3.6- Double Entry Model

Question 1

Describe NCA

Answer 1

Resources owned by the business that it intends to keep for more than 1 year.

They’re used to generate profits and aren’t intended for resale until the end of their useful life.

Incl land, buildings and vehicles

Question 2

Describe CA

Answer 2

Resources that are owned by a business and are already cash/ are intended to become cash within the next 12 months.

Incl inventory, trade receivables, prepayments, cash in hand/bank

Question 3

Define inventory

Answer 3

Goods that are intended for resale but haven’t yet been sold

Question 4

Define trade receiveables

Answer 4

Customers that owe money to the business because they’ve bought goods on credit

Question 5

Describe CL

Answer 5

Amounts owed by the business that must be repaid within 1 year.

Incl trade payables, accruals, bank overdraft and tax

Question 6

Define trade payable

Answer 6

Suppliers that are owed money by a business because they’ve sold goods to the business on credit

Question 7

Formula for net assets

Answer 7

CA -CL

Question 8

Describe NCL

Answer 8

Amounts owed by a business that’ll be fully repaid after more than 1 year.

Incl bank loans, mortgages and debentures

Question 9

Formula for net assets

Answer 9

NCL + NCA - NCL

Question 10

Formula for capital

Answer 10

Balance at the start of the year + Capital introduced + Profit for the year - Drawings

Question 11

Define capital introduced

Answer 11

Any money or other assets provided by the owner of the business

Question 12

Define drawings

Answer 12

Money or goods taken out of the business by the owners

Question 13

Describe prepayment

Answer 13

An expense that’s been paid in advance that relates to the NEXT accounting period

Shown as a CA and it DECREASES the expense to which it relates

Incl rent, rates and insurance

Question 14

Double entry for prepayment

Answer 14

Debit prepayment (CA)
Credit expense on IS (e.g rent)

The expense on IS will decrease and there’ll be an additional CA on the SOFP

Question 15

Calculating prepayments

Answer 15

The monthly amount is calculated and then multiplied by the number of months’ prepayment

The prepayment is then subtracted from the expense in the trial balance

Question 16

Describe accruals

Answer 16

An expense for services that’ve been used unit not yet invoiced to the business at the end of the accounting period.

Shown as a CL as it INCREASES the expense to which it relates .

Incl gas, telephone & electricity bills and wages

Question 17

Accrual example

Answer 17

E.g an electricity bill which is often invoiced for a period of 3 months.

Electricity is being used throughout this period, so it’s an expense that is being accrued .

E.g an electricity bill dated 31 Jan will be for Nov, Dec and Jan. if the financial statements are prepared up to 30 Nov, then two months’ electricity has been accrued at the end of the financial year.

Question 18

Double entry - accrual

Answer 18

Debit the expense on IS (e.g electricity)

Credit accrual (CL)

The expense on IS will INCREASE and there’ll be an additional CL on the SOFP

Question 19

Calculating accruals

Answer 19

When told that an amount is “accrued” or “owing”- ADD the accrual to the expense in the trial balance .

When told an invoice hasn’t been recorded yet- calculate the accrued expense by calculating the monthly amount and MULTIPLY that by the number of months they’ve been accrued . Then add the accrual to the figure from the trial balance .

Question 20

Define irrecoverable debt

Answer 20

A debt that will not be paid- the business will not receive. The amount owed by a customer who has been sold goods on credit.

This may be because the customer has been declared bankrupt or a company has closed down

Question 21

Double entry- irrecoverable debt

Answer 21

Debt - irrecoverable debts - expense on IS

Credit- trade receivables- decreased this figure in CA

Question 22

Describe depreciation

Answer 22

Spreading the cost of a NCA over its useful life

It decreases in value of NCA over a period of time

Question 23

Examples of NCA that are depreciated

Answer 23

Vehicles

Machinery

Equipment

Question 24

Why isn’t land usually depreciated despite being a NCA

Answer 24

Its value doesn’t normally decrease over time

Question 25

Formula for SL depreciation (1)

Answer 25

Cost - Expected residual value / Expected years of useful life

Question 26

Define residual value

Answer 26

The expected sales proceeds of the asset at the end of its useful life

Question 27

Formula for SL depreciation (2)

Answer 27

Cost x % given

Question 28

Formula for RB depreciation

Answer 28

Percentage x NBV

Question 29

Formula for NBV

Answer 29

Cost - provision for depreciation If an asset is newly purchased, used the % of its cost (told in question). The estimated value of NCA that’s shown on SOFP

Question 30

Formula - P/L on disposal of NCA

Answer 30

Disposal proceeds - NBV

Question 31

Double entry - depreciation

Answer 31

Debit depreciation (expense - IS) Credit Provision for Deprecation

Question 32

Describe P4D

Answer 32

The cumulative figure (running total) for depreciation of that type of NCA. It’s subtracted from the cost of the NCA on the SOFP

Question 33

Define Disposal proceeds

Answer 33

How much the asset is sold for

Question 34

Calculating P/L on disposal of NCA

Answer 34

Negative figure (NBV > disposal proceeds) = LOSS - Expense Positive fig (NBV< disposal proceeds) = PROFIT - INCOME (after G.P)

Question 35

Accounting for depreciation and disposal of NCA

Answer 35

Cost of NCA- DEBIT (as it’s the cost of an asset) P4D of NCA- CREDIT (as it’s SUBTRACTED from the cost of an asset) Disposal of NCA- this account shows the P/L on disposal on the asset

Question 37

Where is prepaid income found in financial statements?

Answer 37

CL - SOFP Other income - IS

Question 38

Where is accrued income found on the financial statements

Answer 38

Other income - IS CA - SOFP

Question 39

Where are provision for doubtful debts found on the financial statement

Answer 39

Decrease in P4DD- Other income (+) - IS Increase in P4DD- Expense - IS P4DD- CA (subtracted under trade receivables) - SOFP

Question 40

Where are accrued expenses found on financial statements

Answer 40

Current liabilities Expense

Question 41

Where are prepaid expenses found on financial statements

Answer 41

Expenses Current Assets

Question 42

Where are bad debts written off found on the financial statements?

Answer 42

Expense

Question 43

Where are irrecoverable debts recovered found on the financial statements ?

Answer 43

Other income - I/S

Question 44

Are returns outwards (purchase returns) added or subtracted in the C.O.S calculation?

Answer 44

Subtracted

Question 45

Are carriage inwards added or subtracted in the C.O.S calculation?

Answer 45

Added

Question 46

Where are sales returns located in the financial statements

Answer 46

Underneath sales Subtracted

Question 47

Are carriage outwards added or subtracted in the C.O.S calculation?

Answer 47

Not apart of the calculation Found in expenses

Question 48

What’s found in the CA section of SOFP

Answer 48

Closing stock Trade receivables Provision for DD (subtracted) Prepayment expense Accrued income Bank/cash

Question 49

What’s found in the CL section of SOFP

Answer 49

Trade payables Accrued expenses Prepaid income Bank overdraft

Question 50

Where is profit on sale of NCA found in financial statements?

Answer 50

Other income (after G.P)

Question 51

Where is loss on sale of NCA found in financial statements?

Answer 51

Expense

Question 52

Describe accrued income/ income due

Answer 52

Accrued income- an amount due to a business that’s not been received at the end of the financial year e.g rent receivable that’s owed to a business .

Question 53

Double entry - accrued income / income due

Answer 53

Debit income due (CA - SOFP) Credit source of income on IS (e.g increase rent receivable) Just like accrued expenses , accrued income INCREASES that item on the IS Income earned but not received= ASSET (£ owED to US)

Question 54

Describe prepaid income/income received in advance

Answer 54

A payment received in advance of the accounting period to which it relates. Refers to income sources such as commission receives or rent receivables

Question 55

Double entry- prepaid income

Answer 55

Debit income source on IS (e.g decrease rent receivable) Credit prepaid income (CL - SOFP) Just like prepaid expenses, prepaid income DECREASES that item on the IS Income received not earned

Question 56

Describe Irrecoverable debts recovered

Answer 56

When a former trade receivable , whose account had been written off as an irrecoverable debt , makes a payment

Question 57

Double entry - irrecoverable debt recovered

Answer 57

Debit- Bank Credit - irrecoverable debts recovered ( ADDED after G.P - IS) There’s no need to change the receivables lesser as the amount owed has remained zero

Question 58

What effect does irrecoverable debts recovered have on trade receivables

Answer 58

None There’s no need to change the receivables lesser as the amount owed has remained zero

Question 59

Define provision for doubtful debts

Answer 59

An estimate of the likely amount of trade receivables figure that may become irrecoverable. It involves applying a % to the total amount of TR, based on previous experience of the business (told % in Q).

Question 60

Double entry- P4DD - creating the provision for the first time

Answer 60

Debit - Doubtful debts ( Expense - IS) Cr- P4DD (SUBTRACTED from TR on SOFP

Question 61

Double entry - P4DD- increase in provision

Answer 61

Dr - Increase in DD (expense - IS) Cr- P4DD (INCREASES the amount subtracted from TR on SOFP)

Question 62

Double entry - P4DD- decrease in provision

Answer 62

Dr- P4DD (DECREASES amount subtracted from TR on SOFP) Cr- Increase in DD (ADDED after GP- IS)

Question 63

Calculating P4DD

Answer 63

Once P4DD has been created it must be changed yearly: 1. Calculate the new provision= Trade R x % given 2. Calculate the change in the provision = New provision- Old provision 3. Carry out the double entry for the increase or decrease in provision

Question 64

What side is the balance b/d figure in a P4DD account

Answer 64

Credit

Question 65

A decrease in the P4DD would cause the ‘income statement’ figure to be on the ….

Answer 65

Debit

Question 66

An increase in the P4DD would cause the ‘income statement’ figure to be on the ….

Answer 66

Credit

Question 67

What is on the debit side of a NCA at cost account e.g machinery

Answer 67

Balance b/d at the start of the year New machinery Balance b/d at the start of the next year

Question 68

What is on the credit side of a NCA at cost account e.g machinery

Answer 68

Disposal (not proceeds) Balance c/d (initial cost of machinery still held at the end of the year)

Question 69

What is on the debit side of a P4D at cost account e.g machinery

Answer 69

Disposal (p4D on assets that were sold) Balance c/d (P4D on machinery that was still held at the end of the year

Question 70

What is on the credit side of a NCA at cost account e.g machinery

Answer 70

Balance b/d Depreciation charge for the year ( Expense - IS)

Question 71

What is on the debit side of a disposal cost account e.g machinery

Answer 71

Cost of NCA Income statement figure (profit- Other income)

Question 72

What is on the credit side of a disposal cost account e.g machinery

Answer 72

P4D Bank (sale proceeds) Income statement figure (loss- Expense)