Requirement 1:
Goodwill: Three years’ purchase of the average of the last four

years’ profits = (£22,900 + 34,100 +19,600 + 23,400) / 4 =
£25,000 × 3 = £75,000
Requirement 2:
Goodwill
£ £
Capital a/c – Bill 30,000 Balance c/d 75,000
Capital a/c – George 37,500
Capital a/c – Obama 7,500
75,000 75,000
Requirement 3:
Statement of Financial Position as of 1 January 20x8

£ £
Assets
Goodwill 75000
Sundry assets 80,000
Cash 160,000 315,000
Liabilities
Sundry payables 40000
Loan – George 137,500 177,500
Net assets 137,500
Capital – Bill 110,000

Capital – Obama 27,500 137,500
248 PARTNERSHIPS
Answer 7
Requirement 1:
Revaluation Account
€ €
Allowance for
doubtful debts 1,708 Buildings 20,000
Furniture and
Professional fees 500 fixtures 4,000
Capital – Farkha 9,080
– Salhira 7,264
– Sab 5,448
24,000 24,000
Requirement 2:
Bank Account
€ €
Balance b/d 95,000 Capital - Sakhira 55,000
Capital – Nazick 50,000 Balance c/d 102,000
Capital – Sab 12,000
157,000 157,000
Requirement 3:
Capital Accounts
Farkha Sakhira Sab Nazick Farkha Sakhira Sab Nazick
€ € € € € € € €
Goodwill 13,320 --- 13,320 13,320 Balance b/d 150,000 120,000 70,000 ---
Bank --- 55,000 --- --- Current a/c 9,000 15,000 11,000 ---
Loan a/c 151,410 100,584 75,118 16,680 Bank --- --- 12,000 50,000
Balance c/d 20,000 --- 20,000 20,000 Share profit 9,080 7,264 5,448 ---
Goodwill 16,650 13,320 9,990 ---

184,730 155,584 108,438 50,000 184,730 155,584 108,438 50,000

Balance b/d 20,000 --- 20,000 20,000

PARTNERSHIPS
249
250 PARTNERSHIPS
Requirement 4:
Farkha, Sab, and Nazick

Statement of Financial Position as of 1 September 20x9
€ € €
Non-current assets
Buildings 120,000
Furniture & fixtures 49,000 169,000
Current assets
Inventory 120,000
Allowance for doubtful
debts 1,708 73,292
Bank 102,000 295,292
Current liabilities
Trade payables 60000
Accrued fees 500 60,500
Farkha 151,410
Sakhira 100,584
Sab 75,118
Nazick 16,680 343,792
Net assets 60,000
Equity – capital
Farkha 20,000
Sab 20,000
Nazick 20,000 60,000
PARTNERSHIPS 251
Answer 8
Requirement 1:
Realisation Account
£ £
Premises 28,500 Capital a/c (Inventory) – Nick 11,610
Machinery 16,700 Capital a/c (Premises) – Marshall 38,000
Capital a/c (Machinery) –
Vehicles 3,640 Marshall 9,500
Trade Capital a/c (Receivables) –
receivables 11,950 Marshall 7,500
Inventory 11,000 Capital a/c (Vehicles) – Brendan 2,960
Capital a/c (Machinery) –
Expenses 679 Brendan 8,055
Bank (Remaining trade
receivables) 2,300
Profit on
realisation
Marshall 3,728
Brendan 1,864
Nick 1,864

79,925 79,925

Requirement 2:
Bank Account
£ £
Debt Agency 2,300 Balance b/d 190
Marshall 8,272 Loan 3,100
Expenses 679
Brendan 4,849
Nick 1,754

10,572 10,572

252
PARTNERSHIPS
Requirement 3:
Capital Accounts
Marshall Brendan Nick Marshall Brendan Nick
£ £ £ £ £ £
Inventory --- --- 11,610 Balance b/d 20,000 14,000 11,500
Trade
Premises 38,000 --- payables 4,500 --- ---
Machinery 9,500 8,055 --- Mortgage 18,500 --- ---
Trade Profit on
receivables 7,500 --- --- Realisation 3,728 1,864 1,864
Vehicles --- 2,960 --- Bank 8,272 --- ---
Bank --- 4,849 1,754
55,000 15,864 13,364 55,000 15,864 13,364

PARTNERSHIPS 253
Answer 9
Requirement 1:
Realisation Account
$ $
Capital (vehicle) –
Vehicles 45,000 Clyde 10,000
Allowance for
Inventory 5,700 depreciation 12,200
Allowance for
Receivables 21,800 doubtful debts 1,100
Prepayments 290 Bank – vehicles 15,500
Loan interest 250 Bank – inventory 6,500
Bank - dissolution Bank – trade
expenses 1,500 receivables 17,800
Bank – prepayments 290
Bank – goodwill 3,000

loss on realisation:
Bonnie 1,780
Clyde 1,780
74,540 74,540

Requirement 2:
Bank
$ $
Realisation – Balance b/d 5,000
Vehicles 15,500 Trade payables 20,900
inventory 6,500 Bank loan 9,250
Receivables 17,800 Realisation – expenses 1,500
Prepayments 290 Accrued expenses 3,000
Goodwill 3,000
254 PARTNERSHIPS

Capital – Clyde 8,780 Capital – Bonnie 12,220
51,870 51,870

Requirement 3:
Capital Accounts
Bonnie Clyde Bonnie Clyde
$ $ $ $
Current a/c --- 2,000 Balance b/d 9,000 5,000
Vehicles --- 10,000 Current a/c 5,000 ---
Loss on
realisation 1,780 1,780
Bank 12,220 --- Bank --- 8,780
14,000 13,780 14,000 13,780

Answer 10
Requirement 1:
Realisation Account
£ £
Premises 65,000 Payables 13,200
Plant and “Save the
Machinery 49,000 Planet” Ltd 190,000
Fixtures and
Fittings 9,200
Inventory 17,000
Receivables 21,700
PARTNERSHIPS 255

Profit on realisation:
- Theressa 24,780
- Hilary 16,520

203,200 203,200

Requirement 2:
Bank Account
£ £
Balance b/d 12,300 Capital – Theressa 23,770
“Save the
Planet” Ltd 30,000 Capital – Hilary 18,530

42,300 42,300
Requirement 3:
Partners’ Capital Accounts

Theressa Hilary Theressa Hilary
£ £ £ £
Shares in
limited
company 100,800 59,200 balance b/d 96,390 56,610
Cash 23,770 18,530 Current a/c 3,400 4,600
Profit on
realisation 24,780 16,520

124,570 77,730 124,570 77,730

256 PARTNERSHIPS
Requirement 4:

£
Non-current assets
Premises 90,000
Plant and
machinery 42,000
Goodwill 33,200 170,700
Current assets
Inventory 14,500
Current liabilities
190,000
Share capital 160,000

Share premium 30,000
190,000
8
Cash flow statements
and analysis
• Importance of cash
• Some misconceptions
• Cash Flow Statement (based on IAS 7)
• Cash flow analysis
• Interpretation using the cash flow statement
Introduction
The Statement of Profit or Loss (SPL) (Profit and Loss Account) and
the Statement of Financial Position (SFP) (Balance Sheet) do not
provide us with any information about the source and disposition of
the cash during the accounting period (apart from the opening and
closing cash and bank balances between the two SFP dates).
F In other words, can we monitor an entity’s liquidity (i.e. cash)

position by examining the two financial statements (i.e. the
SPL and the SFP)?
The simple answer is NO, because the cash received and the cash
paid is adjusted to reflect the operational activity for a particular
accounting period.
Note: Based on the “realisation” and “matching” concepts, the
sales and various expenses are earned and accrued respectively, and
adjustments need to be made to the SPL to reflect those accruals
and prepayments.
258 CASH FLOW STATEMENTS AND ANALYSIS
A user of financial statements would need to know the following:
1. How successful the business has been in monitoring its cash

position.
2. Whether the business has got enough cash to cover its future
activities.
Importance of cash
It’s important for a business to hold cash to remain solvent, but what
are the reasons for a business to hold cash?
1. To meet the need to make planned payments, such as towards

wages and suppliers.
2. To meet the need to make occasional unexpected payments,
such as unseen costs or demands for early payments by suppliers.
3. To meet the need to take advantage of opportunities when they
arise, such as buying extra materials available at a bargain price.
It is important to note here that the position of a business is affected

by income (sales less expenses) as well as by the cash flow both in
and out (cash inflows and outflows). It must be recognised that a
business can make losses in the short run and survive if it remains
solvent, whereas profitable operations can be brought to a halt by a
lack of liquid funds (enough cash) to pay wages and payables in the
immediate future.
Some misconceptions
The following are usual misconceptions that you need to be aware
of:
a. An accounting profit (loss) does necessarily lead to an automatic increase

(decrease) in cash. This is not true, as sales and expenses that are
used to derive the profit (or loss) are adjusted based on the real-
isation and matching concepts and do not necessarily generate
or absorb cash.
b. If sales are expanding rapidly, the entity is definitely doing very well
(overtrading symptom). This is not true, as it can lead to lack of
CASH FLOW STATEMENTS AND ANALYSIS 259
liquidity in the business (see also the part on “Overtrading” in

section “Interpretation using the cash flow statement”).
c. As long as profit appears acceptable, pay little attention to how much
cash is available. This is not true, as profitability does not neces-
sarily indicate surplus/excess of cash in the business.
d. The sales (and other incomes), and the purchases (and other expenses)
do necessarily cause an immediate change in the cash position. This is
not true, as the sales (and other income) and the purchases (and
other expenses) are adjusted based on the realisation and match-
ing concepts and do not necessarily generate or absorb cash.
So, the question is, what is the cash (liquidity) position of a business?
To answer the above question, another type of statement is
introduced:
The CASH FLOW STATEMENT.
Cash Flow Statement (based on IAS 7)

In this section, the Cash Flow Statement based on the International
Accounting Standard (IAS) 7 is briefly discussed.
As noted earlier, users of financial statements need information
on the following:
• The liquidity of the business: Can it meet its liabilities when they
fall due?
• The viability of the business: Can it survive in the long run by
recruiting adequate long-term funds to finance investment that
maintains competitive ability?
• The adaptability of the business: Can it take advantage of new
products and opportunities and the need to change in order to
keep abreast of market movements?
In essence, does the cash flow statement disclose future cash flows?
The answer is no as the cash flow statement reports current
events. But it also provides:
F A full understanding of the mechanisms within a business which

generate and absorb cash.
F A reconciliation between profit and cash flows.
F An understanding that the movements of inventories, receiva-

bles/debtors, and payables/creditors as part of normal operation
absorb or release cash.
The cash flow statement, therefore, analyses the changes that have
taken place between the two SFP dates so far as sources and uses
of cash funds are concerned. This statement shows changes in the
capital structure (the cash funds that have been recruited to finance
the business) and asset structure of a business (how the supplied cash
funds have been applied) during the period and, together with the
SPL, explains the events which have led up to the most recent SFP.
The cash flow statement is published in a prescribed format. The
IAS 7 also requires the statement to be accompanied by a number
of reconciliations and a series of notes.
The format of the cash flow

statement
IAS 7 requires companies to analyse cash inflows and cash outflows
for each accounting period under the following three main headings:
1. Operating Activities are the main revenue-producing activi-

ties of the business that are not investing or financing activities,
so operating cash flows include cash received from customers
and cash paid to suppliers and employees.
2. Investing Activities are the acquisition and disposal of long-
term assets and other investments that are not considered to be
cash equivalents.
3. Financing Activities are activities that alter the equity capital
and borrowing structure of the business.
Note: The reconciliation of operating profit to net cash (in/out)flow

from operating activities is required in order for the first heading
above to be derived.
Two methods can be taken:
a. The direct method: The payments and receipts relating to op-

erating activities are compared, i.e. the cash received from
customers and cash paid to suppliers, to employees, and for

any other expenses.
b. The indirect method:The starting point is the company’s operating
profit and then a number of adjustments to this profit are made.
In other words, the following formula is applied:
Operating profit before interest and tax:

minus (−), interest paid *
minus (−), income tax paid *
minus (−), dividend paid *
• Adjust for non-cash charges:

plus (+), depreciation charges
plus (+), loss on sale of fixed assets
plus (+), increases in the provision for doubtful debts
minus (−), profit on sale of non-current (fixed) assets
minus (−), decreases in the provision for doubtful debts
• Adjust for charges in current assets and current liabilities:

minus (−), inventory/stock increase
minus (−), trade receivables/debtor and prepayment increases
minus (−), trade payables/creditor and accrual decreases (exclud-
ing tax and dividends)
plus (+), inventory/stock decrease
plus (+), trade receivables/debtor and prepayment decreases
plus (+), trade payables/creditor and accrual increases (excluding
tax and dividends)
The above calculations provide the net cash inflow/(outflow) from

Operating Activities (heading 1 in the cash flow statement).
*For interest paid, income tax paid, and dividends paid:

To calculate the amount paid, use the following formula:
To the relevant amount shown in the SPL, add
the amount shown in the opening SFP and deduct
the amount shown in the closing SFP.
Specimen format of the cash flows

statement
COMPANY NAME
The Cash Flow Statement
Period Covered
Cash flows from Operating Activities

(List of individual items) XX
Net cash provided (used) by operating activities XXX
Cash flows from Investing Activities

(List of individual inflows and outflows) XX
Net cash provided (used) by investing activities XXX
Cash flows from Financing Activities

(List of individual inflows and outflows) XX
Net cash provided (used) by financing activities XXX
Net increase (decrease) in cash XXX

Cash at beginning of period XXX
Cash at end of period XXX
Non-cash investing and financing activities

(List of individual non-cash transactions) XXX
Cash flow analysis

Using cash flows to evaluate a business means that the next two tools
can be applied:
• Free cash flow

• Quality of earnings
Free cash flow
Free cash flow describes the cash remaining from operations after
adjustment for capital expenditures and dividends.
Free cash flow can be calculated as follows (there are other possi-
ble calculations too):
= Cash Provided by − Capital − Cash

Operating Activities Expenditures Dividends
The first item is derived from the cash flow statement, heading 1,
from Operations.
The second item is derived from the cash flow statement, head-
ing 2, from Investment.
Free cash flow: what does it indicate?
Free cash flow indicates the amount of money available for other
necessary payments.
It also provides a cushion for emergency cash needs.
It helps to exploit sudden investment opportunities.
Quality of earnings (income) r atio
A quality of earnings ratio equation helps to separate out the income a

business generates through real operations versus other sources of rev-
enue, such as the sale of assets.The logic behind the quality of income
ratio is that high-quality earnings should reflect the cash flows (from
operations) of the business. Said another way, if each pound sterling (£)
of income is supported by one pound sterling (£) or more of cash flow
from operations, then such income has a high quality, and vice versa.
The formula is as follows:
Operating cash flows
=
Net income ( profit or loss )
This should be at least 1, indicating high-quality earnings (income),

as the figure reported for net income is a strong representation of a
company’s ongoing earnings.
On the other hand, a quality of earnings ratio of significantly
less than 1 indicates that the net cash flows from operating activi-
ties is significantly less than the net income reported for the same
period, which suggests that a substantial amount of reported net
income may have come from accounting adjustments rather than
the actual sale of goods or services. The following can contribute

to a low-quality ratio:
• Aggressive use of accounting rules

• Elimination of the last-in, first-out (LIFO) inventory technique
• Inflation
• Sale of assets for a profit/gain
The denominator could also be the sales or average total assets.
Interpretation using the cash flow

statement
The following can be concluded by analysing the cash flow statement:
1. Overcapitalisation è Cash in excess of operating requirements

This is the case when
• Initial financial requirements were overestimated and too

much capital was raised, and/or
• A closure of a segment of a business has occurred, and/or
• A sale of a valuable freehold property has taken place.
If this is the case, then
• Excess cash should not be allowed to lie idle, and/or

• Plans for the investment of these resources must be made,
and/or
• If not possible, cash should be returned to shareholders in
the form of reduction of equity/capital.
2. Financing long-term investment

This is the case when cash has been used to finance long-term
investments.
The following recommendations can be made:
• Cash should only be used for a short-term application, and
• Long-term finance should be used for long-term invest-
ment, e.g. by raising a long-term loan, by issuing shares, by
retaining profits permanently within the business.
3. Overtrading è A company attempts to do too much too

quickly
This term is often used to describe one of the reasons for busi-
ness failure. It can arise when a business expands quickly be-
yond the level to which the cash funds available can properly
finance it.
The usual “symptoms” (from an examination of consecu-
tive SFPs) are as follows:
• A sharp increase in expenditure on non-current (fixed) assets

• An increase in inventories, work-in-progress, and trade receivables
• A decrease in the balance of cash, and perhaps the emergence
of bank overdraft
• A less liquid structure of the current assets
• A sharp increase in payables/creditors caused by the company’s
inability to pay debts as they fall due
Unless the business expansion is curtailed quickly, suppliers may re-

fuse credit beyond certain limits, and the bank may call for a reduc-
tion of the overdraft. If this happens, the business may be insolvent,
in that it does not have sufficient liquid resources (cash) to pay for
current operations or to repay current liabilities until customers pay
for sales made on credit terms, or unless inventory is sold for imme-
diate cash payment (possibly at a loss).
The cash flow statement shows how much long-term finance has been
made available during the year and how it has been used.
Questions
Question 1
An extract from the SPL of Spin Ltd for the year ended 31
March 20x7 is given below, together with the company’s SFP
as of 31 March 20x6 and 31 March 20x7.
Spin Ltd
Statement of Profit or Loss (extract)
for the year ended 31 March 20x7
£’000 £’000
Profit on ordinary activities before taxation 205,600
Tax on profit on ordinary activities 46,980
Profit on ordinary activities after taxation 158,620
Retained profits brought forward 19,990
178,610
Transfer to general reserve 90,000
Dividends: paid Preference shares 5,000
Ordinary shares 45,000
Proposed ordinary dividend 10,000 150,000
Retained profits carried forward 28,610

as of 31 March
20x6 20x7
£’000 £’000 £’000 £’000
Non-current (fixed) assets
Plant and machinery
at cost 183,000 285,000
Accumulated 95,160 87,840 151,650 133,350
depreciation
Investments at cost 10,000 12,000
97,840 145,350
Current assets
Inventory 133,330 171,220
Receivables and
prepayments 86,500 121,630
Cash at bank and in
hand --- 710
Treasury bills --- 5,000
219,830 298,560
Current liabilities
Payables and accruals 61,530 89,370
Taxation 42,660 45,930
Proposed dividends 20,000 10,000
Bank overdraft 23,490 ---
147,680 145,300
Net current assets 72,150 153,260
169,990 298,610
11% debenture stock --- 30,000
Net Assets 169,990 268,610
Financed by
Preference share
capital 50,000 50,000
Ordinary share
capital 100,000 100,000
General reserve --- 90,000
SPL 19,990 28,610
169,990 268,610
Additional information:
1. The 11% debentures were issued on 1 October 20x6, and
the first half-year’s interest was paid on 31 March 20x7.
2. Bank overdraft interest paid during the year amounted to
£1,320.
3 . Dividends received for the year were £930.

4. No investments were sold during the year.
5. During the year, plant and machinery which had cost the
company £22,000 was sold for £7,000. The accumulated
depreciation on this plant and machinery was £16,230,
and the profit made on disposal is £1,230.
6. Proposed dividends on 31 March 20x6 and 31 March
20x7 consist entirely of ordinary dividends.
7. The treasury bills rank as liquid resources for IAS 7 purposes.
Required:
Prepare a cash flow statement for the year ended 31 March

20x7 in accordance with the requirements of IAS 7.
Question 2
The following summarised information relates to CGill Ltd:
for the year ended 31 October 20x9 £’000
Gross profit 2,400
Distribution costs 190
Administration expenses 900
Profit before taxation 1,310
Taxation 200
Profit after taxation 1,110
Dividends 170
Retained profits for the year 940
Statement of Financial
Position as of 31 October 20x8 20x9
£’000 £’000
Non-current (fixed) assets
At cost 3,400 5,800
Accumulated depreciation 1,400 2,100
NBV 2000 3700
Current assets
Inventories 700 100
Trade receivables (net of
allowance) 2,000 6,000
Other receivables 200 250
Bank and cash 950 -----
3,850 6,350
Current liabilities
Bank overdraft ----- 400
Trade payables 300 1,200
Other payables 400 210
Taxation 350 450
Dividend 100 150
1,150 2,410
15% debentures ----- 2,000
4,700 5,640
Capital and reserves

Called up share capital 2,500 2,500
Share premium account 500 500
SPL 1,700 2,640
4,700 5,640
1. During the year ended 31 October 20x9, fixed assets orig-

inally costing £650,000 were sold for £300,000 in cash.
The accumulated depreciation on these fixed assets was
£400,000.
2. The company maintains a provision for bad and doubt-

ful trade debts. The provision on 1 November 20x8 was
£100,000, and on 31 October 20x9, it was £500,000.
3. The interest for the year was paid in full.
Required:
i. Prepare CGill’s cash flow statement for the year ended 31

October 20x9 using the indirect method.
ii. Comment on the financial position of CGill Ltd as shown
by the cash flow statement you have prepared.
iii. Briefly state some of the ways in which companies could
manipulate their year-end cash position.
Answers
Answer 1
Requirement 1:
(In this example, there is no interest accrued, so the interest added

back and the interest deducted are the same. The same is done for the
dividend received.)
Calculation of the net cash inflow £’000
from operating activities:
Operating profit (205,600 + 1,650 + 1,320 – 930) 207,640
Debenture interest paid (1,650)
Bank overdraft interest paid (1,320)
Tax paid (43,710)
Dividend received 930
Dividends paid - ordinary (65,000)
Dividends paid - preference (5,000)
Depreciation charges (151,650 − (95,160 – 16,230)) 72,720
Profit on disposal of fixed assets (1,230)

Increase in stocks (37,890)
Increase in debtors (35,130)
Increase in creditors 27,840
Net cash inflow from operating activities 118,200
Cash flow statement £’000 £’000

1. Operating activities 118,200
2. Investing activities
Sale of fixed assets 7,000
Purchase of fixed assets
(285,000 − (183,000 – 220,00)) (124,000)
Purchase of fixed asset
investment (2,000) (119,000)
3. Financing activities
Issue of debentures 30,000
Increase in cash during the year 29,200
Cash at the beginning of the year (23,490)

Cash at the end of the year (710 + 5,000) 5,710
Answer 2
Requirement 1:
Cash flow statement £’000

for the year ended 31 October 20x9
Operating activities (Note 1) (600)
Investing activities
Payments to acquire tangible fixed assets
(5,800 − (3,400 − 650)) (3,050)
Receipts from sales of tangible fixed assets 300 (2,750)
Financing activities
Issue of debenture loan 2000
Decrease in cash during the year (1,350)
Note 1:
Operating profit (1,310 + 300) 1,610
Interest paid (2,000 × 15%) (300)
Corporation tax paid (350 + 200 − 450) (100)
Equity dividends paid (100 + 170 − 150) (120)
Depreciation charges (2,100 − (1,400 − 400)) 1,100
Profit on sale of tangible fixed assets
(650 − 400 − 300) (50)
Increase in provision for bad and doubtful debts 400
Decrease in stock (700 − 100) 600
Increase in trade debtors
((6,000 + 500) − (2,000 + 100)) (4,400)
Increase in other debtors (250 − 200) (50)
Increase in trade creditors (1,200 − 300) 900
Decrease in other creditors (210 − 400) (190)
(600)
Requirement 2:
There has been a net outflow of cash of £1,350,000 which

has left the company with an overdraft of £400,000.
There was significant expenditure on non-current assets
of £3,050,000 during the year. This should help improve
the business’s current operational efficiency and its future
profitability.
Additionally, a debenture loan was issued which resulted
in a cash inflow of £2,000,000. This will result in future
cash outflows in the form of interest expense.
There has been an increase in receivables of £4,400,000,

which may mean customers are taking longer to pay and is
consequently having an adverse impact on cash flows.
Requirement 3:
a. Offering short-term incentives to customers to increase

sales
b. Reducing the selling price to increase sales
c. Cutting expenses
d. Disposing of assets
e. Delaying payments to payables and other creditors
f. Encouraging receivables to pay early by offering discounts
g. Resourcing effective debt collection procedures
9
The interpretation of
financial statements
• The basic questions

• Financial statement analysis
• Ratio analysis
• DuPont ratio analysis
• Limitations of ratios
• Time series analysis
Introduction
In this chapter, we shall attempt to answer the following question:
How should users of financial statements analyse and interpret
the data provided in order to obtain the (predictive) information
required?
Although financial statements do not provide direct forecasts
and forecast-based approaches to the measurement of income and
value, nonetheless, users of financial statements require future-
orientated information to make rational economic and financial
decisions.
However, interpretation of the relative importance of certain
items and the meanings of changes in the relationship of one fig-
ure to another in the financial statements can bring the operations
of the business into sharper focus. Comments can often be made
on the planned future position of a business as well as on accounts
reflecting past operations. The role of the financial statements
analysis is important in this regard.
interpretation of financial statements 275
The basic questions

The interpretation and analysis of financial statements should pro-
vide a framework for making informed judgements about a busi-
ness’s financial performance and financial status.
Users are interested in finding answers to the following basic
questions:
The first question is about the business’s profitability. The anal-
ysis should indicate whether profits are sufficient to warrant the
amount of funds invested in a business, the risk taken by investing
those funds, and whether a better return for the same class of risk
could be earned by an alternative employment of the funds. It can
also provide information on whether the assets are employed in
the right way or in the best combination.
The second question concerns solvency. This is the ability of a
business to pay its way and, in essence, to meet its financial ob-
ligations and prevent the possibility of insolvency. This analysis
revolves around the availability of cash to repay payables and the
adequacy of working capital resources to finance the level of activ-
ity required by management.
The third question investigates ownership of the business. This
analysis looks into the structure of the equity of a business, as well
as who controls the business and whether management policy is
influenced by one individual or group of shareholders. It also looks
wider into various other groups who have supplied the funds uti-
lised to finance the business (such as the shareholders, long-term
lenders, and current liabilities).
The fourth question concerns financial strength. This analy-
sis attempts to indicate the relative efficiency with which the
business’s resources have been employed. It examines whether a
business used up all its credit facilities, or has unused overdraft
facilities, or uncharged assets. It also measures the amount of assets
which the business controls year by year.
The fifth question deals with trends. This analysis places finan-
cial statements for several years in columnar form and side by side,
and so changes in the relative importance of certain items can be
identified.
The last basic question concerns cover. This analysis attempts
to determine the financial implications of the business’s capital
276 interpretation of financial statements
structure. It looks into the adequacy of the margin of profits over a

required rate of dividend, or the effect of a fluctuation in profit on
the ability of the company to pay a dividend or to meet its liability
for loan interest.
The answer to each question should lead to further questions
and investigations so that gradually a picture of what is happening
in the business can emerge.
The above questions can be answered using three techniques,
and by doing so, users can form an opinion of a set of financial
statements. The techniques are the ratio analysis, the time-series
analysis including trends, and the cash flow statements.
Financial statement analysis

In this section, the more common financial ratios are briefly intro-
duced and discussed. This is not an exhaustive list by any standard.
There are many ratios that can be used. Then the DuPont ratio
analysis and limitations of ratios are discussed before the time-
series analysis is introduced.
Ratio analysis
Ratios should be treated as indicators, supplying evidence of what
may be taking place in a business. A number of red flags may emerge
that should help focus the attention.
What are r atios?
Ratios describe the relationship between different items in the fi-

nancial statements.
Hundreds of ratios can be calculated; the expertise lies in know-
ing which ratios provide useful info.
The relative usefulness of each ratio depends on what aspects of
a company’s business affairs are being investigated.
Ratios can be expressed as decimals or percentages or even as
time periods. All the numbers come from either the Statement of
Financial Position (SFP) (balance sheet) or the Statement of Profit
or Loss (SPL) (profit and loss account) or both.
Definitions of ratios may vary from source to source as

concepts and terminology are not universally defined.
How can we use ratios?
If ratios are applied incorrectly, they may be

completely useless or misleading.
If ratios are used correctly, they are a powerful

tool for understanding and interpreting company
accounts.
Some assumptions:
In order for the ratios to be comparable, we assume:
• Accounting policies are the same throughout either the period

or the industry (i.e. conformity and uniformity in the prepara-
tion of accounts is applied).
• The economic activity of the company is the same throughout
the period.
If we compare companies in different countries, we

need to be aware of any differences in international
accounting policies and standards.
Some other basic rules:

The relative performance of a company can be gauged in a num-
ber of different terms by comparing that company’s financial ratios
with:
• Financial ratios for the preceding period(s)

• Budgeted financial ratios for the current period
• Financial ratios of other profit centres within the company
• Financial ratios of other companies within the same industry

• Financial ratios of the industry sector average
Note:
A ratio compares two values, and changes in either of these under-
lying values over time may be obscured in the final ratio figure.
Example:
Net profit Capital employed* Return on capital

employed (ROCE)
£ £
2014 100,000 1,000,000 10%
2015 150,000 1,500,000 10%
2016 225,000 2,250,000 10%

The ratio does not say anything about the trends of its indi-
vidual components – only about the combined effect of both
components.
*Capital employed definition:

Either just the Total assets, or
Total assets – Current liabilities, which is the same as Equity +
Long-term liabilities.
Six key r atios
Note that the formulas presented here for each ratio may differ from
those reported elsewhere. This means that when you compare ratios
computed by different sources, you must be sure they are all com-
puted in the same way.
i. Operating return on equity (ROE)

This is a primary investment ratio and represents the net profit
of a company as a percentage of the shareholders’ equity/funds.
Net profit before interest & tax
Shareholders’ equity / funds
The net profit before interest and tax is also usually referred to
as earnings before interest and tax (EBIT).
ii. Ratio of capital employed as a percentage of equity
This ratio is a primary financing ratio and expresses how
many times bigger the capital employed is than the sharehold-
ers’ equity/funds.
Capital employed
Shareholders’ equity / funds
iii. Return on capital employed (ROCE)
The ROCE is a primary operating ratio, a fundamental meas-
ure of the profitability of a business. It is an indicator of man-
agement efficiency; it contrasts the net profit generated by the
company with the total value of fixed and current assets (which
are presumed to be under management control), minus the cur-
rent liabilities; in other words, ROCE demonstrates how well
the management has utilised the capital employed.
Capital employed
iv. Asset turnover

This ratio is a primary activity and utilisation ratio, a measure
of how many sales are generated by the capital asset base of a
company.
Sales
Capital employed
v. Net profit margin

This ratio is a primary profitability and efficiency ratio and
is also used in the assessment of company performance and in
comparisons with other companies.

Sales
vi. Current ratio (also known as working capital ratio)
This ratio is a primary solvency and liquidity ratio, a short-
term measure of a company’s liquidity position.
 It is claimed that it should be above 2, but it depends on

the industry sector. If it is less than 1, then it could indicate
that the business might have a potential problem in meet-
ing payables’ claims. On the other hand, a number signifi-
cantly greater than 1 could imply that current assets are being
underemployed.
Current assets
Current liabilities
Subsidiary r atios
1. Gearing (or leverage, or financing) ratios:

Total liability – Current liability It represents the proportion
Capital employed of capital employed, which is
accounted for by long-term
fixed interest debt.
Or in simpler terms as: Debt* / Debt + Equity (D/(D+E))

* “Long-term (LT) debt” is implied.
This ratio sometimes is called the debt to value ratio (D/V).

The gearing structure of a company refers to the amount of long-
term debt compared with the amount of shareholders’ equity/funds.
High gearing è Low financing

Low gearing è High financing
The gearing structure affects factors such as annual interest pay-

ments and earnings per share è payables and shareholders are also
influenced.
Another gearing definition:
It includes both short-term and long-term

Total liabilities
financing. It may be relevant for companies that
Capital employed rely on high levels of overdraft.
Debt/equity ratio:
Long − term debt ( D ) The D/E ratio can be used to evaluate
Shareholders’ equity ( E ) how much gearing a company is using. It
measures a company’s debt relative to the
value of its net assets. A high D/E ratio is
often associated with high risk; it means
that a company has been aggressive in
financing its growth with debt.
Shareholders’ ratio:
Shareholders’ funds It represents the proportion of capital employed
Capital employed that is made up by shareholders’ equity/funds.
Interest cover ratio:

Net profit before interest & tax It describes how many times
Interest charges larger the profit is than the
(debt) interest charges. It gives
creditors an indication of how
safe these repayments are.
2. Other solvency/liquidity ratios
Quick or acid test:
Current assets – Inventory It indicates the company’s ability to
Current liabilities cover/pay immediate commitments
using cash and/or near-cash.
LT debt + Current liabilities – Currents assets It expresses the length

Net profit after interest & tax of time it would take
to repay borrowings
out of net profit after
interest and tax.
3. Other asset utilisation (activity) ratios
Another asset turnover definition:
Sales This ratio is a measure of efficiency. It
Non − current assets indicates the sales volume produced by the
available non-current assets.
Inventory turnover ratio:
Sales Cost of sales Cost of sales

or Or, more usually Closing inventory
Inventory Average inventory
It shows the number of times that a company turns over (sold and
replaced) its average/normal level of inventory during the account-
ing period.
The average inventory holding period (in days):

Closing inventory
× 365
Cost of sales
Receivable turnover ratio [expressed in terms of the trade receivable

payment period (in days)]:
Receivable It gives the number of days for which the

× 365 company gives credit. It can be used to evaluate
Sales
credit control and how efficiently/quickly the
company receives cash.
Payable turnover ratio [expressed in terms of the trade payable

payment period (in days)]:
Payables It indicates the credit facilities extended to a

× 365 company by its trade suppliers.
Sales
4. Investment or market value ratios

Earnings per share (EPS):
This ratio indicates the amount
Profit after interest, tax &
of profit after interest, tax, and
preference shares
preference shares (i.e. profit available
No of ordinary shares issued to ordinary shareholders) earned for
each ordinary share.
Price earnings (PE) ratio:

Market value per ordinary share This ratio is a measure of market
EPS confidence in the shares of a
company.
Dividend cover:
Per-share earnings/profit in This ratio compares net profit

period attributable to ordinary with dividends; it shows the
shareholders (EPS) number of times current earnings
cover dividend payments and how
Per-share cash dividend safe this annual yield is. It is also
paid/proposed to ordinary called the payout or ploughback
shareholders in period ratio, as it indicates the proportion
of available profit to be paid out
and the proportion to retain.
Dividend yield:
Gross dividend (before any tax ) This ratio measures the
ordinary shareholders’ annual
Market value of the ordinary share
return on investment.
DuPont ratio analysis

The DuPont ratio analysis provides an effective method for
identifying company problems and for using ratios. This method of
analysis was developed at the DuPont Corporation and is now fre-
quently used by analysts. Its primary contribution is to help organise
and give direction to the financial statement analysis.
DuPont analysis is a technique that is used to decompose the
different drivers of ROE. Decomposition of ROE means that
there are three metrics that drive ROE: operating efficiency (mar-
gin), asset use efficiency (volume/turnover), and financial leverage.
The DuPont analysis computes the ROE as the product of
margin, volume/turnover, and leverage. DuPont analysis breaks
ROE into its constituent components to determine which of these
components is most responsible for changes in ROE.

ROE = Net profit margin × Total asset turnover × Equity multiplier
The equity multiplier, as shown below, is a measure of the busi-

ness’s leverage. We can rewrite the DuPont relationship using the
ratio formulas as follows:
Net Income* Sales 1

ROE = × ×
Sales Total assets total liabilities
1−
total assets
*In some textbooks, net income in the equation above refers to the
income before interest and tax, and elsewhere, to the income that
remains after subtracting all operating expenses, taxes, interest, and
preferred share dividends from a company’s total revenue.
By using the above DuPont equation, users can determine
whether operating efficiency, asset use efficiency, or leverage is
most responsible for ROE variations.
There is nothing mystical about the above equation. With a little
algebra, it collapses to net income divided by equity, which is just the
equation for ROE. However, it is extremely useful as a tool to estab-
lish a beginning point for analysis. Whether the ROE is declining, or
not as high as the company’s competitors, determines if the problems
are with the margin, volume, or leverage of the company. Note that
high leverage may mask problems with margin and volume/turnover.
Once you have located the problem, examine the inputs to the
troublesome ratio for additional clues. For example, if total asset
turnover is declining, is it because sales have dropped or because
the business has acquired additional assets? The ratios will provide
flags that prompt further investigation and possibly generate new,
more probing questions.
Overtr ading
See Chapter 8 for more details about overtrading.

Overtrading can be detected by using the following ratios:
1 . Current ratio
2. Acid test ratio
3. Inventory turnover ratio
4 . Receivables turnover ratio

5. Payables turnover ratio
6. Receivable over payables ratio
The object of using the above ratios is to detect a deterioration of

the liquidity position of the business and an increasing reliance upon
trade payables and overdraft facilities.
Limitations of ratio analysis

Along with the assumptions set out at the beginning, other limita-
tions are as follows:
• How do we know which ratios to select for the analysis of

company accounts?
• Which ratios can be combined to produce an informative end
result?
• How should individual ratios be ranked to give the user an
overall picture of company performance?
• How reliable are all the ratios – can users place more reliance on
some ratios than others?
Time-series analysis
In addition to ratio analysis, an equally important method of fi-
nancial analysis is time-series analysis, which mainly involves
comparing the business’s current performance to prior periods. This
method allows the user to identify trends, changes over time that
are more or less consistent in one direction. Unless the business has
undergone some type of major restructuring, prior period numbers
are a near perfect comparison against today’s figures.
The following time-series analysis can be performed.
Horizontal analysis between two periods
The percentage change (positive or negative) for each item in the finan-
cial statements between two accounting periods needs to be calculated.
Calculations are straightforward, but the skill rests with their
interpretation.
For example:
Profit and Loss Statement % change 20x7 20x6
£’000 £’000
Turnover 38.8 139,444 100,480
Cost of sales 40.8 106,972 76,001
Gross profit 32.7 32,472 24,479
Administrative expenses 27.5 9,533 7,476
Operating profit 34.9 22,939 17,003
Net interest payable 37.8 5,373 3,898
Profit before taxation 34.0 17,566 13,105
Taxation 36.5 770 564
Profit attributable to shareholders 33.9 16,796 12,541
Dividends 14.0 3,894 3,417
Retained earnings for the year 41.4 12,902 9,124
Trend analysis over a series of periods
Advantage: This technique gives a very quick rough guide to spe-

cific trends in individual items in the financial statements.
Disadvantage: The figures may ignore the effects of inflation
and not represent company performance in real terms.
First form of trend analysis: percentage change

Percentage changes illustrate the change each year and show the
exact trend in percentage changes. For example:
20x2 20x3 20x4 20x5 20x6

£000 £000 £000 £000 £000
Net profit 150 195 249 309 375
% change +30.00% +27.69% +24.10% +21.36%
The trend shows a positive increase in the net profit every year. How-
ever, there is a constant decrease in percentage change from one year
to the next (from 30% down to 21.36%).
Second form of trend analysis: index numbers

Index numbers give a good indication of how the results over a
series of years compare with each other and the general direction of
the trend.
For example:
20x2 20x3 20x4 20x5 20x6
£000 £000 £000 £000
Net profit 150 195 249 309 375
Index number 100 130 166 206 250
We set the first year (normally) to 100 and it becomes the base year,
and the future years are scaled according to the base year.
Vertical analysis
Financial statements themselves cannot be compared across an in-

dustry or across time because of scale differences. One way to stand-
ardise financial statements is to divide each line item by a constant.
This standardised format is referred to as common-sized financial
statements. In effect, this converts every entry into a ratio.
Common-sized statements express all items in each financial
statement as a percentage of a selected figure.
Hence, common-sized statements are just a specialised type of
ratio analysis in which the denominator of every ratio is typically
either total assets or total sales (turnover).
For example:
20x7 Calculation %
£’000
Turnover 139,444 139,444 / 139,444 100.0
Cost of sales 106,972 106,972 / 139,444 76.7
Gross profit 32,472 32,472 / 139,444 23.3
Administrative expenses 9,533 9,533 / 139,444 6.8
Operating profit 22,939 22,929 / 139,444 16.5
Net interest payable 5,373 5,373 / 139,444 3.9
Profit before taxation 17,566 17,566 / 139,444 12.6
Taxation 770 770 / 139,444 0.6
Profit attributable to
shareholders 16,796 16,796 / 139,444 12.0
Dividends 3,894 3,894 / 139,444 2.8
Retained earnings for
the year 12,902 12,902 / 139,444 9.3
Further analysis can combine the vertical analysis with the horizon-
tal analysis. The horizontal analysis can be adopted after the vertical
analysis has been done for some years. For example:
20x7 20x6
£’000 £’000
Turnover 100.0 100.0
Cost of sales 76.7 75.6
Gross profit 23.3 24.4
Administrative expenses 6.8 7.4
Operating profit 16.5 16.9
Net interest payable 3.9 3.9
Profit before taxation 12.6 13.0
Taxation 0.6 0.5
Profit attributable to shareholders 12.0 12.5
Dividends 2.8 3.4
Retained earnings for the year 9.3 9.1
Segmental analysis
Accounting standards regard segmental reporting as important, and it

assists users of accounts in assessing the different business segments and
geographical regions of a group and how they affect its overall results.
According to the accounting standard, a segment must be
d istinguishable to be regarded as a segment.
It must also be significant to be disclosed.
Historical summaries
Historical summaries are not required by accounting standards or

Companies Acts to be disclosed in the financial statements. How-
ever, many companies do disclose a five-year historical summary.
Note: Past reported figures may need to be adjusted.
Multivariate analysis – Z-scores
This analysis evaluates corporate stability and, more importantly,

predicts potential instances of corporate failure so that appropriate
action to reverse the process of failure can be taken.
Z-score analysis is based on various financial ratios. However, it

overcomes the limitations of ratio analysis.
It replaces the financial historical ratios with scientifically ana-
lysed ratios which can reliably predict future events by identifying
benchmarks above which “all is well” and below which there is an
imminent danger of failure.
The best-known Z-score is the Altman’s Z-score:
Z = 0.012X1+ 0.014X 2 + 0.033X 3+ 0.006X 4 + 0.999X 5

where:
X1 = working capital/total assets
X2 = retained earnings/total assets
X3 = earnings before interest and tax/total assets
X4 = market capitalisation/book value of debt
X5 = sales/total assets
Z-score > 2.7 è Companies are unlikely to fail
Z-score < 2.7 è Companies demonstrate the same characteristics
as companies that have failed in the past
Other forecasting bankruptcy models are developed by Ohlson

(1980), Hopwood (1989), and others. Details of these models can be
found in the following published academic papers:
• Altman, Edward I. 1968. “Financial ratios, discriminant anal-

ysis and the prediction of corporate bankruptcy”. Journal of
Finance 23(4): 589–609.
• Zmijewski, Mark E. 1984. “Methodological issues related to the
estimation of financial distress prediction models”. Journal of
Accounting Research 22 (Supplement): 59–86.
• Hopwood, W. S., J. C. McKeown, and J. P. Mutchler. 1989. “A
test of the incremental explanatory power of opinions qualified
for consistency and uncertainty”. The Accounting Review 64
(January): 28–48.
• Ohlson, J. A. 1980. “Financial ratios and the probabilistic pre-
diction of bankruptcy”. Journal of Accounting Research 19
(Spring): 109–131.
• Jones, S., D. A. Hensher. 2004.“Predicting firm financial distress: A
mixed logit model”. The Accounting Review 79(4): 1011–1038.
• Gilbert, L. R., K. Menon, and K. B. Schwartz. 1990. “Predicting

bankruptcy for firms in financial distress”. Journal of Business
Finance & Accounting 17(1): 161–171.
Short questions
Question
Miden Ltd has sales of £500,000, operating profit of £50,000, in-
terest expense of £10,000, tax expense of £20,000, total equity of
£125,000, and total debt of £275,000. On the basis of the debt-
to-equity ratio, Miden would be considered to have:
Answer
Too much debt, making it a risky company to invest in.

( £275,000 / £125,000 = 220% ( > 100% is risky ) )
Question
Firm A has an ROE equal to 24%, whilst firm B has an ROE of 15%
during the same year. Both firms have a total financial leverage equal
to 0.5. Firm A has an asset turnover ratio of 0.9, whilst firm B has an
asset turnover ratio equal to 0.4.Which firm has a higher profit margin?
Answer
Firm B has a higher profit margin than firm A (Profit margin of firm
A = 5.33%; profit margin of firm B = 7.5% – use DuPont equation).
Question
If a firm has $100 in inventories, a current ratio equal to 1.2, and a
quick ratio equal to 1.1, what is the firm’s net working capital?
Answer
Below, current assets is denoted as CA and current liabilities as CL.
CA / CL = 1.2 and (CA − 100) / CL = 1.1 => Solve and find
CL = 1,000 and CA = 1,200 => so CA − CL = 200
Question
To measure a firm’s solvency as completely as possible, we need to
consider
a. The firm’s relative proportion of debt and equity in its capital

structure.
b. The firm’s capital structure and the liquidity of its current assets.
c. The firm’s ability to use net working capital to pay off its cur-
rent liabilities.
d. The firm’s leverage and its ability to make interest payments on
its long-term debt.
e. The firm’s leverage and its ability to turn its assets over into sales.
Answer
d.
Questions
Question 1
Maps Ltd is a small manufacturing business with premises in
the West Midlands, UK. The SFP is shown below, together
with other significant figures extracted from the accounts:
Maps Ltd
Statement of Financial Position as of 31 March
£’000 £’000 £’000
Non-current assets
Buildings 400 400
Plant 800 424 376
Vehicles 30 6 24
800
Current assets
Inventory 480
Receivables 720
Investments 80 1,280
Current liabilities
Payables 200
Tax 60
Overdraft 300 560
10% loan 800
720
Shareholders’ equity
Ordinary shares of £1 each 240
Reserves 480
720
Sales 1,600
Gross profit 320
Net profit 160
Required:
Using simple ratio analysis, comment on the performance of

this company for the year up to 31 March.
Question 2
You have been hired as an analyst for PAST Consulting,
and your team is working on an independent assessment of
Daffy Duck Food Plc (DDF Plc). DDF Plc is a company
that specialises in the production of freshly imported farm
products from France and Belgium. Your assistant has pro-
vided you with the following data for DDF Plc and their
industry.
Ratio 20x9 20x8 20x7 20x9

Industry
Average
Long-term debt 0.45 0.40 0.35 0.35
Inventory turnover 62.65 42.42 32.25 53.25
Depreciation/total 0.25 0.014 0.018 0.015
assets
Days’ sales in 113 98 94 130.25
receivables
Debt-to-equity ratio 0.75 0.85 0.90 0.88
Profit margin 0.082 0.07 0.06 0.075
Total asset turnover 0.54 0.65 0.70 0.40
Quick ratio 1.028 1.03 1.029 1.031
Current ratio 1.33 1.21 1.15 1.25
Times interest earned 0.9 4.375 4.45 4.65
Equity multiplier 1.75 1.85 1.90 1.88
Required:
a. In the annual report to the shareholders, the CEO of

DDF Plc wrote, “20x7 was a good year for the company
with respect to our ability to meet our short-term obli-
gations. We had higher liquidity largely due to an increase
in highly liquid current assets (cash, trade receivables, and
short-term marketable securities).” Is the CEO correct?
Explain and use only relevant information in your analysis.
b. What can you say about the company’s asset management?
Be as complete as possible given the above information,
but do not use any irrelevant information.
c. You are asked to provide the shareholders with an assess-
ment of the company’s solvency and leverage. Be as com-
plete as possible given the above information, but do not
use any irrelevant information. Note that depreciation is
quite a large expense.
Question 3
Bianqa Ltd, a medium-sized company operating in the agri-
food sector supplies quality prepared food products in the
Irish and UK markets.
The average performance of companies in the same indus-
try as Bianqa Ltd for 20x0 is detailed in the table as follows:
Industry average results 20x0

Return on investment (ROI) 11%
Current ratio 2
Acid test ratio 1.2
Debt/equity ratio 0.3
The following figures are taken from the final accounts of

Bianqa Ltd for 20x0.
Bianqa Ltd figures for 20x0 €

Net profit 50,000
Sales 975,000
Current assets (including closing stock) 155,000
Long-term loan 300,000
Ordinary share capital 500,000
Current liabilities 85,000
Retained earnings 100,000
Closing inventory 80,000
Required:
a. Calculate the following for 20x0 for Bianqa Ltd:

1. Return on investment (ROI)
2. Current ratio
3. Acid test ratio
4. Debt/equity ratio
b. Analyse the profitability and liquidity of Bianqa Ltd for 20x0,
with reference to the industry average results shown in the
box above, and make recommendations for Bianqa Ltd.
Question 4
The data summarised in the table below show the perfor-
mance of two firms, A and B, over five years.
Years
1 2 3 4 5
Firm
Gross profit A 42 37 35 37 35
margin % B 30 32 32 33 34
Net profit A 16 13 12 12 10
margin % B 10 11 11 12 12
ROCE % A 14 13 12 12 11
B 9 10 10 11 11
Acid test ratio A 2.7 2.6 2.5 2.5 2.4
B 1.7 1.8 1.5 0.8 1.0
Required:
a. Using the information in the table, explain the compara-

tive attractiveness of the two firms to a potential investor.
b. Why is it important that potential investors should be
aware of the ratio of ordinary share capital to other forms
of long-term finance (known as the gearing ratio)?
c. Why might a company use various sources of finance?
d. Using examples, explain why it is important that poten-
tial investors should consider non-financial factors before
making their investment decision.
Question 5
The managing director of Boot & Shoe Ltd, a company in the
boot and shoe industry, has just received a statistical bulletin
showing the performance of the industry as a whole for the
year ended 30 June. She would like to assess the results of the
company for the same period, using these statistics for com-
parison purposes.
The list of accounts of Boot & Shoe Ltd for the year ended
30 June this year are given below:
£’000
Equipment at cost 26
Long-term investment in associated company 2.5
Land 20
Cash at bank 11
Plant and buildings 21
Inventory 55
General reserve 13
Ordinary share capital 50
Trade payables 47.5
Taxation (payable 1 Jan. next year) 7
Long-term loan 30
Allowance for depreciation on equipment 13
SPL 42
Taxation (payable 1 Jan. year after next) 8
Balance of undistributed profit at 30 June this year 42

Loan interest (10%) 3
General expenses 49
Depreciation of equipment 2.5
Cost of goods sold 584.5
Dividend on share capital 2.5
Corporation tax 8
Sales 652
Balance of undistributed profit on 1 July last year 39.4
Dividends on shares in associated company 0.1
The following ratios were extracted for the industry:

ROCE 10%
Inventory turnover 15 times
Current ratio 1.8
Gross profit on sales 20%
Receivable ratio 33%
Required:
a. Redraft the accounts in a form suitable for presentation to

management and for publication later.
b. Calculate the above ratios for Boot & Shoe Ltd.
c. Compare the two sets of ratios and advise the managing
director.
Question 6
Celia Clough wonders whether to invest in the shares of
SpotsDirect Plc, and she has analysed the financial statements
of the company over the last three years to assist her decision.
She supplies you with a copy of her analysis and has given you
the following information:
SpotsDirect Plc analysis of financial data

20x0 20x1 20x2
Sales trend as a percentage 100 107 120
Inventory turnover 6.4 times 5.3 times 4.7 times
Dividend per share 25 pence 25 pence 25 pence
Share capital no change over three-year period
Dividend yield 4% 5% 6%
Dividend cover 50% 40% 30%
Receivable turnover 10 times 9.1 times 8.3 times
Return of total assets 5.80% 6.20% 6.70%
Acid test ratio 1.3 0.8 0.6
Return of shareholders’
funds 4.80% 5.80% 7.20%
Current ratio 1.8 2.1 2.5
Required:
Celia asks you to respond to the following questions concern-

ing the last three years.
1. Is SpotsDirect Plc better able now to pay its creditors than

in the past?
2. Has a change in gearing taken place during the period?
3. Is the credit controller collecting receivable balances as
quickly now as in the past?
4. Is the company owed more by trade receivables than two
years ago?
5. How has the share price moved over the last two years?
6. Have EPS increased over the last three years?
7. How has the PE ratio moved over the last three years?
8. Have inventory levels changed over the last two years?
Answers
Answer 1
Requirement:
Net profit to capital employed = 160 / 2,080 = 7.7%. Disap-

pointing return. Investigate whether the profitability of oper-
ations or the underuse of capacity is the cause.
Net profit to sales = 160 / 1,600 = 10%.

Sales to capital employed = 1,600 / 2,080 = 0.77 times.
The profit margin on sales is fairly good, but it could be
improved. Resources do not appear to be working hard
enough, since £1 of assets earns only 7.7 pence of sales in the
year (0.77 × 10% = 7.7%)
Sales to non-current assets = 1,600 / 800 = 2 times.

Sales to current assets = 1,600 / 1,280 = 1.25 times.
Non-current assets to current assets = 800 / 1,280 = 1:1.16.
Currents assets earn less per £1 than non-current assets,
yet current assets have more weight in the asset structure.
This may reflect the nature of the business or could be evi-
dence of overinvestment in current assets.
Receivable period = (720 / 1,600) × 365 = 164 days (more

than five months).
Inventory turnover = 480 / 1,280 × 365 = 137 days (more
than four months).
Five months’ credit to customers seems excessive. Credit
control could reduce the investment here, so long as it does
not harm sales effort. Perhaps inventory control could re-
duce the four-month period, which is, on average, the cur-
rent inventories wait in stores before being sent out.
Gross profit to sales = 320 / 1,600 = 20%.

Expenses to sales = 160 / 1,600 = 10%.
Half of the gross profit margin is used up by the expenses.
Answer 2
Requirement a:
The answer should be focused on using the current and quick

ratios. Whilst the current ratio has steadily increased, it is to be
noted that the liquidity has not resulted from the most liquid
assets as the CEO proposes. Instead, from the quick ratio, one
could note that the increase in liquidity is caused by an increase
in inventories. For a fresh food company, one could argue that
inventories are relatively liquid when compared to other in-
dustries. Also, given the information, the industry benchmark
can be used to derive that the company’s quick ratio is very
similar to the industry level and that the current ratio is indeed
slightly higher – again, this seems to come from inventories.
Requirement b:
Inventory turnover, days sales in receivables, and the total asset

turnover ratio are to be mentioned here. Inventory turnover has
increased over time and is now above the industry average.This
is good – especially given the fresh food nature of the company’s
industry. In 20x9 1999 it means, for example, that every 365 /
62.65 = 5.9 days, the company is able to sell its inventories as
opposed to the industry average of 6.9 days. Days’ sales in re-

ceivables has gone down over time, but is still better than the
industry average. So, whilst they are able to turn inventories
around quickly, they seem to have more trouble collecting on
these sales, although they are doing better than the industry. Fi-
nally, total asset turnover has gone down over time, but it is still
higher than the industry average. It does tell us something about
a potential problem in the company’s long-term investments,
but again, they are still doing better than the industry.
Requirement c:
Solvency and gearing (leverage) are captured by an analysis of

the capital structure of the company and the company’s ability
to pay interest. Capital structure: Both the equity multiplier
and the debt-to-equity ratio tell us that the company has be-
come less geared. To get a better idea about the proportion of
debt in the company, we can turn the D/E ratio into the D/V
ratio: 20x9: 43%, 20x8: 46%, 20x7: 47%, and the industry aver-
age is 47%. So based on this, we would like to know why this
is happening and whether this is good or bad. From the num-
bers, it is hard to give a qualitative judgement beyond observ-
ing the drop in leverage. In terms of the company’s ability to
pay interest, 1999 looks pretty bad. However, remember that
times interest earned uses EBIT as a proxy for the ability to
pay for interest, whilst we know that we should probably con-
sider cash flow instead of earnings. Based on a relatively large
amount of depreciation in 20x9 (see information provided in
the question), it seems that the company is doing just fine.
Answer 3
Requirement a:
1. ROI
= Net profit / Capital employed × 100
= 50,000 / (500,000 + 100,000 + 300,000) × 100
= 50,000 / 900,000 × 100
= 5.56%
2. Current ratio
= Current assets / Current liabilities
= 155,000 / 85,000
= 1.82
3. Acid test ratio

= (Current assets – Closing inventory) / Current liabilities
= (155,000 − 80,000) / 85,000
= 75,000 / 85,000
= 0.88
4. Debt/equity ratio
= Long-term debt / Equity capital
= 300,000 / (500,000 + 100,000)
= 300,000 / 600,000
= 0.5
Requirement b:
Comparison of ratios
Bianqa Industry average
ROI 5.56% 11%
Current ratio 1.82 2
Acid test ratio 0.88 1.2
1. Profitability
ROI
The ROI for Bianqa Ltd is 5.6%, which measures the return
on capital for investors in a business. This is half the average
performance of companies in the same industry. However,
it is a new company and its ROI still compares favourably
with the prevailing interest rates currently available on deposit
accounts, e.g. a permanent NatWest bank personal savings
account offering a return of 2.1%.
Recommendations for Bianqa Ltd

Bianqa Ltd will want the ROI to be as high as possible and to
remain above the bank interest rate. To improve its position,
it needs to reduce its capital employed figure or improve its
net profit by, for example, controlling its expenses/overheads or
trying to increase its sales.
2. Liquidity
Current ratio
The average industry result in 20x0 had a very healthy level of
working capital. It had €2 available to pay for every €1 of lia-
bilities. Maintaining this healthy working capital is essential for
a business’s cash flow. Bianqa Ltd has €1.82 available to pay for
every €1 owed, a little below the ideal of 2:1. It should make
every effort to maintain its current ratio so that it can pay its
short-term debts as they fall due. If the liquidity position of a
new business is poor and it cannot pay its current liabilities, it
may have to go into liquidation.
Or
Acid test ratio

In 20x0, the average industry result was 1.2:1, indicating
that on average, €1.20 was available immediately to pay
for every €1 owed. The situation for Bianqa Ltd in 20x0
was 0.88:1, with the business only having 88c available to
pay for every €1 it owes. Neither the industry average nor
Bianqa Ltd manages to attain the ideal acid test ratio of 1:1.
Bianqa Ltd will have difficulty raising cash quickly to pay its
bills as they fall due. Failure to improve on this could result
in Bianqa Ltd having difficulty in buying goods on credit
in the future.
Recommendations for Bianqa Ltd

In order to improve its liquidity position:
• Sell slow-moving inventory at a discount.

• Effective cash flow forecasting will help avoid liquidity
problems.
• Effective credit control will reduce the risk of bad debts.
• Effective stock control will reduce the amount of money
tied up in inventory.
• Increase cash sales.
Answer 4
Requirement a:
It would appear that A’s performance is deteriorating com-

pared with B. This seems to be confirmed by the net profit as
a percentage of capital employed. On this basis, B would seem
to be the better bet.
But with regard to liquidity, it would seem that B is sailing
close to the wind and may find itself with cash flow problems.
A seems to be more secure, but has it got too much cash?
More information is needed to make a true assessment.
Requirement b:
The gearing ratio shows the relationship between equity cap-

ital and interest-bearing capital.
For example, if the gearing ratio is less than 100%, a com-
pany is said to be low geared.
This means that the majority of long-term funds comes
from the owners of the company, usually implying that a
company is not a risk-taker and the potential for growth is
higher.
Requirement c:
Sources of funds can be internal or external. Internal sources

indicate the company has control over compared with ex-
ternal funding. There is the time period for borrowing and
charges made that have to be taken into consideration.
Expenditure can be for revenue or capital expenditure.
Capital expenditure is on goods such as machines which
can be used and financed over a long time period.
Revenue expenditure is spent on items such as raw mate-
rials or labour. This will be consumed quickly. Trade credit
is a source of funds used to purchase raw materials.
Requirement d:
Examples other than financial help to give a fuller picture of

the likely future performance of the company. For example,
it is important to look at the previous performance of the
company to identify trends and compare them with what is
happening in the marketplace.
For example, if company sales are increasing in a shrink-
ing market, this should sound alarm bells to a potential in-
vestor. Why is the market shrinking?
The state of the economy might indicate the timing of in-
vestment; for example, is the economy entering a downturn
or is the economy enjoying a boom?
Answer 5
Requirement a:
Boot & Shoe Ltd

Statement of Profir or Loss as of 30 June
£’000
Sales 652
Cost of goods sold 584.5
Gross profit 67.5
Investment income (dividends) 0.1
67.6
Expenses
Loan interest (10%) 3
General expenses 49
Depreciation of equipment 2.5
Profit before tax 13.1
Tax 8
Profit after tax and before dividends 5.1
Dividends 2.5
Net profit 2.6
Boot & Shoe Ltd

Statement of Financial Position as of 30 June
£’000 £’000 £’000
Non-current assets
Equipment at cost 26 13 13
Plant and buildings 21 – 21
Land 20 – 20
Long-term investment in
associated company 2.5 2.5
56.5
Current assets
Cash at bank 11
Inventory 55 141
Current liabilities
Trade payables 47.5
Taxation (payable 1 Jan. next year) 7 54.5
Taxation (payable 1 Jan. year
after next) 8
Long-term loan 30 38
105
Equity
Ordinary share capital 50

General reserve 13
SPL 42
105
Requirement b and c:
ROCE = 13,100 / 197,500 = 6.6% (industry average is 10%).

Less profitable than average for industry. Investigate profitabil-
ity and underuse of capacity.
Inventory turnover = 584.5 / 55 = 10.6 times (industry aver-
age is 15 times).This suggests that inventories are not working
hard enough. Other companies manage with less inventory
per £1 of sales. Inventory control is required.
Current ratio = 141 / 54.5 = 3.03 (industry average is 1.8).
Less dependent on outside finance to fund current assets. Per-
haps does not take as much trade credit as it could.
Gross profit margin = 67.5 / 652 = 10.4% (industry average
is 20%). Less profitable per £1 of sales made than average for
industry. Investigate pricing policy of buying department to
isolate markup or cost of sales as the reason.
Receivable ratio = 75 / 652 = 11.5%, or (75 / 652) × 365 = 42
days (industry average is 33% or 120 days).The company is giv-
ing much less credit than average to customers. This reflects an
efficient collection policy, but the question is whether the sales
effort is being supported by a good credit line. More credit may
mean more sales and a faster inventory turnover at higher prices.
Answer 6
Requirement 1:
Receivable and inventory turnover have both decreased over

the three-year period, indicating that these two items are an
increasing element among the current assets (making current
assets less liquid). The current ratio is increasing, whilst the

quick test ratio is slowing down. These two factors point to
a shrinking cash and bank balance available to pay liabilities
(creditors).
Requirement 2:
In 20x0 and 20x1, the return of shareholders’ funds was less

than the return of total assets. The position was reversed in
20x2, indicating a change in gearing (leverage) during the last
year.
Requirement 3:
Debt collection is as follows (in days):

20x0: 36 days 20x1: 40 days 20x2: 44 days
The debt collections from customers (receivables) is increased.
Requirement 4:
The collection period has increased (see Requirement 3) and

turnover has expanded, so receivables must be more now than
two years ago.
Requirement 5:
Dividend per share is unchanged but yield has risen. There-

fore, the share price (market value) has fallen.
Requirement 6:
Dividend per share is unchanged, but the dividend cover has

fallen. This indicates an increase in EPS (witness the increased
return on total assets). There has been no change in the share
capital over the period.
Requirement 7:
EPS has increased, but share price (market value) has fallen.
The PE ratio must be decreasing.
Requirement 8:
Inventory turnover (in days):

20x0: 57 days 20x1: 69 days 20x2: 77 days
The average inventory holding period has increased, and this,
coupled with 20% expansion of sales, suggests greater inven-
tory holdings.
10
General questions
Question 1
Angelina opened a business in London on 1 January. She was
able to arrange two main agencies under the same business –
one for word processing and the other for shoe repairs.
For the first six months, Angelina was able to produce the
following information:
Cash receipts $ $
Initial deposit to start business 5,000
Customers - Word processing 6,000
- Shoe repairs 3,000
14,000
Cash payments
To word processor 4,000
To shoe repairer 2,500
Rent 1,000
Wrappings 500
Advertising 500
Motor vehicle 5,000
Motor vehicle
expenses 300 13,800
Cash on hand 200

310 GENER AL QUESTIONS
At the end of December, she was able to produce the

following additional information:
$
Completed word processing yet to be 500
paid for by customers
Completed shoe repairs yet to be 100
paid for by customers
Amounts owing to word processor 300
Wrappings on hand 200
The advertising payment represents a 12-month advertise-

ment which appears in the shopping centre newspaper.
The motor vehicle was purchased on 1 January and is ex-
pected to have a useful life of four years, at which time its
residual is expected to be $1,000.
Required:
Prepare a Statement of Profit or Loss (SPL) for the first six

months of Angelina’s operations.
Question 2
Prepare an SPL to determine gross and net profit from the
following information:
Sales £ 214,000 Sale returns £ 21,000
Purchases 138,000 Purchase returns 15,000
Electricity 8,320 Carriage inwards 400
Discounts received 200 Commission received 500
Discounts allowed 110 Wages 28,040
Advertising 200 Rent expense 2,200
Office expenses 670 Insurance 300
Inventory 38,000 Inventory 30/6/20x2 22,500
1/7/20x1
GENER AL QUESTIONS 311
Question 3
On 31 May 20x8, the Statement of Financial Position (SFP) of
Daponte Trading Ltd appears as follows:
Daponte Trading Ltd
Current assets
Cash $10,000
Receivables 12,000
Supplies 6,000
Inventory 25,000 53,000
Non-current assets
Plant 30,000
Less: accumulated
Current liabilities
Payables $18,000
55,000
Owner’s equity
Capital 55,000
During the month of June 20x8, Daponte Trading Ltd

had the following summary of transactions:
1 . Received $5,000 from receivables.

2. Sold $7,500 worth of inventory on credit. This inventory
had cost $3,000.
3. Sold inventory costing $5,000 for $12,800 cash.
4. Purchased $15,000 inventory on credit.
5. Paid payables $14,000.
6. Bought supplies for $1,500 cash.
7. Paid wages for the month of $3,500.
8. Paid rent of $600 for the month.
9. Paid annual insurance policy in advance, $840.

10. The plant is expected to last for five years with no scrap
value. Depreciation adjustment required.
11. At the end of the month, $4,300 of supplies were left on
hand.
12. Adjusted for prepaid insurance used.
From the above information, prepare an SPL and an SFP for

the end of the month.
Question 4
The following SFP is for Ditbit Co. Limited as of June 20x6:
Current assets
Cash £30,000
Inventory 40,000
Receivables 6,000 76,000
Non-current assets
Equipment 25,000
Less: Accumulated
£91,000
Current liabilities
Payables £25,000
Wages owing 3,000
28,000
£63,000
Shareholders’ funds
Paid-up capital 60,000
Retained profits 3,000
£63,000
During the following month, just completed, the com-

pany had the following transactions:
a. Sold inventory for cash £30,000 (had cost £18,000).

b. Sold inventory on credit £55,000 (had cost 30,000).
c. Purchased inventory on credit £16,000.
d. Paid payables £24,000.
e. Received £18,000 from receivables.
f. Issued £10,000 worth of shares at par value for cash.
g. Paid wages of £18,000, which included the wages
owing.
h. At the end of the month, £2,400 was owing in wages.
i. The equipment was written off at £500 per month.
j. Rent of £2,700 was paid for the quarter beginning 1 July.
From the above information, prepare an SPL and an SFP at

the end of the month.
Question 5
Below is the trial balance of Mobile Phone Services Ltd, prior
to adjustment, and the adjustments which must be made on
SFP day.
Mobile Phone Services Ltd
Trial balance as of 30 June 20x6
Debit Credit
Cash $26,400
Prepaid rent 1,800
Prepaid insurance 1,100
Supplies 2,400
Equipment 42,200
Trade payables $ 6,800
Revenue received 92,600
Loan payable 6,000

Capital – Alesha Dixon 28,000
Drawings – Alesha Dixon 12,000
Deposits received 2,400
Salaries expense 28,000
Rent expense 8,400
Electricity expense 3,400
Advertising expense 1,700
$135,800 $135,800
The following adjustments are to be made.
a. The prepaid rent figure includes $1,200 which relates to

the month just completed.
b. The prepaid insurance is for a policy which has just
expired.
c. Since this is the first year of operation and no monthly
adjustments have been made, there has been no adjust-
ment made so far for depreciation. All assets have been
owned for the full year, and it is assessed that the equip-
ment will be usable for ten years. No resale value is
assumed.
d. Salaries owing at the end of the year are $1,200.
e. Supplies still on hand at the end of the year cost $800.
f. An amount of $1,000 included in the deposits received
relates to a contract which has just been completed.
g. $800 is receivable from a subtenant for rent.
h. One month’s interest on the bank loan is provided for at
15% per annum.
i. 5% of the trade receivables are considered to be doubtful.
Show the adjusting journal entries for Mobile Phone Ser-

vices Ltd and prepare the SPL and the SFP as of 30 June 20x6
for the same company.
Question 6
The transactions below are for a business owned by Mickey
Rooney. The business was started on 1 July 20x8 and has an
accounting year end on 30 June.
July 1 Mickey commenced business by
transferring £10,000 to a bank account.
3 Bought fixtures for the shop, £600,
paying by cheque.
4 Made cash sales, £1,250.
6 Purchased goods from Nice Supplier
Ltd on credit, £2,040.
9 Paid £900 by cheque for the first
quarter’s rent on the premises.
10 Bought goods from Nice Supplier Ltd,
£800, paying in cash.
11 Paid an insurance premium by cheque,
£80.
14 Paid wages in cash, £350.
15 Sold goods on credit to Nina, £500.
17 Purchased further goods from Nice
Supplier Ltd on credit, £1,350.
21 Paid Teal Ltd by cheque the balance on
their account.
24 Made cash sales, £1,100.
29 Paid wages in cash, £300.
31 Nina settled her account cash.
31 Mickey’s business owed £50 to his
secretary.
Required:
1. Do the double entries and balance the accounts as of 31

July.
2. Extract a trial balance as of 31 July 20x8 to check the basic
accuracy of your work.
Question 7
Cosi, a painter and decorator, has the following transactions
during September 20x5:
Sept. 1 Cosi starts business with £7,000 in cash.
2 Purchases various equipment for
£150 in cash.
3 Purchases ladders for £120 in cash.
8 Pays £1,000 cash into a business bank
account.
9 Pays insurance premiums of £100
in cash.
12 Purchases paint and wallpaper for
Job. No. 1 for £135 on credit from
Paint Ltd.
15 Completes Job No. 1 and receives
£240 cash from customer.
18 Purchases materials for Job No. 2 for
£190 – pays by cheque.
21 Pays secretary’s wages, £400 in cash.
24 Purchases second-hand van for
£1,900 – pays by cheque.
27 Completes Job No. 2 for £410. His
customer, Mr Aris, has agreed to pay in
one month’s time.
30 Pays account of WPS Ltd in full by
cheque.
Required:

3. Prepare an SFP as of 31 September 20x5.
Question 8
The adjusted trial balance of Happy Car Garage Ltd as of 30
June 20x5 appears as follows:
Happy Car Garage Ltd
Adjusted trial balance, 30 June 20x5
Cash $36,000
Supplies 7,000
Equipment 24,000
Equipment $3,000
Accrued salaries 3,500
Loan from AZ Finance 19,200
Owner capital 41,300
Owner drawings 800
Service revenue 17,200
Rent expense 1,800
Supplies expense 1,200
Depreciation expense 3,000
$84,200 $84,200
Owner established Happy Car Garage Ltd on 2 July 20x4

with an initial cash investment of $41,300.
Prepare Happy Car Garage Ltd’s SPL for the year ended
30 June 20x5. Also prepare the company’s 30 June SFP.
Question 9
Boat Repairs Services Ltd has the following trial balance as of
June 20x1:
Cash £ 4,300
Supplies 1,700
Plant and equipment 68,700

Accumulated depreciation: £ 2,700
Equipment 8,250
Loan 64,700
Dell Hewllet, capital 6,700
Dell Hewllet, drawings 84,500
Service revenue 52,500
Promotions expense 9,600
Rent expense 10,600
Advertising expense 2,400
£186,650 £186,650
Boat Repairs Services Ltd’s accountant has identified the

following adjustments which must be made.
a. A special rain insurance policy costing £800 is still in-

cluded in the prepaid insurance by error.
b. Supplies valued by inventory take £900.
c. Depreciation on the equipment for this year is £9,700.
d. 5% of the trade receivables is usually not collected.
e. Accrued salaries incurred but not yet paid are £900.
f. Interest owing but unpaid on the loan is £200.
Prepare an SPL and an SFP. Record the adjusting entries

in the general journal.
Question 10
Cutting Tree Services Ltd, which began operations on 1 July
20x3, had the following transactions:
July 1 Received €50,000 from Ilias, the owner,
as an investment to commence his business.
2 Purchased €15,000 worth of office
equipment, paying for it in cash; the
equipment has a life of six years.
3 Paid €960 for a six-month general

insurance policy.
8 Received €440 from a client to provide
services evenly over the next eight weeks.
11 Paid rent on the premises for the next two
months, €4,200.
13 Billed clients for services provided, €6,800.
15 Applied for a loan of €19,000 for the
purchase of an office computer.
17 Received €1,750 from clients billed on
14 July.
22 Received the proceeds from the loan that
was applied for on 15 July.
28 Purchased €9,000 worth of new computer
equipment, paying for it in cash. This will
not be depreciated until the end of next
month.
29 Paid the salaries of the office staff, €2,900.
30 Recorded €290 of sundry expenses that
were incurred in July but will be paid
during the next month.
On 31 July, accrued interest on the loan amounted to €70,

whilst accrued salaries totalled €350. Also, since the last bills
were sent out to clients, the firm has provided services billed
at €3,400. Three weeks’ worth of the money received in
advance has now been earned.
Required:
1 . Record the transactions for July in the general journal.

2. Post the journal entries to the correct ledger accounts.
3. Prepare an SPL and an SFP.
Record Cutting Tree Services Ltd adjusting entries in the
4.
journal and post to the correct ledger accounts.
5 . Record Cutting Tree Services Ltd closing entries in the
journal and post to the correct ledger accounts.
Question 11
Quick Cleaning Service Ltd rents a shop in Edinburgh. It also
does pickup and delivery for a small fee. It owns two delivery
vans and employs three assistants. The SFP as of 30 June 20x9
was as follows:
Quick Cleaning Service Ltd.
Statement of Financial Position as of 30 June 20x9
£ £
Current assets
Bank 1,600
Cleaning materials 950
Receivables 1,500 4,050
Non-current assets
Shop fittings 8,550
Vehicles 15,100
Equipment 40,100 63,750
Current liabilities
Payables 2,870
Non-current liabilities
Loan – RBS
Finance 10,100
Net assets 54,830
Owner’s equity
Capital 50,000
Add: net profit 6,500
Less: drawings (1,670)
54,830
During the first two weeks in July, the following transac-

tions were recorded on the appropriate documents.
July 1 Takings from customers of £150.

3 Purchased petrol and oil for delivery vans for £170.
4 Purchased cleaning materials for £450.
5 Paid for advertisement in local newspaper, £40.
6 Received £490 from receivables and allowed
£30 discount.
Takings from customers of £540.
8 Paid wages of assistants of £350.
9 Paid payables of £140. Received £5 discount.
10 Takings from customers of £300.
11 Paid interest on loan of £85.
Paid payable of £520. Received £60 discount.
Paid for advertisement in local newspaper, £40.
12 Purchased cleaning materials for £250.
Takings from customers of £510.
13 Purchased petrol for delivery vans, £70.
14 Paid wages of assistants of £350.
Purchased shop fittings for £380.
Drawings by owner of £500.
Bank statement received – bank fees of £9.
Cleaning materials on hand on 14 July were
valued at £280.
Prepare an SPL for the fortnight ending 14 July 20x9 and

an SFP as of 14 July 20x9.
Question 12
Data for Jennifer Aniston’s business as of 31 December 20x9
is as follows:
£
Cash at bank 4,000
Fees earned 52,000
Wages 21,000

Advertising 2,200
Commission earned 17,000
Mortgage on land and buildings 45,000
Insurance expense 4,200
Drawings, Jennifer Aniston 8,800
Capital, Jennifer Aniston ?
Inventory of stationery 750
Stationery used 250
Discount allowed 100
Required:
1 . Prepare an SPL for the year ended 31 December 20x9.

2. Prepare an SFP as of 31 December 20x9.
Question 13
Tom Cruise’s business has the following SFP items on 31
December 20x8:
£
Cash at bank (1,200)
Office supplies 1,400
Equipment 15,000
Furniture 400
Trade payables 730
Bank loan (due December 20x9) 10,000
Capital – Tom Cruise ?
During the first two weeks of January 20x9, the following

transactions occurred:
Jan. 1 Cruise contributed additional capital of
£2,000 in cash and furniture worth £500.
3 Paid payables amount owing.
Billed customers for services performed for
£7,000.
4 Purchased equipment worth £1,000 on
credit.
6 Paid the following week’s expenses:
Wages - £800
Rent - £500
Petrol - £300
7 Cruise withdrew £80 for his personal use.
9 Billed customers for services performed for
£3,800.
Reduced bank loan by £2,000.
Received £4,500 from receivables.
11 Purchased office supplies for £600.
13 Used office supplies worth £850 for the
period.
Paid the weekly expenses:
Wages - £750
Rent - £500
Petrol - £400
Required:
1 . Prepare an SPL for the first two weeks of January 20x9.

2. Prepare an SFP as of 14 January 20x9.
Question 14
Theo Paphetes, a retailer of office equipment and stationery,
works from home and started his business on 1 March with
£450,000 capital in cash. During the month of March, the

following transactions take place:
Mar. 1 Buys desk for his office at home for £500, pays cash.
2 Purchases stationery from Stationery Suppliers Ltd
for £65,000 on credit.
3 Buys delivery van from Garage Ltd for £2,100 on
six month’s credit.
7 Purchases further stationery from Stationery
Suppliers Ltd. for £10,000 on credit.
9 Cash sales of stationery, £51,000.
10 Purchases office equipment (for resale) from
Stationery Suppliers Ltd for £15,000 on credit.
15 Borrows £20,000 from his uncle and deposits the
amount in the business’s current bank account, as the
whole of this amount is to be used in Theo’s business.
The loan must be repaid within the next 12 months.
18 Sells office equipment to James Caane for £3,000
on credit.
21 Rents a warehouse and pays £500 rent (for the
month of March) by cheque.
22 Pays secretary’s wages in cash, £800.
24 Pays £40,000 cheque to Stationery Suppliers Ltd
in part settlement of account.
27 Pays for service of van, insurance, and tax,
amounting to £900, by cheque.
29 Sells all remaining inventory of stationery and
equipment for £12,000 cash.
31 Pays £500,000 cash into the business bank account.
Required:

3. Prepare an SFP as of 31 March.
Question 15
Starbacks Ltd’s account balances on 31 December 20x5 are as
follows:
£ £
Bank overdraft 1,620 Cash on hand 400
Receivables 4,000 Payables 5,000
Cash sales 54,000 Cash purchases 42,000
Credit
purchases 9,000 Credit sales 26,000
Purchase
Sales returns 950 returns 1,100
Inventory Inventory
(1 Jan. 20x5) 6,500 (31 Dec. 20x5) 5,400
Office
Electricity 350 equipment 6,900
Office
furniture 1,200 Motor vehicles 28,000
Bank loan 17,000 Rent expense 9,800
Advertising 3,000 Wages 5,600
Office Carriage
expenses 1,300 inwards 850
Carriage Discount
outwards 1,280 received 380
Discount Sundry
allowed 1,000 expenses 870
Stationery 450 Capital 18,350
Commission
Drawings 1,250 received 1,250
Given the information listed below, you are required to:
1 . Prepare an SPL for the year ended 31 December 20x5.

2. Prepare a classified SFP as of 31 December 20x5.
Question 16
Phototronic Services Ltd has employed you as their account-
ant to record their business transactions. On 1 September
20x8, the following SFP is presented:
Phototronic Services Ltd
1 September 20x8
£ £
Current assets
Inventory 15,000 24,000
Non-current assets
Land 25,000
Warehouse 20,000
Current liabilities
Net assets 77,700
Owners’ equity
Capital – Matt Damon 68,000
Plus: profit 17,000
Less: drawings 7,300 77,700
Sept. 3 Sold goods on credit to Russell Crowe for £300.
Received from George Clooney £2,940 cash and
a discount allowed of £60.
Purchased goods on credit from Hilary Duff £480.
6 Damon deposited £24,000 in the business’s bank
account.
Purchased stationery for £60.

7 Sales on credit to Denzel Washington of £990.
Cash sales of £180.
8 Sales on credit to George Clooney of £2,880.
Received from Nicole Kidman £1,764 cash and
a discount allowed of £36.
9 Paid for petrol and oil, £60.
10 Purchased goods on credit from Jessica Biel for
£1,800.
Credit sales to Nicole Kidman of £1,320.
Sales on credit to Denzel Washington for £1,650.
11 Purchased stamps for £78 cash.
Paid fire insurance of £288.
13 Credit sales to Johnny Depp of £2,520.
14 Paid Hilary Duff £1,470, discount allowed
of £30.
Purchased office supplies for £95 cash.
15 Purchase on credit from Lindsay Lohan for £1,200.
16 Sales on credit to Johnny Depp of £2,400.
18 Johnny Depp returned goods worth £60.
21 Received from Will Smith £2,646 cash and a
discount allowed of £54.
23 Returned to Lindsay Lohan goods purchased on
15 September worth £240.
25 Received from Russell Crowe £1,500 cash.
28 Purchased stamps for £78 cash.
Paid for petrol and oil, £72.
30 Purchased two new computers for £720.
Additional information on 30 September 20x8:
1 . Inventory on hand Is worth £11,000.

2. Monthly wages owing are £2,100.
3. The fire insurance is a 12-month premium expiring 31
August 20x9.
4. Phototronic Services Ltd has earned commission of

£2,450 for September. Payment is expected to be re-
ceived in October.
5. Depreciation on the vehicles for September is £150.
6. Stationery on hand is worth £25.
7. Office supplies on hand are worth £35.
Required:
1. Produce the general journal incorporating all the above

information.
2. Post all the above transactions to the general ledger.
3. Produce an SPL for the month of September 20x8.
4. Produce a balance as of 30 September 20x8.
Question 17
Below is the trial balance on 31 December 20x8 of a sole trad-
er’s business, prior to adjustment, and the adjustments which
must be made on SFP day.
Dr Cr
€ €
Fixtures and fittings (cost) 1,500
Allowance for depreciation of
fixtures and fittings 800
Inventory 1,800
Purchases 7,500
Rent and rates 670
Cash 120
Sales 12,940
Returns inwards 200
Returns outwards 90
Trade receivables and trade payables 4,300 3,300
General expenses 330
Motor vehicles (cost) 3,000
Allowance for depreciation of

motor vehicles 2,250
Bank 940
Capital 2,500
23,020 23,020
1 . Inventory on 31 December 20x8 valued at €2,000.

2. Depreciation is to be provided for as follows:
Motor vehicles – 25% of cost (straight line method).
Fixtures and fittings – 10% of reduced balance.
3. General expenses owing on 31 December 20x8, €50.
4. Rates prepaid on 31 December 20x8, €20.
5. Wages and salaries accrued on 31 December 20x8, €100.
Required:
1 . Prepare the SPL for the year ended 31 December 20x8.

Question 18
The following trial balance was extracted from the books of a
sole trader as of 31 December 20x6:
£ £
Sales 72,500
Furniture and fittings 1,000
Motor vans 1,610
Inventory 5,100
Discounts received 1,367
Purchases 52,587
Motor expenses 1,100
Equipment 4,510
Rent and rates 421
Bank 8,451
Capital account 11,400
Lighting and heating 500
92,822 92,822
At the end of December, the trader was able to produce

the following additional information:
1 . Inventory as of 31 December 20x6 is £9,687.

2. Lighting and heating of £60 accrued as of 31 December
20x6.
3. Rates of £67 paid in advance as of 31 December 20x6.
4. The motor vans account appeared in the books as follows:
Motor vans
20x6 £ 20x6 £
Balance b/d Cash – sale
1 Jan. (old van) 354 1 Jan. of old van 244
Cash – cost
of new van 1,500 31 Dec. Balance c/d 1,610
1,854 1,854
20x7
1 Jan. Balance c/d 1,610
Note: The Balance c/d of £354 on 1 January 20x6 is the net book value of
the old van.
Depreciation on the new van is at the rate of 20% per

annum. Ignore depreciation of furniture and fittings and
equipment.
Required:

2. Prepare the SFP on that date.
Question 19
The following trial balance was extracted from the books of a
sole trader as of 31 December 20x8:
£ £
Sales 65,000
Repairs to buildings 3,500
Car expenses 440
Provision for doubtful debts 170
Freehold land and buildings 10,000
Purchases 48,000
Rates and insurances 348
Discounts allowed 1,199
Motor car 1,850
Discounts received 1,040
Drawings 2,500
Bad debts 390
Bank 1,420
Capital account 21,000
92,520 92,520
At the end of December, the trader was able to produce

the following additional information:
1 . Inventory as of 31 December 20x8 is £9,200.

2. Rates and insurances paid in advance as of 31 December
20x8 are £48.
3. Wages and salaries outstanding on 31 December 20x8
are £494.
4. The provision for doubtful debts is to be reduced to £90.
5. One-fourth of the car expenses represents the costs of the

sole trader’s motoring for private, as distinct from business,
purposes.
6. The item “Repairs to buildings £3,500” includes £2,500
in respect of alterations and improvements to the
buildings.
Required:

Note: Ignore depreciation of fixed assets.
Question 20
Alex Boots, a retailer, has produced the following information:
1. Summary of the bank account for the year ended 30 April

20x9.
$ $
Balance Purchases of goods for
1 May 20x8 1,890 resale 25,542
Receipts Alex’s personal
from sales 33,521 drawings 7,200
Redecoration of Alex’s
private house 844
Additional fixtures and
fittings purchased
1 November 20x8 140
Payments for general
expenses 985
Balance 30 April 20x9 700
35,411 35,411
2. Assets and liabilities other than balance at bank:

Additional information as of 30 April 20x8 20x9
$ $
Fixtures and fittings (at cost less
depreciation) 1,260 ?
Motor vehicle (at cost less
depreciation) 900 ?
Trade receivables 985 850
Trading inventory 7,450 6,780
3. It is Alex Boots’s policy to provide depreciation on fix-

tures and fittings at 10% per annum and on the motor
vehicle at 25% per annum, both on the reducing balance
method.
4. Alex Boots withdrew $420 (at cost) of the inventory for
his own consumption.
Required:
a. Prepare Alex’s SPL for the year ended 30 April 20x9.

b. Prepare Alex’s SFP as of 30 April 20x9.
Question 21
On 1 January 20x6, a business’s list of assets and liabilities are
as follows:
£ £
Mortgage loan 50,000 Premises 80,000
Rates in advance 450 Inventory 3,820
Trade payables 2,810 Bank 6,555
The business’s sales are strictly cash only. The owner of the
business does not keep any books at all.
During the financial year, the following transactions took

place:
£
Cash paid into bank, proceeds of cash sales 98,234
Cheques drawn for payments to suppliers 45,279
Cash discount deducted (received) 621
Cheques drawn for expense items 2,250
Cheques drawn for private expenditure 16,400
During the year, rates amounting to £2,000 had been paid

(by cheque) for the period 1 April 20x6 to 31 March 20x7.
Repayments of the mortgage loan have been made by
standing order at the bank at the rate of £300 per calendar
month, but the account has been debited with £600 interest
by the mortgage holder.
On 31 December 20x6, the following balances were
provided:
£
Inventory 4,590
Required:
a. Prepare the SPL for the year ended 31 December 20x6.

b. Prepare the SFP as of 31 December 20x6.
Question 22
Astony Ltd commenced trading on 1 January 20x8. Prem-
ises were acquired for £900,000, plant for £632,000, and
vehicles for £70,000. Materials were purchased on credit
terms for £60,000. This expenditure was financed by issuing
650,000 £1 ordinary shares and raising a long-term loan of
£1,000,000 at 10%.
During the first year, transactions were as follows:
£
Sales on credit terms 720,000
Sales for cash 130,000
Wages paid 95,000
Rates paid (1 January 20x8 to 31 March 20x9) 40,000
Electricity paid 22,000
Materials purchased on credit terms 185,000
Materials purchased for cash 28,000
Cash received from receivables 600,000
Cash paid to payables 150,000
Administration costs paid 71,000
Insurance paid (annual premiums up to 30 June 20x9) 60,000
The following information is relevant:
i. Depreciation rates are: premises 25 years straight line, plant

eight years straight line, vehicles 30% reducing balance.
ii. Accrue for long-term loan interest and electricity at £2,000.
iii. Provide for tax payable on profit £40,000 and a dividend
of 6 pence per share.
iv. The closing inventory on 31 December 20x8 is made up
as follows:
Product Cost Net realisable

value
£ £
A 6,000 7,100
B 8,200 7,500
C 1,550 1,500
15,750 16,100
Required:
a. Prepare an SPL for the year ended 31 December 20x8.

b. Prepare a Statement of Financial Position as of that date.
c. Prepare Astony Ltd’s cash flow statement for the year
ended 31 December 20x8 using the indirect method.
Answers
Answer 1
Requirement 1:
Statement of Profit or Loss for the first six

months of operations
$ $
Revenue
Word processing 6,500
Shoe repairs 3,100 9,600
Less: expenses
Word processor 4,300
Shoe repairer 2,500
Rent 1,000
Wrappings 300
Advertising 250
Motor vehicle
expenses 300
Depreciation of
motor vehicle 500 9,150
Net profit (loss) (450)
Answer 2
Answer 3
Requirement 1:
Daponte Trading Ltd

Statement of Profit or Loss for June 20x8
Revenue
Credit sales $7,500
Cash sales 12,800 $20,300
Less: cost of sales 8,000
$12,300
Less: expenses
Wages 3,500
Rent 600
Depreciation 500
Supplies 3,200
Insurance 70
Total expenses 7,870
Operating profit $4,430
Requirement 2:
Daponte Trading Ltd

Current assets
Cash $7,360
Receivables 14,500
Supplies 4,300
Inventory 32,000
Prepayments 770 58,930
Non-current assets
Plant 30,000
Less: accumulated
Current liabilities
Payables $19,000
59,430
Owner’s equity
Capital 55,000
Profit 4,430
59,430
Answer 4
Answer 5
Requirement 1:
Adjusting journal entries for Mobile Phone Services Ltd

20x6 Debit Credit
30 June Rent expense 1,200
Prepaid rent 1,200
Adjusting entry
Insurance expense 1,100
Adjusting entry
Depreciation expense 4,220
Accumulated depreciation on equipment 4,220
Annual depreciation on equipment
Salaries accrued at the end of the year
Supplies expense 1,600
Supplies 1,600
Supplies used for the year
Revenue received 1,000
Transfer of revenue now earned
Rent receivable 800
Revenue received 800
Rent receivable from subtenant
Interest expense 75
Accrued interest 75
Interest accrued on bank loan
Bad debts expense 420
Allowance for 5% doubtful debts
Requirement 2:

Statement of Profit or Loss for the year
ended 30 June 20x6
Revenue received $94,400

Less: expenses
Salaries $29,200
Rent 9,600
Electricity 3,400
Advertising 1,700
Insurance 1,100
Depreciation 4,220
Supplies 1,600
Bad debts 420
Interest 75 51,315
Net profit $43,085
Requirement 3:

Assets
Cash $26,400
Less: allowance for
doubtful debts 420 7,980
Prepaid rent 600
Supplies 800
Rent receivable 800
Equipment 42,200
Less: accumulated
depreciation 4,220 37,980 $74,560
Liabilities
Trade payables $6,800
Loan 6,000
Accrued interest 75 15,475
Net assets 59,085
Owners’ equity
Capital 28,000
Plus: net profit 43,085
71,085
59,085
Answer 6
Requirement 1:
Capital
31 July Balance c/d 10,000 1 July Bank 10,000
Bank
£ £
1 July Capital 10,000 3 July Fixtures 600
9 July Rent 900
11 July Insurance 80
21 July Nice Supplier 3,390
31 July Balance c/d 5,030
10,000 10,000
Fixtures
3 July Bank 600 31 July Balance c/d 600
Cash
4 July Sales 1,250 10 July Purchases 800
24 July Sales 1,100 14 July Wages 350
31 July Nina 500 29 July Wages 300
30 July Balance c/d 1,400
2,850 2,850
Trade payable - Nice Supplier Ltd

21 July Bank 3,390 6 July Purchases 2,040
17 July Purchases 1,350
3,390 3,390
Trade receivable - Nina

15 July Sales 500 31 July Cash 500
Purchases
6 July Nice Supplier 2,040 31 July Balance c/d 4,190
10 July Nice Supplier 800
21 July Teal Ltd 1,350
4,190 4,190
Sales
31 July Balance c/d 2,850 4 July Cash 1,250
15 July Nina 500
24 July Cash 1,100
2,850 2,850
Rent
9 July Bank 900 31 July Balance c/d 300
31 July Prepayment 600
900 900
Wages
14 July Cash 350 31 July Balance c/d 700
29 July Cash 300
31 July Accrual 50
700 700
Prepaid rent
31 July Rent 600 31 July Balance c/d 600
Insurance
11 July Bank 80 31 July 80
Accrued wages
31 July Balance c/d 50 31 July Wages 50
Requirement 2:
Trial balance as of 31 July

Dr Cr
£ £
Capital 10,000
Bank 5,030
Fixtures 600
Cash 1400
Payable – Nice Supplier Ltd 0
Receivable – Nina 0
Purchases 4,190
Sales 2,850
Rent 300
Wages 700
Prepaid rent 600
Insurance 80
Accrued wages 50
12,900 12,900
Answer 7
Requirement 1:
Capital
£ £
30 Sept. Balance c/d 7,000 1 Sept. Cash 7,000

1 Oct. Balance c/d 7,000
Cash
£ £
1 Sept. Capital 7,000 2 Sept. Equipment 150
15 Sept. Sales 240 3 Sept. Equipment 120
9 Sept. Insurance 100
8 Sept. Bank 1,000
21 Sept. Wages 400
30 Sept. Balance c/d 5,470
7,240 7,240

Equipment
£ £
2 Sept. Cash 150 30 Sept. Balance c/d 270
3 Sept. Cash 120

270 270
1 Oct. Balance c/d 270
Bank
£ £
8 Sept. Cash 1,000 18 Sept. Purchases 190
24 Sept. Motor 1,900
vehicle - van
30 Sept. Balance c/d 1,225 29 Sept. Paint Ltd 135

2225 2,225
Trade payable - Paint Ltd.

£ £
30 Sept. Bank 135 12 Sept. Purchases 135
Trade receivable - Mr Aris

£ £
27 Sept. Sales 410 30 Sept. Balance c/d 410
1 Oct. Balance c/d 410
Motor vehicles - van

24 Sept. Bank 1,900 30 Sept. Balance c/d 1,900
Insurance
9 Sept. Cash 100 30 Sept. SPL 100
100 100
Purchases
12 Sept. Paint Ltd 135 30 Sept. SPL 325
18 Sept. Bank 190
325 325
Wages
21 Sept. Cash 400 30 Sept. SPL 400
400 400
Sales
30 Sept. SPL 650 15 Sept. Cash 240
27 Sept. Receivable – 410
Mr Aris
650 650
Requirement 2:
Statement of Profit or Loss for month of September

Sales £ 650
Purchases 325
Gross profit 325
Expenses:
Insurances 100
Wages 400 500
Net loss (175)
Requirement 3:
Statement of Financial Position as of 30 September

Non-current assets
Equipment 270
Motor vans 1,900 £ 2,170
Current assets
Receivables 410
Cash 5,470 5,880
Current liabilities
Bank 1,225 1,225
£ 6,825
Capital £ 7,000
Loss for the year 175
£ 6,825
Answer 8
to answer it themselves
Answer 9
Answer 10
Answer 11
Answer 12
Requirement 1:
Jennifer Aniston’s business

Statement of Profit or Loss for the year ended
31 December 20x9
£ £
Revenue
Fees earned 52,000
Commission earned 17,000
Discount received 150 69,150
Less: expenses
Wages 21,000
Advertising 2,200
Insurance 4,200
Stationery used 250
Discount allowed 100 27,750
Net profit £41,400

Requirement 2:
Jennifer Aniston’s business

31 December 20x9
£ £
Current assets
Cash at bank 4,000
Inventory of stationery 750 12,250
Non-current assets
Current liabilities
Mortgage on land and
buildings 45,000
Net assets 66,000
Owner’s equity
Capital – 1 January 20x9 (2) 33,400
Net profit for year 41,400
Less: drawings (8,800)
Capital – 31 December 20x9 (1) 66,000
1. From net assets

2. Working back from (1)
Answer 13
Requirement 1:
Tom Cruise’s business

Statement of Profit or Loss for the fortnight ending
14 January 20x9
Revenue
Fees £ 10,800
Less: expenses
Wages 1,550
Rent 1,000
Petrol 700
Office supplies used 850 4,100
Net profit £6,700
Requirement 2:
Tom Cruise’s Business

Statement of Financial Position as of 14 January 20x9
Current assets
Inventory of office supplies 1,150 7,950
Non-current assets
Equipment 16,000
Furniture 900
Motor vehicle 5,200 22,100
Current liabilities
Trade payable 1,000
Bank loan 8,000 10,360
Net assets £ 19,690

Owner’s equity
Capital – 31 December 20x8 10,570
Plus: net profit 6,700
Plus: additional capital 2,500
Less: drawings 80
Capital – 14 January 20x9 £ 19,690
Answer 14
Requirement 1:
Capital
£ £
28 Mar. Balance c/d 450,000 1 Mar. Cash 450,000
1 Apr. Balance c/d 450,000
Cash
£ £
1 Mar. Capital 450,000 1 Mar. Office 500
furniture
9 Mar. Sales 51,000 22 Mar. Wages 800
12 Mar. Sales 22,000 31 Mar. Bank 500,000
28 Mar. Sales 15,000 31 Mar. Balance c/d 48,700
29 Mar. Sales 12,000
550,000 550,000
Trade payable – Stationery Supplies Ltd

£ £
24 Mar. Bank 40,000 2 Mar. Purchases 65,000
7 Mar. Purchases 10,000
31 Mar. Balance c/d 50,000 10 Mar. Purchases 15,000
90,000 90,000
Office furniture
1 Mar. Cash 500 31 Mar. Balance c/d 500
1 Apr. Balance c/d 500
Motor vans
3 Mar. Garage Ltd 2,100 31 Mar. Balance c/d 2,100
Bank
£ £
15 Mar. His uncle 20,000 21 Mar. Rent 500
31 Mar. Cash 500,000 24 Mar. Stationery 40,000
supplies
27 Mar. Van expenses 900
31 Mar. Balance c/d 478,600
520,000 520,000
Other payable – Garage Ltd

Motor
31 Mar. Balance c/d 2,100 3 Mar. vehicles - van 2,100
Loan – His uncle

31 Mar. Balance c/d 20,000 15 Mar. Bank 20,000

Trade receivable – James Caane

18 Mar. Sales 3,000 31 Mar. Balance c/d 3,000
Purchases
£ £
1 Mar. Stationery 65,000 31 Mar. SPL 90,000
supplies
7 Mar. Stationery 10,000
supplies
15 Mar. Stationery 15,000
supplies
90,000 90,000
Sales
£ £
31 Mar. SPL 103,000 9 Mar. Cash 51,000
12 Mar. Cash 22,000
18 Mar. James Caane 3,000
28 Mar. Cash 15,000
29 Mar. Cash 12,000
103,000 103,000
Rent
£ £
21 Mar. Bank 500 31 Mar. SPL 500
Van expenses
£
24 Mar. Bank 900 31 Mar. SPL 900
Wages
£
22 Mar. Cash 800 31 Mar. SPL 800
Requirement 2:
Statement of Profit or Loss for month of March

Sales £ 103,000
Purchases 90,000
Gross profit 13,000
Expenses:
Rent 500
Van expenses 900
Wages 800 2,200
Net profit £ 10,800
Requirement 3:
Statement of Financial Position as of 31st March

Non-current assets
Motor vans 2,100
Office furniture 500 2,600
Current assets
Bank 478,600
Cash 48,700 530,300
Current liabilities
Loan 20,000
Other payables 2,100 72,100
£ 460,800
Owners’ equity
Capital 450,000
£ 460,800
Answer 15
Requirement 1:
Starbacks Ltd
Statement of Profit or Loss for year ended 31
December 20x5
£ £ £
Revenue
Sales 80,000
Less: sale returns (950) 79,050
Cost of goods sold

Purchases 51,000
Less: purchase returns (1,100)
Plus: carriage inwards 850 50,740
Less: closing inventory (5,400) 51,850
Gross profit 27,200
Other operating revenue

Commission received 1,250 1,630
28,830
Other operating expenses

Electricity 350
Advertising 3,000
Freight outwards 1,280
Discount allowed 1,000
Stationery 450
Rent 9,800
Wages 5,600
Sundry expenses 870 23,650
Net profit 5,180
Requirement 2:
Starbacks Ltd
31 December 20x8
£ £
Current assets
Cash on hand 400
Inventory 5,400 9,800
Non-current assets
Office furniture 1,200
Current liabilities
Loan 17,000
Net assets 22,280

Owners’ equity
Capital 18,350
Plus: profit 5,180
Less: drawings 1,250 22,280
Answer 16
Requirement 1:
General journal
Date Description Debit Credit
20x8
Sept. 3 Trade receivables 300
Sales 300
Bank 2,940
Discount allowed 60
Purchases 480
Trade payables 480
6 Bank 24,000
Capital 24,000
Stationery 60
Bank 60
7 Trade receivables 990
Sales 990
Bank 180
Sales 180
Sales 2,880
Bank 1,764
Discount allowed 36
9 Petrol and oil 60
Bank 60
10 Purchases 1,800
Sales 1,320
Sales 1,650
11 Postage 78
Bank 78
Insurance 288
Bank 288
Sales 2,520
Bank 510
Sales 510
14 Trade payables 1,500
Bank 1,470
Office supplies 95
Bank 95
15 Purchases 1,200
Sales 2,400
18 Sales returns 60
21 Bank 2,646
Discount allowed 54
23 Trade payables 240
Purchase returns 240
25 Bank 1,500
Bank 132
Sales 132
28 Postage 78
Bank 78
Petrol and oil 72
Bank 72
30 Office equipment 720
Bank 720
358
Requirement 2:

General ledger
Bank Trade receivables
GENER AL QUESTIONS
1/9 2,940 1/9 Bal 2,100 1/9 Bal 9,000 1/9 3,000

6/9 24,000 6/9 60 1/9 300 8/9 1,800
7/9 180 9/9 60 7/9 990 18/9 60
8/9 1,764 11/9 78 8/9 2,880 21/9 2,700
13/9 510 11/9 288 10/9 1,320 25/9 1,500
21/9 2,646 14/9 1,470 10/9 1,650
25/9 1,500 14/9 95 13/9 2,520
25/9 132 28/9 78 16/9 2,400
28/9 72 30/9 12,000
30/9 720
30/9 28,651
Land Inventory
1/9 Bal 25,000 1/9 Bal 15,000
Vehicles Warehouse
1/9 Bal 18,000 1/9 Bal 20,000
Office equipment Trade payables

30/9 720 14/9 1,500 1/9 Bal 7,200
23/9 240 1/9 480
10/9 1,800
15/9 1,200
30/9 8,940
GENER AL QUESTIONS
359
360
Capital – Matt Damon Sales

1/9 Bal 77,700 1/9 300
6/9 24,000 7/9 990
30/9 101,700 7/9 180
GENER AL QUESTIONS
8/9 2,880
10/9 1,320
10/9 1,650
Sales returns and allowances 13/9 2,520
13/9 510
18/9 60 16/9 2,400
25/9 132
30/9 12,882
Purchases Purchase returns and allowances

1/9 480 23/9 240
10/9 1,800
15/9 1,200
30/9 3,480
Discount allowed Discount received
1/9 60 14/9 30
8/9 36
21/9 54
30/9 150
Stationery Petrol and oil

6/9 60 9/9 60
28/9 72
30/9 132
Postage Insurance
11/9 78 11/9 288
28/9 78
30/9 156
Office supplies
14/9 95
GENER AL QUESTIONS
361
Requirement 3:

Statement of Profit or Loss for September 20x8
£ £ £
Revenue
Sales 12,882
Less: sale returns and
allowances 60 12,822
Cost of goods sold

Inventory (1 Sept. 20x8) 15,000
Purchases 3,480
Less: purchase returns 240 3,240
Less: inventory (30 Sept.
20x8) 11,000 7,240
Gross profit 5,582
Other operating revenue

Commission received 2,450 2,480
8,062
Other operating expenses

Discount allowed 150
Stationery 35
Petrol and oil 132
Postage 156
Insurance 24
Office supplies 60
Wages 2,100
Depreciation of vehicles 150 2,807
Net profit 5,255

Requirement 4:

Statement of Financial Position as of 30 September
20x8
£ £ £
Current assets
Bank 28,651
Inventory 11,000
Prepaid expenses 264
Commission receivable 2,450
Inventory of stationery 25
Inventory of office
supplies 35 54,425
Non-current assets
Land 25,000
Warehouse 20,000
Vehicles 18,000
Less: accumulated
Office equipment 720 63,570
Current liabilities
Accrued expenses 2,100 11,040
Net assets 106,955
Owner’s equity
Capital – Matt Damon 101,700
Add net profit 5,255 106,955
Answer 17
Requirement 1:

31 December 20x8
€ €
Sales 12,940
Less: returns inwards 200 12,740
Cost of goods sold

Purchases 7,500
Less: returns outwards 90 7,410
Less: closing inventory 2,000 7,210
Gross profit 5,530
Expenses:
Rent and rates 650
Depreciation on:
Motor vehicles 750
Fixtures and fittings 70 5,550
Net profit 180
Requirement 2:

Non-current assets
Less: allowance for depreciation 3,000 0
Fixtures and fittings (cost) 1,500
Less: allowance for depreciation 870 630
Current assets
Inventory 2,000
Receivables 4,300
Cash 120
Current liabilities
Payables 3,300
Wages accrued 100
General expenses accrued 50
Bank overdraft 940 4,390
Net assets € 2,680
Owner’s equity
Capital 2,500
Profit for the year 180
€ 2,680
Answer 18
Requirement 1:

31 December 20x6
Sales £ 72,500
Cost of goods sold
Purchases 52,587
Less: closing inventory 9,687 48,000
Gross profit 24,500
Discount received 1,367
Expenses:
Motor expenses 1,100
Rent and rates 354

Light and heat 560
Loss on sale of van 110
Depreciation of vans 300 14,987
£ 10,880
Requirement 2:

31 December 20x6
Non-current assets
Less: allowance for
Equipment 4,510
Current assets
Inventory 9,687
Bank 8,451
Current liabilities
Light and heat accrued 60 7,615
Net assets £ 22,280
Owner’s equity
Capital 11,400
£ 22,280
Answer 19
Requirement 1:

31 December 20x8
Sales £ 65,000
Cost of goods sold
Inventory 6,100
Purchases 48,000
Less: inventory 9,200 44,900
Gross profit 20,100
Discount received 1,040
Allowance for doubtful 80
debts
Expenses:
Repairs to buildings 1,000
Car expenses 330
Rates and Insurance 300
Discounts allowed 1,199
Bad debts 390
General expenses 1,680 13,999
Net profit £ 7,221
Requirement 2:

31 December 20x8
Non-current assets
Freehold land and buildings 10,000
Add: additions 2,500 12,500
Motor car 1,850
Current assets
Inventory 9,200
Less: provision for doubtful
debts 90 4,897
Rates and Insurance prepaid 48
Bank 1,420 15,565
Current liabilities
Wages and salaries accrued 494 5,804
£ 25,611
Owner’s equity
Capital 21,000
Add: net profit 7,221
Less: drawings (2,500 + 110) 2,610
£ 25,611
Answer 20
Requirement 1:
Alex Boots
30 April 20x9
$ $
Sales 33,386
Less: cost of sales
Inventory at 1 May 20x8 7,450
Add: purchases (25,492 − 420) 25,072
75,890
Less: inventory as of 30 April 20x9 6,780 25,742
Gross profit 7,644
Less: expenditure
Depreciation on:
Fixtures and fittings (126 + 14) 140
Motor van 225 1,350
Net profit 6,294
Requirement 2:
Alex Boots
Statement of Financial Position as of 30 April 20x9
$ $
Non-current assets
Fixtures and fittings (NBV) 1,260
Motor vehicle (NBV) 675
1,935
Current assets
Inventory 6,780
Bank 700 8,330

Net assets 9,115
Equity - Capital
Balance as of 1 May 20x8 11,285
17,579
Less: drawings (7,200 + 420 + 844) 8,464
Balance as of 30 April 20x9 9,115
Answer 21
Requirement 1:

31 December 20x6
£ £
Sales 98,234
Less: cost of sales
Inventory as of 1 January 20x6 3,820
50,590
Less: inventory as of 4,590 46,000
31 December 20x6
Gross profit 52,234
Less: expenditure
Expenses 2,250
Rates 1,950
Interest 600
Depreciation of van 1,100 5,900
Net profit 46,955
Requirement 2:

£ £
Non-current assets
Premises 80,000
Motor vehicles (NBV) 10,000
90,000
Current assets
Inventory 4,590
Rates in advance 500
Bank 35,260 40,350

Mortgage loan 47,000
Net assets 79,670
Equity - Capital
Balance as of 1 January 20x6 49,115
96,070
Balance as of 31 December 20x6 79,670
Answer 22
Requirement 1:

for the year ended 31 December 20x8
£ £
Sales (£720,000 + 130,000) 850,000
Cost of goods sold
Opening inventory -----
Purchases 273,000
Closing inventory 15,000 258,000
Gross profit 592,000
Expenses
Wages 95,000
Rates (£40,000 – 8,000) 32,000
Electricity (£22,000 + 2,000) 24,000
Administration 71,000
Insurance (£60,000 – 20,000) 40,000
Depreciation:
Premises 36,000
Plant 79,000
Vehicles 21,000
398,000
194,000
Interest 100,000
Tax 40,000
54,000
Dividend 39,000
Requirement 2:

31 December 20x8
£ £ £
Non-current assets
Premises 900,000 36,000 864,000
Plant 632,000 79,000 553,000
Vehicles 70,000 21,000 49,000
1,466,000
Current assets
Inventory 15,000
Bank 312,000
Prepayments 28,000 475,000
Current liabilities
Accruals (100,000 + 2,000) 102,000
Tax 40,000
Dividend 39,000 276,000
Loan 1,000,000 1,000,000
665,000
Owners’ equity
Share capital 650,000
665,000
Requirement 3:
Cash flow statement

£
Operating activities 264,000
Investing activities (1,602,000)
Financing activities 1,650,000
312,000
Reconciliation:
Operating profit 194,000
Depreciation premises 36,000
Depreciation plant 79,000
Depreciation vehicles 21,000
Increase in inventories (15,000)
Increase in receivables (120,000)
Increase in prepayments (28,000)
Increase payables 95,000
Increase in accruals 2,000
264,000
Glossary
Account A record of business transactions, part of double-entry

records, containing details of transactions for each specific
financial statement item.
Account payable (or trade payable, or trade creditor) A
business or person to whom money is owed for goods pur-
chased or services rendered, or differently, a liability owed to
suppliers for goods purchased or services rendered.
Account receivable (or trade debtor, or trade receivable) A
business or person who owes money to another business for
goods or services supplied, or differently, amounts owed to a
business (after selling on credit), whether or not they are cur-
rently due.
Accounting The process of designing and operating an informa-
tion system for collecting, measuring, and recording business
transactions (activities) and summarising and communicating
the results of these transactions to users to facilitate making
informed judgements and financial/economic decisions.
Accounts (or final accounts, or financial statements) This
is a term previously used to refer to financial statements pro-
duced at the end of an accounting period, such as the State-
ment of Profit or Loss account (formerly called the profit and
loss account or income statement), the Statement of Financial
Position (formerly called the balance sheet), and the cash flow
statement. Nowadays, the term “financial statements” is more
commonly used.
Accrual (or simply accrued expense) An expense that is
incurred and for which the benefit has been received but
Glossary 375
which has not yet been paid for by the end of the account-
ing period. It is included in the relevant expense account
and in the Statement of Financial Position (formerly called
the balance sheet) under current liabilities as “accruals” or
“accrued expense”.
Accrued income Income (normally) from a source other than
the main source of business income, such as rent receivable or
interest receivable, that was due to be received by the end of the
period but which has not been received by that date, and so it
is expected to be received in a subsequent period. It is added to
the relevant income account and in accounts receivable under
the current assets in the Statement of Financial Position (for-
merly called the balance sheet).
Accumulated depreciation (or allowance/provision for
depreciation account) The account where depreciation
of non-current (fixed) assets is accumulated for Statement of
Financial Position (formerly called balance sheet) purposes.The
accumulated depreciation is subtracted from the original cost
or valuation of the asset to arrive at its net book value in the
balance. The accumulated depreciation amount represents only
the expired value of an asset; it is neither cash nor any other
type of asset that can be used to purchase another asset.
Allowance for doubtful debts (or provision for doubtful
debts) An account representing an estimate of the expected
amount of trade receivables/debtors (i.e. debts to the business)
at the Statement of Financial Position date which may not pay
(i.e. be irrecoverable).
Amortisation A term used instead of “depreciation” for intan-
gible assets.
Assets Resources owned by a business.
Bad debt A trade receivable/debtor who is unlikely to be able to
pay, or a debt that a business will not be able to collect.
Bad debt expense An expense that is associated with a business’s
inability to collect the amount owed to that business by its trade
receivable/debtor.
Balance brought down (or brought forward) It is the open-
ing balance of a new accounting period, transferred from the
previous accounting period. It is the difference between both
sides of a T-account that is entered below the totals on the
376 Glossary
opposite side to the one on which the balance carried down

was entered. (This is normally abbreviated to “bal b/d” or “bal
b/f ”.)
Balance carried down (or carried forward) It is the closing
balance of a T-account at the end of an accounting period and
the amount that will become the opening balance for the next
accounting period. It is the difference between both sides of an
account that is entered above the totals and makes the total of
both sides equal each other. (This is normally abbreviated to
“bal c/d” or “bal c/f ”.)
Balance sheet (now called the Statement of Financial Posi-
tion) A statement showing the financial position of a business
on a specified date (i.e. the business’s assets, liabilities, and eq-
uity/capital). It is a list of the physical resources (assets) owned
by a business at a particular date, shown at the proportion of
their original cost which remains unused (unexpired cost), net
of amounts owed by the business (liabilities).
Balance off the T-account (or close off the account) Insert
the difference (called a “balance”) between the two sides of an
account and then total and rule off the account.This is normally
done at the end of a period (usually a month, a quarter, or a year).
Bank loan An amount of money advanced by a bank that has a
fixed rate of interest that is charged on the full amount and is
repayable on a specified future date.
Bookkeeping The process of systematic recording of the finan-
cial aspects of business transactions and activities in the appro-
priate accounting books.
Capital The total of resources (cash and other assets) invested
and left in a business by its owner(s). It can also be seen as the
amount the business owes back to its owners.
Capital expenditure Any asset-related expenditures with ben-
efits extending beyond the current year, or when a business
spends money to buy or add value to a non-current (fixed) asset.
Carriage inwards Transport or delivery expenses incurred
through the purchase of goods from suppliers (trade payables/
creditors) of a business. It is added to the purchases figure in the
Statement of Profit or Loss, as it is part of the cost of the goods
being purchased.
Glossary 377
Carriage outwards Transport or delivery expenses incurred

through the sale of goods to customers (trade receivables/debt-
ors) of a business. It is taken up as an expense in the Statement
of Profit or Loss.
Cash Ready money, including cash balances and bank balances,
customer cheques, plus funds invested in “cash equivalents”.
Close off the account (or balance off the T-account) Total-
ling and ruling off an account on which there is no outstanding
balance. This is normally done at the end of a period (usually a
month, a quarter, or a year).
Credit The right-hand side of the accounts in double entry. It has
the effect of increasing a capital, liability, or revenue (income)
account and decreasing an asset or expense account.
Current assets Assets consisting of cash, bank, goods for resale
(inventory/stock), trade receivables/debtors, or other items
having a short life, and they are constantly flowing in and out
of a business in the normal course of a business. In accounting,
any asset expected to last or be in use for less than one year is
considered a current asset.
Current liabilities Liabilities (obligations) such as trade paya-
bles/creditors, accruals, and unpaid taxes, arising in the normal
course of a business and which must be paid within a year of the
Statement of Financial Position (balance sheet) date.
Debit The left-hand side of the accounts in double entry. It has
the effect of increasing an asset or expense account and decreas-
ing a capital, liability, or revenue (income) account.
Depletion A term used instead of “depreciation” for natural
resources.
Depreciation A system of cost allocation. The part of the cost
of a non-current (fixed) asset consumed during its period of
use by the business. It represents an estimate of how much of
the overall economic usefulness of a non-current (fixed) asset
has been used up in each accounting period and as a result, it
reflects reduction in the net book value of the asset due to usage
and/or obsolescence. It is charged as a debit to the Depreciation
Expense account (and in essence as a debit to the profit or loss)
and a credit against the allowance/provision of depreciation of
the non-current (fixed) asset account in the general ledger.
378 Glossary
Discounts allowed An expense in the Statement of Profit or

Loss, it is a deduction from the amount due given to customers
who pay their accounts within the time allowed.
Discounts received A sundry income in the Statement of Profit
or Loss, it is a deduction from the amount due given to a busi-
ness by a supplier when their account is paid before the time
allowed has elapsed.
Dissolution When a partnership business ceases operation and its
assets are disposed of.
Double-entry bookkeeping (or double entry) A system
where each transaction is entered twice, once on the debit
side of one account and once on the credit side of another
account.
Drawings Funds or goods taken out (withdrawn) of a business by
the owners for their private use.
Economic life of an asset The number of years before an as-
set wears out or becomes obsolete, whichever comes first. Also
known as useful life.
Equity Another name for owner’s equity or owner’s interests.
Error of omission Where a transaction is completely omitted
from the business’s books.
Error of original entry Where an item is entered, but both the
debit and credit entries are of the same incorrect amount.
Error of principle Where an item is entered in the wrong type
of account, e.g. a non-current asset in an expense account.
Expenses Money expended or costs incurred in a business’s ef-
forts to generate revenue (income), representing costs of doing
business.
FIFO This is the First in First out (FIFO) inventory/stock valua-
tion method by which the earlier items held are said to be the
first to be sold.
Final accounts (or accounts, or financial statements) This
is a term previously used to refer to financial statements pro-
duced at the end of an accounting period, such as the State-
ment of Profit or Loss (formerly called profit and loss account
or income statement), the Statement of Financial Position
(formerly called the balance sheet), and the cash flow state-
ment. Nowadays, the term “financial statements” is more com-
monly used.
Glossary 379
Financial statements (or final accounts, or accounts) The

more common term used to refer to statements produced at
the end of accounting periods to quantitatively describe the
financial performance and financial position of a business, such
as the Statement of Profit or Loss (formerly called profit and
loss account or income statement), the Statement of Financial
Position (formerly called the balance sheet), and the cash flow
statement (sometimes referred to as “final accounts” or simply
“the accounts”).
Fixed assets (now called non-current assets) Assets which
have a long life bought with the intention to use them in the
business and produce a benefit (revenue) in the future and not
with the intention to simply resell them.
Fixed capital accounts Capital accounts which consist only of
the amounts of capital actually paid into the partnership.
Float A small amount of money kept at hand to meet small ex-
panses. This is also the amount at which the cash account starts
each day or period.
General ledger A ledger (central repository) for all T-accounts
other than those for customers and suppliers. Also known as a
nominal ledger.
Goodwill (or purchased goodwill) An amount representing
the added value to a business of such factors as customer loy-
alty, reputation, intellectual property, market penetration, and
expertise. It is an intangible but saleable asset, and its value is not
recognised in the financial statements but is realised when the
business is sold. It is the difference between the amount paid to
acquire a part or the whole of a business as a going concern and
the value of the net assets owned by the business.
Gross loss Where the cost of goods sold exceeds the sales revenue.
Gross profit Where the sales revenue exceeds the cost of goods
sold.
Income (or revenue) The financial value of goods and services
sold to customers.
Income statement (profit and loss account, now called the
Statement of Profit or Loss) The financial statement in
which the calculations of gross profit (loss) and then net profit
(loss) are presented, by using the equation (profit (or loss) =
revenue − expenses).
380 Glossary
Intangible asset An asset, such as goodwill, that has no physical

existence.
Interest on capital An amount at an agreed rate of interest
which is credited to a partner’s current account based on the
amount of capital contributed by him/her.
Interest on drawings An amount at an agreed rate of interest,
based on the drawings taken out by a partner, which is debited
to the partner’s current account.
Inventory (formerly called stock) Goods which the busi-
ness normally holds with the intention of resale. They may be
finished goods, partly finished goods, or raw materials awaiting
conversion into finished goods which will then be sold.
Journal A book of original entry for all items not contained in
the other books of original entry.
Liabilities Economic obligations payable to outsiders, or the debts
of business arising out of past or current transactions or actions.
LIFO This is the Last in First out (LIFO) inventory/stock valu-
ation method by which the latest items held are said to be the
first to be sold.
Limited partner A partner whose personal liability for the business’s
debts is limited to the capital s/he has put into the business.
Long-term liabilities Liabilities that do not have to be paid
within twelve months of the Statement of Financial Position
(balance sheet) date.
Loss The result of selling goods for less than they cost, or the ex-
cess of expenditure over revenue.
Markup (cost) Profit shown as a percentage of cost price.
Negative goodwill The name given to the amount by which the
total purchase price for a business taken over is less than the val-
uation of the acquired assets at that time.The amount is entered
at the top of the non-current (fixed) assets in the Statement of
Financial Position (balance sheet) as a negative amount.
Net assets Total assets minus total liabilities. It is an alternative
term for owners’ equity (or owners’ interest).
Net book value The value of a non-current (fixed) asset as
shown in the Statement of Financial Position (balance sheet).
It is calculated by deducting accumulated depreciation (or al-
lowance/provision for depreciation) from the historical cost of
a non-current (fixed) asset.
Glossary 381
Net current assets Current assets minus current liabilities. The

figure represents the amount of resources the business has in
a form that is readily convertible into cash. It is an alternative
term for working capital.
Net loss Where the cost of goods sold and expenses exceeds total
revenue in an accounting period.
Net profit Where sales revenue plus other revenue (income),
such as rent received, exceeds the sum of cost of goods sold and
other expenses.
Nominal ledger Another name for the general ledger.
Non-current assets (formerly called fixed assets) Assets
which have a long life bought with the intention to use them
in the business and produce a benefit in the future and not with
the intention to simply resell them.
Overdraft An agreed facility (or loan arrangement) granted by a
bank that allows a customer holding a bank account with the
bank to spend more than the funds in the account allow. Interest
is normally charged daily on the amount of the overdraft on
that date and the overdraft is repayable at any time upon request
from the bank.
Owners’ equity Capital invested by the owners, plus any new
capital invested by them, minus any withdrawals made by them
for personal use, plus (minus) any net profits (net losses) the
business has made during the accounting period. It is an alter-
native term for net assets (or owners’ interest).
Owners’ interest Capital invested by the owners, plus any new
capital invested by them, minus any withdrawals made by them
for personal use, plus (minus) any net profits (net losses) the
business has made during the accounting period. It is an alter-
native term for net assets (or owners’ equity).
Partnership A business in which two or more people are work-
ing together as owners, pooling money, skills, and other re-
sources with a view to making profits.
Partnership salaries Agreed amounts payable to partners in re-
spect of duties undertaken by them. They are credited to the
partner’s current account.
Prepaid expense (or prepayment) An expense which has been
paid in advance and before it is actually incurred, the benefits of
which will be received in the next period. It is deducted from
382 Glossary
the relevant expense account in the Statement of Profit or Loss

and included in the Statement of Financial Position under cur-
rent assets as “prepayments” or “prepaid expenses”.
Profit The result of selling goods or services for more than they cost.
Profit and loss account (or income statement, now called
Statement of Profit or Loss) The financial statement in
Profit margin (or percentage) Profit shown as a percentage of
the selling price.
Provision/allowance for depreciation account (or accu-
mulated depreciation) The account where depreciation
of non-current (fixed) assets is accumulated for Statement of
Financial Position (balance sheet) purposes. The accumulated
depreciation is subtracted from the original cost or valuation
of the asset to arrive at its net book value in the Statement
of Financial Position. The accumulated depreciation amount
represents only the expired value of an asset; it is neither
cash nor any other type of asset that can be used to purchase
another asset.
Provision for doubtful debts (or allowance for doubtful
debts) An account representing an estimate of the expected
amount of trade receivables/debtors (i.e. debts to business) at
the Statement of Financial position (balance sheet) date which
may not pay (i.e. be irrecoverable).
Purchased goodwill (or goodwill): Goodwill (or purchased
goodwill) An amount representing the added value to a busi-
ness of such factors as customer loyalty, reputation, intellectual
property, market penetration, and expertise. It is an intangible
but saleable asset, and its value is not recognised in the financial
statements but is realised when the business is sold. It is the dif-
ference between the amount paid to acquire a part or the whole
of a business as a going concern and the value of the net assets
owned by the business.
Purchases (or inventory/stock) Goods bought by the business
for the prime purpose of selling them again.
Purchases returns (or returns outwards) Goods purchased
from the suppliers and subsequently are returned to suppliers.
Glossary 383
Returns are deducted from the purchases figure in the State-

ment of Profit or Loss and are debited to the individual trade
payable/creditor’s T-account.
Reducing balance method A method of calculating deprecia-
tion in which the net book value of a non-current (fixed) asset
in the Statement of Financial Position (balance sheet) is reduced
every accounting year by a fixed percentage rate.
Residual value (or scrap value) The net amount predicted to
be received from the sale or disposal of a non-current (fixed)
asset at the end of its economic or useful life.
Returns inwards (or sales returns) Goods already sold by the
business and returned by customers some time later. Returns
are deducted from the sales figure to derive the net sales for
the period and are credited to the individual trade receivable/
debtor’s T-account.
Returns outwards (or purchase returns) Goods purchased
from suppliers and subsequently returned to suppliers. Returns
are deducted from the purchases figure in the Statement of
Profit or Loss and are debited to the individual trade creditor’s
T-account.
Revaluation account An account used to record gains and losses
when assets are revalued.
Revenue (or income) The financial value of goods and services
sold to customers.
Revenue expenditure Money expended in sales revenue or in
maintaining the business’s earning capacity, including mainte-
nance and repair of non-current (fixed) assets and any other
expenditures that provide a benefit lasting one year or less and
are needed for the day-to-day running of the business.
Sales Cash or claims to a customer’s cash from selling goods or
services in the normal operations of a business.
Sales ledger A subsidiary ledger for customers’ personal
accounts.
Sales returns (or returns inwards) Goods returned by cus-
tomers. Returns are posted to the individual trade receivable/
debtor’s T-account.
Scrap value (or residual value) The net amount predicted to
be received from the sale or disposal of a non-current (fixed)
asset at the end of its economic or useful life.
384 Glossary
Statement of Financial Position (formerly called balance

sheet) A statement showing the financial position of a busi-
ness on a specified date (i.e. the business’s assets, liabilities, and
equity/capital). It is a list of the physical resources (assets) owned
by a business at a particular date, shown at the proportion of
their original cost which remains unused (unexpired cost), net
of amounts owed by the business (liabilities).
Statement of Profit or Loss (formerly called income state-
ment, profit and loss account) The financial statement in
Stock (now called inventory) Goods which the business nor-
mally holds with the intention of resale. They may be finished
goods, partly finished goods, or raw materials awaiting conver-
sion into finished goods which will then be sold.
Straight line method A method of calculating depreciation that
involves deducting the same amount every accounting period
from the historical cost of a non-current (fixed) asset.
Suspense account A temporary account (not included in the
financial statements) in which you can enter the amount equal
to the difference in the trial balance while you try to find the
cause of the error(s) that resulted in the failure of the trial bal-
ance to balance.
T-account The layout of accounts in the accounting books where
the double-entry bookkeeping is done.
Trade creditor (or trade payable, or account payable) A
Trade debtor (or trade receivable, or account receivable) A
business or person who owes money to another business for goods
or services supplied, or differently, amounts owed to a business
(after selling on credit) whether or not they are currently due.
Trade discount A deduction in price given to a trade cus-
tomer (reseller) when calculating the price to be charged to
that customer for some goods. It does not appear anywhere in
the accounting books and so does not appear anywhere in the
financial statements.
Glossary 385
Trade payable (or account payable, or trade creditor) A

Trial balance A list of T-accounts and their balances in the
ledgers, on a specific date, shown in debit and credit columns.
Useful life of an asset The number of years before an asset wears
out or becomes obsolete, whichever comes first. Also known as
“economic life”.
Working capital (or net current assets) Current assets minus
current liabilities.The figure represents the amount of resources
the business has in a form that is readily convertible into cash.
Index
account 374; adjustments to 74, 143 accrual (simply accrued expense)

see also adjustments to accounts; 5, 73, 77, 112, 143–5, 153, 257,
current 209–10; ledger 33–4; 374–5
partnership 209–12; see also accrued income 375
partnership; realisation 215–16; accumulated depreciation
revaluation 213, 215, 230, 248, (allowance/provision for
383; suspense 143, 149, 384; depreciation account) 116–17,
T-account 180, 210, 384 121–2, 132, 133, 375, 382
accounting equation 2–4, 6, 9, 33 adjustments to accounts 74, 143;
accounting for inventories 77–8; accruals 143–4; credit sales 146–7;
LCM method 74–5; periodic discounts 146–7; doubtful debts
inventory system 75–6; perpetual 147–9; prepayment 144–5; rules
inventory system 75; principles 73; for accruals and prepayments 145;
valuation methods 76–7 suspense account 149
accounting information, processing: allowance for doubtful debts
balancing off 35; debit and (provision for doubtful debts)
credit rules 34; double-entry 147–9, 154, 155, 159–60, 168–71,
bookkeeping 33–4; ledger 375, 382
accounts 33–4; transaction process Altman’s Z-score 289
34–5; trial balance 35 amortisation 109, 110, 112, 375
accounting problems 212 another asset turnover 281
accounting process 374 asset-related expenditures 112
account payable (trade payable/trade assets 2, 4–5, 375; current 4, 109,
creditor) 5, 144, 147, 180, 374, 145, 148, 261, 377; intangible 212,
384, 385 380; net 2, 5–6, 380; partnership
account receivable (trade debtor) 212, 217; revaluation process 213;
144, 146, 374, 384 see also non-current assets (fixed
accounts (final accounts/financial assets)
statements) 149, 178, 210, 374; asset turnover 279, 281, 284
see also financial statements asset utilisation (activity) ratios
accrual rule 145 281–2
Inde x 387
bad debt 147–9, 375 credit 377
bad-debt expense 146, 375 CREDIT BALANCE 34
balance brought down (brought credit rules 34
forward) 145, 375–6 credit sales 146–7
balance carried down (carried CREDIT side 33–4
forward) 145, 376 credit trade receivables 146–8
balance-off the T-account (close off current account, partnership 209–10
the account) 376 current assets 4, 109, 145, 148,
balance sheet see Statement of 261, 377
Financial Position (SFP) current liabilities 5, 144, 261, 265,
balancing figure 179–84, 186–8 275, 377
balancing off accounts 35 current ratio 279
bank loan 376
bookkeeping 33–4, 74–5, 112, debit 377
113, 376 DEBIT BALANCE 34
business 2–5; adaptability 259; double debit rules 34
entry 33–4, 315, 340–2, 378; DEBIT side 33–4
liquidity 259; ownership of 275; debt/equity ratio 281
profitability 275; segments 288; debt to value ratio (D/V) 280
viability 259 depletion 109, 377
depreciable value 110–11
capital 376 depreciation 109–12, 119–21, 126–7,
capital employed 278–81 129–31, 137–9, 377
capital expenditure 112, 114, 262, direct method 260–1
304, 376 discount received 147
carriage inwards 376 discounts 146–7
carriage outwards 78, 377 discounts allowed 378
cash 258, 377 discounts received 378
cash/bank account 215 dissolution 215–17, 378
cash discount 146–7 dividend cover 283
cash flow analysis 262–4 dividend yield 283
cash flow statement 259–60; double-entry bookkeeping (double
financing long-term investment entry) 33–4, 315, 340–2, 378
264; format of 260–1; doubtful-account expense 146
overcapitalisation 264; overtrading doubtful debts 147–9, 156–60,
265; specimen format of 262 164–71
charges, adjust for 261 drawings 378
close off the account (balance off the DuPont ratio analysis 283–5
T-account) 377
COGS 180–2 earnings before interest and tax
common-sized statements 287 (EBIT) 278–9
complete “single entry” 178, 179 earnings per share (EPS) 282
computer manufacturing company earnings ratio, quality of 263–4
80, 93–4 economic life of an asset 111,
convertion of partnership 217–18 214, 378
388 Inde x
equity 378 incomplete records 177; complete

error of omission 378 “single entry” 179; dealing with
error of original entry 378 178–9; forms of 177–8; gross
error of principle 378 margin 180–2; income and
estimated useful life 111 expenditure 178–9; incomplete
expenditure 112 “single entry” 179; information,
expenses 3, 144, 378 cash 182–3; markup equations
180–2; purchases and trade
fair value 217–18 payables 180; sales and trade
Fairy Ltd 121–2, 132–4 receivables 179–80
FIFO see First In, First Out (FIFO) incomplete “single entry” 178, 179
final accounts see financial index numbers 286–7
statements indirect method 261
financial statements 1, 33, 143, 179, information, cash 182–3
258, 259, 274–6, 378, 379; DuPont insider claims 2
ratio analysis 283–5; ratio analysis intangible asset 212, 380
276–83, 285; Statement of Cash interest cover ratio 281
Flows 5; Statement of Financial interest on capital 218, 380
Position 4–5; Statement of Profit interest on drawings 210, 380
or Loss 3–4; time-series analysis International Accounting Standard
285–90 (IAS) 7, cash flow statement
financial strength 275 259–60
financing activities 260 inventory (stock) 77–8, 380; LCM
financing long-term investment 264 method 74–5; periodic inventory
First In, First Out (FIFO) 77, 378 system 75–6; perpetual inventory
fixed assets see non-current assets system 75; principles 73; turnover
(fixed assets) ratio 282; valuation methods
fixed capital accounts 379 76–7
float 379 investing activities 260
free cash flow 262–3 investment/market value ratios
282–3
gearing ratios 280–1
general ledger 379 journal 45–6, 48, 60, 61, 74–5, 380
goodwill (purchased goodwill)
212–15, 379 Last In, First Out (LIFO) 77, 380
gross loss 379 ledger accounts 33–4
gross margin 180–2 liabilities 5, 380; current 5, 144, 261,
gross profit (GP) 180–2, 379 265, 275, 377; non-current 5
LIFO see Last In, First Out (LIFO)
historical summaries 288 limited partner 380
Hopwood, W. S. 289 long-term liabilities 5, 380
horizontal analysis 285–6 loss 3–4, 380
lower-of-cost-or-market-value
income and expenditure (revenue) (LCM) method 74–5
177–9, 379
income statement see Statement of markup (cost) 380
Profit or Loss (SPL) markup equations 180–2
Inde x 389
matching/accruals 5, 73, 77, 112, perpetual inventory system 75
143–5, 153, 257, 375–6 prepaid expense (prepayment) 4,
matching process 144 144–5, 381–2
multivariate analysis 288–9 prepayment rule 145
price earnings (PE) ratio 283
negative goodwill 380 profit 2–4, 211, 261, 382
net assets 2, 5–6, 380 profit/loss account see Statement of
net book value (NBV) 110, 112, 113, Profit or Loss (SPL)
115–16, 380 profit margin (percentage) 276, 278,
net current assets 4, 381 279, 382
net loss 4, 381 profit sharing ratio (PSR) 211,
net profit 381 213–15
net profit margin 279 provision/allowance for depreciation
net purchases 78 account (accumulated
net realisable value (NRV) 73, 74 depreciation) 116–17, 121–2, 132,
nominal ledger 34, 179, 381 133, 375, 382
non-cash charges, adjust for 261 provision for doubtful debts (allowance
non-current assets (fixed assets) 4, for doubtful debts) 147–9, 154, 155,
381; capital expenditure 112; 159–60, 168–71, 375, 382
depreciation of 109–12; disposal of purchased goodwill (goodwill)
113; revenue expenditure 112 212–15, 379, 382
non-current liabilities 5 purchases (inventory/stock) 75, 76,
180, 382
Ohlson, J. A. 289 purchases returns (returns
operating activities 260, 261, 263 outwards) 382–3
outsider claims 2, 5
overcapitalisation 264 quality of earnings ratio 263–4
overdraft 5, 265, 275, 280, 285, 381
overtrading 265, 284–5 ratio analysis 276–83, 285, 287, 289
owners’ equity (OE) 2–5, 7–9, 178, ratio of capital 279
184, 381 ratios 276–8, 280–5, 289
ownership of business 275 realisation account 215–16, 251,
owners’ interest 381 253–5
receivable turnover ratio 282
partners’ capital accounts 215 reducing balance method 111–12,
partnership 221–35, 236–56, 116, 124–6, 136–7, 383
381; accounts of 209–12; residual value (scrap value) 111, 383
convertion of 217–18; return on capital employed
dissolution of 215–17; structure (ROCE) 279
of 212–15 return on equity (ROE) 278–9,
partnership salaries 282, 381 283–4, 290
payable turnover ratio 282 returns inwards (sales returns) 79, 383
payout/ploughback ratio 283 returns outwards (purchase
percentage (profit margin) 276, 278, returns) 383
279, 382 revaluation account 213, 215, 230,
percentage change 286 248, 383
periodic inventory system 75–6 revaluation of assets 213
390 Inde x
revenue expenditure 112, 114, 383 straight line method 111, 114–16, 384
revenue (income) 3, 383 supermarkets financial year 163, 174
rules for accruals and suspense account 143, 149, 384
prepayments 145
T-account 180, 210, 316, 323–4,
sales 180–2, 383 343–5, 349–52, 384
sales and trade receivables 179–80 time-series analysis 276, 285–90
sales ledger 383 trade debtor (account receivable)
sales returns (returns inwards) 79, 383 144, 146, 374, 384
scrap value (residual value) 111, 383 trade discount 147, 384
segmental analysis 288 trade payable (account payable/trade
settlement discount 146, 147 creditor) 5, 144, 147, 180, 374,
shareholders’ ratio 281 384, 385
solvency/liquidity ratios 275, 281, trade receivables 4, 144, 146–8,
290–1 179–80
specimen format of cash flow transaction process 34–5, 48–9,
statement 262 62–3
Statement of Cash Flows 5 trend analysis 286–7
Statement of Financial Position (SFP) trends 275
1, 4–5, 12–15, 21, 24, 27–8, 30–2, trial balance 35, 149, 315, 342, 385
35, 41–4, 57, 110, 257, 276, 321–3,
323–4, 345, 347, 348, 352–3, 384; uncollectible-account expense 146
assets and liabilities 333–4, 370–1; useful life of an asset 110, 111, 385
sole traders business 328–32, 364–8
Statement of Profit or Loss (SPL) vertical analysis 287–8
3–4, 21, 24, 29–32, 35, 82, 92,
97, 108, 210–11, 257, 309–10, Weighted Average Cost (WAC) 77
321–3, 323–4, 336, 345, 346, 348, working capital (net current assets)
352, 379, 384; assets and liabilities 279, 385
333–4, 370; sole traders business written-down value (WDV) 110
328–32, 364–7
stock see inventory (stock) Z-scores 288–9

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What is the purpose of the book according to the text?

What is the purpose of the book according to the text?

What topics does the book cover?

What topics does the book cover?

Financial Accounting

Understanding the basics of financial accounting can be a tricky

• The interpretation of financial statements and the accounting

With the latest coverage of International Financial Reporting Stand-

Ilias G. Basioudis is Senior Lecturer of Financial Accounting &

For a full list of titles in this series, please visit

The Qur’an (second edition)

Special Educational Needs And Disability (third edition)

ISBN: 978-1-138-60550-3 (hbk)

1 Financial statements and the accounting

This book is part of The Basics series published by Routledge

remind students to do as much practice as they can at the intro-

• It encourages students to learn and fulfil the learning objectives

• They may use the book to introduce new accounting topics

addition, I would encourage you to pass the temptation of looking

Traditional UK accounting International Financial Reporting

Profit and loss account Statement of Profit or Loss

Exceptional item No equivalent

I would like to thank Terry Clague, Senior Publisher, and M­ atthew

This chapter covers briefly the following topics:

• Introduction to financial statements

Introduction to financial statements

F WHAT do YOU want to know about a business at the

1. How well has the business performed during the period?

The accounting equation

Assets – Liabilities = Owners’ Equity

Owners’ Equity + Liabilities = Assets.

The above equation is called the accounting equation. The total

these three factors and can be calculated by applying the follow-

More about the financial statements

Statement of Profit or Loss:

The Statement of Profit or Loss (SPL) (or previously known as the

Statement of Financial Position

A Statement of Financial Position (SFP) (previously known as the

1. Non-current assets are assets held by a business over more than

Liabilities are the “outsider” claims, or economic obligations (debts)

1. Current liabilities are claims that need to be paid off within 12

Owners’ equity (OE), as we have seen above, represents the “insider”

Statement of Cash Flows

Motor vehicles €2,000

1. Arranged the sale of an apartment building owned by a

2. Collected $2,000 cash from trade receivable. The receiva-

Which of these transactions represented revenue earned to the

1. Paid $2,000 salary to a sales representative for time worked

Which of these transactions represented expenses incurred for

“increase total assets”;

a. O wner contributed a computer to the business.

Capital as of 1 July 20x9 $22,800

During the past year, George Mikael has withdrawn

Cash on hand $200; bank overdraft $12,000;

Prepare a classified SFP as of 31 October 20x1.

Mobile Centre Ltd

Net assets

Nov. 21 Purchased equipment including a

Prepare an SFP for The Model’s Vineyard Ltd as of 30

I would like to thank Terry Clague, Senior Publisher, and M atthew

a. O wner contributed a computer to the business.