Semester 1 Week 3 Tutorial 1 Flashcards
Prepare the appropriate journals for each of the following transactions:
1. A sale of £2,000 on credit.
2. A receipt from a debtor of £750.
3. A cash purchase of £218.
4. The purchase of goods for £700 on credit.
- Dr debtors £2,000
Cr sales £2,000
Being sale of goods on credit - Dr bank £750
Cr debtors £750
Being cash received from debtor - Dr purchases £218
Cr bank £218
Being purchase of goods for cash - Dr purchases £700
Cr creditors £700
Being purchase of goods on credit
Magland Plc. (‘Magland’) has a December 31st year end. On 5 March 20X4 they receive a gas
bill for £975, for the three months ended 28 February 20X4.
Prepare any journal required at the 31 December 20X3 year end.
This gas bill relates to the three months December, January, and February. As one of these
three months (December) falls into the December 20X3 year end, one month requires to be
accrued.
1/3 x £975 = £325
Dr Heat and light expense £325
Cr Accruals £325
Being gas accrual
Kate Plc. (‘Kate’) has a 30 June year end. On 18 September 20X6 they receive an invoice of
£1,200 for cleaning services for the quarter ending 30 September 20X6.
Prepare any necessary journals for the year ended 30 June 20X6.
No adjustment is required, the invoice relates to expenses incurred post year end and was
received post year end. This question was essentially trying to see if you read the dates!
Richenbach Ltd. (‘Richenbach’) is a vehicle parts manufacturing company with a 30 April year
end. On 5 April 20X2 they receive an order from a client for a custom series of vehicle parts.
Due to the custom nature of the job, the client pays half of the £40,000 cost up front and this
is recorded by Richenbach in sales.
Richenbach commences the manufacture of the vehicle parts in May 20X2.
Prepare any necessary journals for the year ended 20 April 20X2.
£20,000 (half of £40,000) has been received in the year and counted as sales revenue. In line
with the accruals principle, however, we should recognise income when it is earned not
received. This income has not been earned as the work has not been done by the year end; it
should therefore be recognised as deferred income not as sales.
Dr Sales £20,000
Cr deferred income £20,000
Being correct recognition of monies received
The Seagrove partnership (‘Seagrove’) run a business planting trees and shrubs, they have a
30 September year end. One client pays them £4.50 for every tree planted on their land. By
30 September 20X7 1,000 trees have been planted by Seagrove, although no amount has yet
been invoiced.
Discuss if Seagrove should recognise any revenue. What would the journal be?
This question aimed to get you thinking about the principles of revenue recognition which
we’ll be considering in greater detail in this course.
In line with the accruals principle income should be recognised when it is earned not
necessarily when it is received. Here, Seagrove, in planting 1,000 trees have earned this
revenue regardless of when the cash was actually received.
Accordingly Seagrove should recognise this as accrued income income earned but not
received.
1,000 x £4.50 = £4,500
Dr accrued income £4,500
Cr sales £4,500
Being correct recognition of sales
Mr Griffin starts his business as a clothes retailer in 20X1, in his first year he has purchases of
£45,000. A stock-count at the end of his first year on 31 December 20X1 reveals he has stock
remaining with a cost of £8,000.
During the year ended 31 December 20X2 Mr Griffin purchases goods with a value of £53,000,
a stock-count on 31 December 20X2 found goods with a value of £9,500 were held in stock.
1. Prepare any necessary journals to account for stock and purchases and in the years
ended 31 December 20X1 and 20X2.
2. Calculate cost of sales for the years ended 20X1 and 20X2.
20X1
Dr purchases £45,000
Cr bank/creditors £45,000
Being purchases in year
Dr Cost of sales £45,000
Cr purchases £45,000
Being transfer of purchases
Dr stock £8,000
Cr cost of sales £8,000
Being transfer of closing stock
Cost of sales = 0 + £45,000 - £8,000 = £37,000
20X2
Dr purchases £53,000
Cr bank/creditors £53,000
Being purchases in the year
Dr cost of sales £8,000
Cr stock £8,000
Being transfer of opening stock
Dr cost of sales £53,000
Cr purchases £53,000
Being transfer of purchases
Dr stock £9,500
Cr cost of sales £9,500
Being transfer of closing stock
Cost of sales = £8,000 + £53,000 - £9,500 = £51,500
Please note: It is unlikely in real life that purchases throughout the year would be recorded in
just one journal, this is for illustration purposes only.
It is also possible to do this question by means of combined journals, either approach would
be acceptable in the exam.
Meredith runs a business selling vintage furniture, with a 31 March year end. On 1 April 20X4
she has an opening doubtful debts provision of £2,030.
At 31 March 20X5 the total balance of the debtors is £39,445; £1,090 of this balance relates
to a Mr Lloyd who has disappeared. Accordingly Meredith considers it appropriate to write
this debt off.
Furthermore balances of £960 and £1,320 respectively relate to customers who are now
considerably behind with payments although Meredith hasn’t heard any further from them.
Accordingly Meredith feels it appropriate to provide for these debts in full. A general provision
of 2% of remaining debts is also required.
Prepare the appropriate journal(s) to account for bad and doubtful debts for the year ended
31 March 20X5.
Initially we need to write off the bad debt:
Dr bad debts expense £1,090
Cr debtors £1,090
Being bad debts written off
Next calculate the provision
A specific provision of £960 + £1,320 = £2,280 is required
Alongside a general provision on remaining debts of 2% x (£39,445 - £1,090 - £960 - £1,320)
= £722
Total provision required = £2,280 + £722 = £3,002
With an existing provision of £2,030 this is an increase of £3,002 - £2,030 = £972
Dr Bad debts expense £972
Cr doubtful debts provision £972
Being increase in doubtful debts provision
Giving examples, define the elements of financial statements.
The elements of financial statements are:
Assets Something controlled by the entity which will give future economic benefits, for
example debtors or tangible non-current assets such as buildings or vehicles.
Liabilities Some obligation which, as the result of a past event, will lead to economic benefits
leaving the business. For example trade creditors or loans.
Expenditure Economic resources (usually cash) leaving the business, for example purchases,
audit fees or rental expense.
Income Economic resources (usually cash) flowing into the business, for example sales income
or bank interest received.
Equity/capital Any money invested by the owners of the business plus any profits of the
business re-invested.
NB: These do not need to be in any particular order.
You are visiting a new client; John. John tells you that he doesn’t see the point behind the
accruals basis and thinks it would make much more sense if accounts simply reflected the
cash in and out of the business in a given period.
Explain to John why accounts are usually prepared on the accruals basis.
The accruals basis gives a more accurate indication of a company’s actual financial position
and income/earnings.
In the modern business world there can often be a considerable difference in time between
when income or expenses are incurred and when they are recognised in the accounts. For
example a business could have incurred considerable expenses just before the year end but
not recognised them in the year, similarly they could have earned significant income that was
not actually included in the year. Both of these could lead to the business’s expenses being
misleading.
- A stock count as at 31 December 20X4 found stock with a cost of £28,000 to be held.
- A gas bill of £3,000 was received on 5 February 20X5, this relates to the three months
ended 31 January 20X5. - On 5 December 20X4, Mulder received and paid a rent expense of £2,000 this relates
to the month of January 20X5. - A debt of £1,000 from Mrs Michaels is considered irrecoverable and should be written
off. In addition a provision of £3,000 is required for a debt for Mr Williamson and Mr
Mulder considers a 5% provision appropriate for all other debts.
Required
Prepare the profit and loss and balance sheet for Mr Mulder at 31 December 20X4
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