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BA10 A01.qxd 21/12/04 10:18 am Page viiiGuided tour of the bookPart openingTHE FINANCIALSTATEMENTS OF SOLETRADERSpartchapter25Balancing off accountsLearning objectivesAfter you have studied this chapter, you should be able to:lclose accounts when appropriatelbalance off accounts at the end of a period and bring down the opening balanceto the next periodldistinguish between a debit balance and a credit balanceldescribe and prepare accounts in three-column formatIntroductionIn this chapter, you’ll learn how to discover what the amount outstanding on anaccount is at a particular point in time. You’ll also learn how to close accounts thatare no longer needed and how to record appropriate entries in accounts at the endand beginning of periods. Finally, you’ll learn that T-accounts are not the only wayto record accounting transactions.5.1Learning objectivesoutline what you willneed to havelearned by the endof the chapter.Accounts for debtorsIntroductionWhere debtors have paid their accountsThis part is concerned with preparing, from double entry records,the financial statements of sole traders.78910So far you have learnt how to record transactions in the accounting books by means of debit andcredit entries. At the end of each accounting period the figures in each account are examined inorder to summarise the situation they present. This will often, but not always, be a year if youare calculating profit. It will be at least once a month if you want to see what is happening withrespect to particular accounts. Probably the most obvious reason for this is to find out howmuch our customers owe us for goods we have sold to them. In most businesses this is done atthe end of each month.Trading and profit and loss accounts: an introduction71Balance sheets83Trading and profit and loss accounts and balance sheets:further considerations91Accounting concepts104Activity5.1Why do you think we would want to look at the debtor accounts in theaccounting books as often as once a month?49A wide range of exhibits offer clear examplesof accounting practice and methodology.Chapter 27 l Double entry records for depreciationThe depreciation is posted directly into the cumulative provision for depreciation account.The double entry is:Part 3 l Books of original entry11.8Debit the profit and loss accountCredit the accumulated provision for depreciation accountTypes of accountsSome people describe all accounts as personal accounts or as impersonal accounts.l Personal Accounts – these are for debtors and creditors (i.e. customers and suppliers).l Impersonal Accounts – divided between ‘real’ accounts and ‘nominal’ accounts:Exhibit 27.1– Real Accounts – accounts in which possessions are recorded. Examples are buildings,machinery, fixtures and stock.– Nominal Accounts – accounts in which expenses, income and capital are recorded.A business has a financial year end of 31 December. A computer is bought for 2,000 on 1 January20X5. It is to be depreciated at the rate of 20 per cent using the reducing balance method. Therecords for the first three years are:A diagram may enable you to follow this better:Computer20X5Jan 1 Cash 2,000Accumulated Provision for Depreciation – Computer20X5Dec 31 Balance c/d 40020X5Dec 31 Profit and loss20X6Dec 31 Balance c/d72020X6Jan1 Balance b/dDec 31 Profit and loss20X7Dec 31 Balance c/d976 40040032072072020X7Jan1 Balance b/dDec 31 Profit and loss72025697697620X8Jan1 Balance b/d97611.9 40032025620X5 Depreciation20X6 Depreciation20X7 DepreciationNominal and private ledgersThe ledger in which the impersonal accounts are kept is known as the Nominal (or ‘General’)Ledger. In order to ensure privacy for the proprietor(s), the capital, drawings, and other similaraccounts are sometimes kept in a Private Ledger. This prevents office staff from seeing details ofitems which the proprietors want to keep secret.Profit and Loss Account (extracts) for the year ended 31 DecemberActivity11.2Note: In this case, the depreciation for the period being posted to the profit and loss account isbeing described as ‘depreciation’ and not by the name of the account it is being posted from. Thisclearly is not the convention usually adopted when posting entries between ledger accounts andis very much ‘the exception that proves the rule’.Activity27.311.10The accountant as a communicatorThe impression is often given that all that an accountant does is produce figures arranged in various ways. This has led to a perception that accountants are boring, pragmatic people with nosense of humour. While it is true that such work does take up quite a lot of an accountant’s time,it does not acount for all of a typical accountant’s work. Accountants also need to be good communicators, not just in the way they present accounting information on paper, but also in howthey verbally communicate the significance of the information they prepare.An accountant can obviously arrange the financial figures so as to present the information inas meaningful a way as possible for the people who are going to use that information. That is,What advantages are there in making this exception to the rule by using’depreciation’ rather than ‘accumulated provision for depreciation’ in the profitand loss account entry?Now the balance on the Computer Account is shown on the balance sheet at the end of eachyear less the balance on the Cumulative Provision for Depreciation Account.295Why bother with books of original entry? Why don’t we just enter transactionsstraight into the ledgers?122Activities occur frequently throughout the bookto test your understanding of new concepts.viii

BA10 A01.qxd 21/12/04 10:18 am Page ixA number of worked examples are providedto guide you through more difficult concepts.Chapter 45 l An introduction to the financial statements of limited liability companiesPart 1 l Introduction to double entry bookkeepingIn Business Accounting 2 you will be told more about the differences between ‘revenue reserves’and ‘capital reserves’. The most important reason for the distinction has to do with deciding howmuch can be treated as being available for paying out to shareholders as dividends. ‘Revenuereserves’, which include the profit and loss account balance and the general reserve, can betreated as available for such dividends. ‘Capital reserves’, which will include revaluation reserveson property and land, also some reserves (which you have not yet met) which have to be createdto meet some legal statutory requirement, cannot be treated as available for payment of dividends.A term which sometimes appears in examinations is that of ‘fungible assets’. Fungible assetsare assets which are substantially indistinguishable one from another.CashAug 25 Drawings 50Sometimes goods are taken for private use. These are also known as drawings. In Section 3.2,you learnt that when goods are purchased, the purchases account is debited. As a result, whengoods are withdrawn it is the purchases account which should be credited.The following example illustrates the entries for this form of drawings:On 28 August, the owner takes 400 of goods out of the business for his own use.sllA fully worked exampleEffectExhibit 45.8Action1 Capital is decreased by 4002 Stock is decreased by 400Debit the drawings account 400Credit the purchases account 400The following trial balance is extracted from the books of F W Ltd as on 31 December 20X5:DrawingsTrial balance as on 31 December 20X5Dr 10% preference share capitalOrdinary share capital10% debentures (repayable 20X9)Goodwill at costBuildings at costEquipment at costMotor vehicles at costProvision for depreciation: buildings 1.1.20X5Provision for depreciation: equipment 1.1.20X5Provision for depreciation: motor vehicles 1.1.20X5Stock 1.1.20X5SalesPurchasesCarriage inwardsSalaries and wagesDirectors’ remunerationMotor expensesBusiness rates and insurancesGeneral expensesDebenture interestDebtorsCreditorsBankGeneral reserveShare premium accountInterim ordinary dividend paidProfit and loss account 31.12.20X4Cr 200,000700,000300,000 400Aug 28 g 28 Drawings100,00024,00051,600Learning outcomes84,912You should now have learnt:1,022,0001 How to calculate profit by comparing revenue with expenses.2 That the accounting equation is central to any explanation of the effect 86,100trading upon capital.34567113,7008,39050,000100,000Why every different type of expense is shown in a separate expense account.Why every different type of revenue is shown in a separate revenue account.Why an expense is shown as a debit entry in the appropriate expense account.Why revenue is shown as a credit entry in the appropriate revenue account.How to enter a series of expense and revenue transactions into the appropriateT-accounts.Learning outcomesrevisit and reinforcethe major topicscovered in thechapter.8 What is meant by the term ‘drawings’.9 That drawings are always a reduction in capital and never an expense of a35,0002,704,512 40043,2122,704,512business.10 How to record drawings of cash in the accounting books.11 How to record drawings of goods in the accounting books.The following adjustments are needed:(i) Stock at 31.12.20X5 was 91,413.(ii ) Depreciate buildings 10,000; motor vehicles 18,000; equipment 12,000.(iii) Accrue debenture interest 15,000.‘58744Each chapter ends with a selection ofpractice questions to prepare you foryour examinations.Five sets of multiple choice questionsallow you a quick and easy method ofchecking your own progress as youwork through the book.Part 2 l The financial statements of sole tradersChapter 13 l Cash booksaccount, the first part of the entry having been made when the transaction was recorded in theCash Book.Review questions13.2 If an entry has not been filled in, i.e. if the folio column is blank against an entry, the double entry7.1has not yet been made. As a result, looking through the entry lines in the folio columns to ensurethey have all been filled in helps detect such errors quickly.From the following trial balance of A Moore, extracted after one year’s trading, prepare a trading and profit and loss account for the year ended 31 December 20X6. A balance sheet is not required.13.3 It should be quite obvious whether discount is received or allowed. And, more importantly, theTrial Balance as at 31 December 20X6SalesPurchasesSalariesMotor expensesRentInsuranceGeneral expensesPremisesMotor vehiclesDebtorsCreditorsCash at bankCash in handDrawingsCapitalDrCr 740Multiple choice questions: Set 2Now attempt Set 2 of multiple choice questions. (Answers to all the multiple choice questions aregiven in Appendix 2 at the end of this ep your answer; it will be used later in Question 8.1)7.2From the following trial balance of B Lane after his first year’s trading, you are required todraw up a trading and profit and loss account for the year ended 30 June 20X8. A balance sheet isnot required.Trial Balance as at 30 June 20X8DrCr 412(Keep your answer; it will be used later in Question 8.2)80MC21MC22(A)(B)(C)(D)Gross profit is114,202396,012(A)(B)(C)(D)To find the value of closing stock at the end of a period wedo this by stocktakinglook in the stock accountdeduct opening stock from cost of goods solddeduct cost of goods sold from sales.MC2415,910Net profit is calculated in theTrading accountProfit and loss accountTrial balanceBalance 12Stock at 30 June 20X8 was 16,280.Each of these multiple choice questions has four suggested answers, (A), (B), (C) and (D). Youshould read each questi

Business Accounting Volume 1is the world’s best-selling textbook on bookkeeping and accounting. Now in its tenth edition, it has become the standard introductory text for accounting students and professionals alike. New to this edition: Over 120 brand new review questions for exam practice Coverage of International Accounting Standards 2005 Additional and updated worked examples for areas of .