Journals and Key Formulas

Question 1

Journal for disposals given in a part exchange

Answer 1

Step 1: Remove cost of disposed asset from cost ledger (as before)
Dr Disposals account £ cost
Cr Non-current cost account £ cost

Step 2: Remove accumulated depreciation from the accumulated depreciation ledger (as before)
Dr Accumulated depreciation account £ accumulated depreciation
Cr Disposals account £ accumulated depreciation

Step 3: Account for the disposal proceeds (replace cash with trade in value)
Dr New asset cost account £ part exchange allowance
Cr Disposals account £ part exchange allowance

The remaining cash paid (after the part exchange allowance) for the new asset is then accounted for in the usual way:
Dr New asset cost account £ cash paid
Cr Cash £ cash paid

Question 2

Accounting Equation

Answer 2

Assets = Liabilities + Equity(Capital)
Assets – liabilities = Equity
Net assets = Equity

Question 3

Profit Formula

Answer 3

Assets - Liabilities - Opening Capital + Drawings

Question 4

Gross Wage Formula

Answer 4

Gross Wage = PAYE + Employee NI + Net Wage

Question 5

Wages and Salaries Expense/Employees Gross Salary Formula

Answer 5

Wages and Salaries Expense/Employees Gross Salary = PAYE + Employee NI + Employers NI + Cash to employees

Question 6

Wages Cost Formula

Answer 6

Wages Cost = Employees gross pay + employers NI

Question 7

DEAD CLIC

Answer 7

Debits INCREASE
Expenses (SOPL) :(
Assets (SOFP) :)
Drawings (SOFP)

Credits INCREASE
Liabilities (SOFP) :(
Income (SOPL) :)
Capital (SOFP)

SOFP = GROSS
SOPL = NET

Question 8

Sale

Answer 8

DR Trade Rec/Cash
CR Sales Income

Question 9

Sales Returns

Answer 9

Dr Sales Returns (or Sales)
Cr Trade receivables

Question 10

Purchase

Answer 10

Cr Trade payables (liability)
Dr Purchase Expense

Question 11

Purchase returns

Answer 11

Dr Trade payables
Cr Purchase returns (or Purchases)

Question 12

Contra

Answer 12

WILL ALWAYS BE THIS, THERE IS NO OPPOSITE
Dr Trade payables
Cr Trade receivables

Question 13

Refund to customers

Answer 13

Dr Trade receivables
Cr Cash

Question 14

Refund to suppliers

Answer 14

Dr Cash
Cr Trade payables

Question 15

Dishonoured cheque Journal

Answer 15

Dr Trade receivables
Cr Cash

Question 16

Cost of Sales Proforma Layout

Formula

Which financial statement does this affect

Answer 16

See FC

Cost of Sales = Opening inventories + Purchases + Carriage Inwards (deliveries) - Closing inventories

So how many did we start with - how many we have left over - how much did it costs us to get everything

We then use this to calculate cost of sales which is in our Statement of Profit or Loss

Page 66 in ICAEW FI WB

Question 17

Revenue Formula

Answer 17

REVENUE = SALES

Sales = Gross profit + Cost of Sales

Question 18

Sales Formula

Answer 18

REVENUE = SALES

Sales = Gross profit + Cost of Sales

Question 19

Gross Profit Formula

Answer 19

Gross profit = Sales (Revenue) - Cost of Sales

Question 20

Net Profit Formula

Answer 20

Net profit = Gross profit - Other expenses

Question 21

Purchases goods (inventories)

Answer 21

Dr Purchase expenses
Cr Trade payables / cash

Question 22

Year end closing inventories

Answer 22

Account for year end closing inventories as follows
Dr Inventories (current asset) account £ closing inventories
Cr cost of Sales expense £ closing inventories

ONLY THESE TWO LEDGER ACCOUNTS ARE TOUCHED FOR YEAR END/OPENING INVENTORY, ANYTHING ELSE IS INCORRECT

Question 23

Reverse out opening inventories

Answer 23

Reverse out opening inventories as follows
Dr Cost of sales expense £ opening inventories
Cr Inventories (current asset) account £ opening inventories

ONLY THESE TWO LEDGER ACCOUNTS ARE TOUCHED FOR YEAR END/OPENING INVENTORY, ANYTHING ELSE IS INCORRECT

Question 24

Closing Inventory Formula

Answer 24

Closing inventory = Quantity (No of units/Stock Count) x Valuation (NRV)

NRV is NET REALISABLE VALUE = Sales price - Cost to complete

Question 25

NRV Formula

Answer 25

Closing inventory = Quantity (No of units/Stock Count) x Valuation (NRV) NRV is NET REALISABLE VALUE = Sales price - Cost to complete

Question 26

Mark Up

Answer 26

MARK UP is calculated on COSTS if the markup is on costs Costs = 100%MARK UP is calculated on COSTS if the markup is on costs Costs = 100%MARK UP is calculated on COSTS if the markup is on costs Costs = 100% We then draw out the table for Sales, Cost of Sales and Gross if the markup was 40% Sales = 140% Cost of Sales = 100% Gross = 40% we can then work out the £ value from here Formula: Sales - Cost of Sales = Gross profit

Question 27

Margins

Answer 27

MARGINS is calculated on SALES if the margins is on sales Sales = 100% We then draw out the table for Sales, Cost of Sales and Gross if the margin was 40% Sales = 100% Cost of Sales = 60% Gross = 40% we can then work out the £ value from here Formula: Sales - Cost of Sales = Gross profit

Question 28

Writing off inventories

Answer 28

If inventory is correctly valued at the lower of cost and NRV, no further inventory “write-down” journal entries are needed. In the rare situation where a material amount of inventory has been stolen or destroyed then then the usual treatment of inventories would unfairly distorted view of the entities gross profitability. To overcome this, the cost of the goods stolen or destroyed is removed from purchases (COST OF SALES) and shown in other expenses below the gross profit line. Dr Other expenses £x Cr Purchases £x Any insurance the entity has against the loss is recorded as: Dr Cash/Receivables £x Cr Other income £x

Question 29

If an owner takes something from the business as drawings what is the journal entry?

Answer 29

Dr Drawings £ cost of items Cr Purchases £ cost of items (don’t be tempted to credit inventories) WE DO NOT TOUCH INVENTORIES - Q MIGHT TRY TO TRICK US

Question 30

Irrecoverable debts

Answer 30

Dr Irrecoverable debt expense Cr Trade receivables Dr Irrecoverable debt expense (often included as part of other expenses - administrative expenses) Cr Trade receivables As they no longer owe us as we have moved it to the debt account -moved off memorandum (individual client) ledger

Question 31

Irrecoverable debts is paid

Answer 31

In the rare situation that an irrecoverable debt subsequently paid, the double entry is: Dr Cash Cr Irrecoverable debt expense If we break it down - The original writing off the debt is DR Irrecoverable debt expense and then CR Trade rec - To reverse this we Dr Trade Rec and then Cr Irrecoverable debt - Then to post the cash we DR cash and Cr Trade Rec The positing in the trade rec account is a DR then CR so these balance each other out so instead what we do is

Question 32

Allowance receivables Formula

Answer 32

So allowance receivables = Trade Rec - Irrecoverable debt Then we calculate the allowance from that figure

Question 33

Allowance for receivables

Answer 33

Dr Irrecoverable debt expense Cr Allowance for receivables We Dr Irrecoverable debt expense due to accounting concept of prudence - we want to recognise cost up front of customers not paying WE NEVER TOUCH TRADE REC - AS WE DON'T WANT TO REDUCE THIS AS WE ARE DOUBTFUL THEY WILL PAY SO WE ARE NOT CERTAIN CLASSED AS AN ASSET HOWEVER IT DOES NOT FOLLOW THE TRADITIONAL RULES In our SOFP this would be a negative asset as we would always minus it If we want to make it bigger we credit it CREDIT Increases Allowance for Receivables DEBIT Decreases Allowance for Receivables Affects my statement of financial position SOFP

Question 34

Increase in Allowance for receivables

Answer 34

INCREASE IN ALLOWANCE Dr Irrecoverable debt expense £ the required increase Cr Allowance for receivables £ the required increase

Question 35

Decrease in Allowance for receivables

Answer 35

DECREASE IN ALLOWANCE Dr Allowance for receivables £ the required decrease Cr Irrecoverable debt expense £ the required decrease

Question 36

Final Trade Receivable Figure

Answer 36

TR - irrecoverable debt = then calculate the percentage of that i.e. allowance is 2% so 2% of that value which is my figure for allowance TR 2. Then to get the final TR we do TR- Allowance TR = Amount to be shown on SOFP (NET FIGURE) = this is my current asset FINAL FORMULA TR = TR total at year end - irrecoverable debt written off then PLUS OR MINUS Allowance for Rec

Question 37

Irrecoverable debt expense formula

Answer 37

We will be asked to find the Irrecoverable debt expense in the statement of profit or loss. This can be quickly found with the following: (1) Irrecoverable debts written off in period - DR (2) Increase/(decrease) in allowance - IF INCREASE ITS A DR, if DECREASE ITS A CR (negative) (3) Old irrecoverable debts that pay in the period - CR (negative) This will give us the overall expense Dr (positive) or other income Cr (negative)

Question 38

How do we calculate a) Allowance Receivable b) Trade Receivable c) Net Trade Receivable

Answer 38

a) So allowance receivables = Trade Rec - Irrecoverable debt Then we calculate the allowance from that figure b) Trade Receivable initial figure - Written off debts c) Net Trade Receivable = TR (AFTER WRITING OFF DEBTS) - Allowance for Rec

Question 39

Accrued Income

Answer 39

Dr Accrued income (an asset in the SoFP) Cr Revenue/other income (sales)

Question 40

Deferred/Prepaid Income

Answer 40

Deferred Income = PREPAID INCOME Dr Revenue/other income Cr Deferred income (a liability in the SoFP)

Question 41

Reverse opening accrual

Answer 41

Reverse opening accrual Dr Accruals (SOFP) Cr Expense (profit or loss)

Question 42

Post closing accrual

Answer 42

Post closing accrual Dr Expense (profit or loss) Cr Accruals (SOFP)

Question 43

Reverse opening prepayment

Answer 43

Reverse opening prepayment Dr Expense (profit or loss) Cr Prepayment (SOFP)

Question 44

Post closing prepayment

Answer 44

Post closing prepayment Dr Prepayments (SOFP) Cr Expense (profit or loss)

Question 45

Purchase of a NCA

Answer 45

Dr Non-current asset £ cost Cr Cash / Trade payables £ cost (depends how we pay - cash or credit)

Question 46

NCA accumulated depreciation

Answer 46

For each period’s calculated depreciation charge: Dr Depreciation expense (profit or loss) Cr Accumulated depreciation (statement of financial position) There is no impact on the non-current asset cost accounts, but in the final statement of financial position the balance on the accumulated depreciation account (Cr) is offset against the cost account (Dr) to derive the carrying amount (carrying value or net book value) of the non-current assets. So the cost - accumulated depreciation = Carry Amount which is the final figure in our SOFP

Question 47

Depreciable Amount formula

Answer 47

Depreciable Amount = Cost - Residual Value

Question 48

Carrying Amount/Value (CA) formula

Answer 48

Carrying Amount = Cost - Accumulated depreciation This is the figure that would appear in our SOFP under our NCA Accumulated depreciation is all the years I have had the asset. Refers to the accumulated reduction in the value of an asset over time. When an asset is first purchased, it's typically assigned a value reflecting its expected lifespan, gradually reducing over time. Accumulated depreciation is the total of this depreciation to date. a.g after 1 year would be price per year, after 7 years would be acc depreciation x7 and so on

Question 49

straight line depreciation formula

Answer 49

Depreciation Charge/Expense = Cost - Residual Value ________________________ Useful life (month or years) It can be expressed as a % of cost (assuming no residual value) or number of years. For example:  10% OF COST straight line = 10 years (120 months) - REDUCING IT OVER 10 YEARS  25% straight line = 4 years (48 months)  20% straight line = 5 years (60 months)  5% straight line = 20 years (240 months) 100/% = No of years 100/No of years = % of cost In your exam, straight line depreciation will normally be calculated on a monthly basis.

Question 50

Reducing Balance depreciation formula

Answer 50

The annual depreciation charge is a fixed percentage of the brought forward carrying amount (carrying value or net book value) of the asset. It allocates a greater proportion of the cost to the asset’s earlier years, and a lower proportion in its later years and the asset becomes less useful to the business. (Cost - Accumulated Depreciation) x % given Carrying Amount = (Cost - Accumulated Depreciation) Would use a pro forma table in the layout as Carrying Amount Accumulated depreciation Asset at cost INITIAL COST Depreciation Year 1 INTIAL COST X % INITIAL COST x depreciation % Carrying Amount Year 1 INITIAL COST - ACC DEP Depreciation Year 2 CA YR 1 X % CA YR 1 x depreciation % Carrying Amount Year 2 CA YR 1 - ACC DEP YR 2 Depreciation Year 3 CA YR 2 X % CA YR 2 x depreciation % Carrying Amount Year 3 CA YR 2 - ACC DEP YR 3 Depreciation Year 4 CA YR 3 X % CA YR 3 x depreciation % Carrying Amount Year 4 CA YR 3 - ACC DEP YR 4 Depreciation Year 5 CA YR 4 X % CA YR 4 x depreciation % Carrying Amount Year 5 CA YR 4 - ACC DEP YR 5

Question 51

calculate Carrying Amount in Reducing Balance depreciation

Answer 51

Carrying Value after n years = Cost × (1 – depreciation rate as a decimal)n power of n is the years

Question 52

change in depreciation method formula

Answer 52

Remaining CA - Residual Value --------------------------------------------- Remaining Useful Life

Question 53

What is a Fall in value (impairment loss) Outline the PROFORMA

Answer 53

Sometimes an asset might suffer a permanent fall in its value (perhaps due to damage) called an impairment loss. The asset should be written down to its new carrying value, called the “recoverable amount” with the difference being expensed to the profit or loss. To decide the recoverable amount we choose the higher figure out of the “fair value less cost to sell” (SELL) of the asset and its “value in use” (KEEP) PROFORMA NCA Lower Recoverable Amount Carrying Amount Higher Cost X Fair value less Value In Use Acc Dep (X) cost to Sale (KEEP) ___________________ (SELL) Carrying Amount ___________________ ___________________

Question 54

profit or loss on a disposal formula

Answer 54

PROFORMA £ Net disposals proceeds x (cash when sold) Less carrying value (x) (at disposal) _______________ Profit/loss on disposal x/(x) Profit would be reported in other income in SPL Loss would be reported as an expense in SPL

Question 55

What is the journal when we dispose of an asset?

Answer 55

SHORT CUT DR CASH DR ACC DEPRECIATION (clear to 0) CR NCA COST (clear to 0) Step 1: Remove cost of disposed asset from cost ledger Dr Disposals account £ cost Cr Non-current cost account £ cost Step 2: Remove accumulated depreciation from the accumulated depreciation ledger Dr Accumulated depreciation account £ accumulated depreciation Cr Disposals account £ accumulated depreciation Step 3: Account for the disposal proceeds Dr Cash £ proceeds Cr Disposals account £ proceeds

Question 56

What is capital called for a company?

Answer 56

Share Capital Share Premium

Question 57

Share Capital

Answer 57

No of Shares x Nominal/Par/Face Value This will be a CR

Question 58

Share Premium

Answer 58

No of Shares x (Amount Sold - NV) This will be a CR

Question 59

Cash in relation to capital shares Formula

Answer 59

Cash = No of shares x Amount Sold This will be a DR

Question 60

Dividends paid during the period - equity/ordinary or irredeemable preference shares

Answer 60

Dr Retained earnings(capital) Cr Cash

Question 61

Dividends paid during the period - redeemable preference shares

Answer 61

Dr Finance charge(cost) Cr Cash

Question 62

Dividends declared before the period ends - equity/ordinary or irredeemable preference shares

Answer 62

Dr Retained earnings Cr Accruals

Question 63

Dividends declared before the period ends - redeemable preference shares

Answer 63

Dr Finance charge Cr Accruals

Question 64

Issuing Shares

Answer 64

Dr Cash £ issue proceeds Cr Share capital £ nominal value of shares issued Cr Share premium £ the balance

Question 65

No of existing shares formula

Answer 65

Share Capital ________________ NV of 1 share

Question 66

No of new shares

Answer 66

No of existing shares x 1/(e.g.1 for 4 so = 4)

Question 67

Value of new share

Answer 67

No of new shares x price for 1 for (4) etc

Question 68

Rights Issue Journal

Answer 68

Dr Cash £ issue proceeds Cr Share capital £ nominal value of shares issued Cr Share premium £ the balance

Question 69

Bonus Issue Journal

Answer 69

Dr Share premium OR retained earnings £ nominal value of shares Cr Share capital £ nominal value of shares

Question 70

Accounting for non-current liabilities on issue of debt

Answer 70

Dr Cash Cr Non-current liabilities

Question 71

Accounting for non-current liabilities one repayment of debt

Answer 71

Cr Cash Dr Non-current liabilities

Question 72

Accounting for non-current liabilities interest paid

Answer 72

Dr Interest expense (finance cost) Cr Cash

Question 73

Accounting for non-current liabilities Outstanding interest owed

Answer 73

Dr Interest expense (finance cost) Cr Accrual

Question 74

Provision - Incur expenditure (increase in provision)

Answer 74

Dr Provision (SoFP) Dr Expense (SPL) Cr Cash

Question 74

Create provision based on best estimate of amounts payable

Answer 74

Dr Expense (SPL) Cr Provision (SoFP)

Question 75

Provision - Remove excess expenditure (decrease in provision)

Answer 75

Dr Provision (SoFP) – to clear Cr Expense (SPL)

Question 76

Tax expense in P or L Formula

Answer 76

Tax expense in P or L = Directors estimated tax for the year (given in a note to the trial balance) + (under) or - (over) provision from prior year (tax figure found in the trial balance)