Introductory Accounting and Finance
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Contents Page
Page 3 ~
Section A – Trading, Profit and loss account for Mr. Stanley
Page 4 ~
Section B – Balance Sheet for Mr. Stanley
Page 5 ~
Section C
Page 6 ~
Section D
Page 7 ~
Section E
Page 8 ~
Section F
Page 9 ~
Section G
Page 10 ~
Section H
Page 11 ~ Bibliography
Trading, Profit & Loss account
for Mr. Stanley relating to trading during January 1st 2002 to December 31st 2002
Sales
125000
Less Cost of Sales
Opening Stock
10430
Add Purchases
67634
78064
Less returns outward
78016
Add Carriage Inward
80136
Less Closing Stock
11250
68886
GROSS PROFIT
56114
Less Expenses
Salaries
28400
Postage & Stationary
Rent & Rates (2900-860)
Packaging
Bad debt
Provision for Bad Debt
Insurance
Electricity (953+263)
Depreciation (3000 + 1680)
41057
Carriage Outward
43907
NET PROFIT
12207
This is a balance sheet for Mr. Stanley as at 31st December 2002.
Fixed Assets
Fixtures & Fittings (15,000 + 8,400)
23,400
Less Depreciation (3,000 + 1,680)
4,680
18,720
Current Assets
Stock
11,250
Debtors
3,200
Less Prov.for bad debt
3,050
Add Prepayments
1,450
15,915
Less Current Liabilities
Creditors
6,765
Accruals
Working Capital
7,028
8,887
27,607
Financed By
Capital
25,000
Add Net Profit
12,027
Less Drawings
9,600
27,607
C. Give an explanation of the accounting treatment for invoices that have been unpaid and unrecorded at the date of the preparation of the final accounts.
This is known as an accrual of expenses, an accrual occurs when expenses that have occurred during an accounting period are not included in the trial balance, they are unpaid and unrecorded. When this occurs the accounting treatment in the profit and loss account would be to add the outstanding amount to the expense in question showing the full amount of expense used up in that accounting period.
In the balance sheet however an accrual is classed as a current liability. This is because the firm owes the outstanding amount and is expected to pay this debt in the short term. The outstanding amount will therefore appear under current liabilities in the Balance Sheet under the heading ACCRUALS. The reasons for making these adjustments is to ensure that the profit and loss account records the cost that has been incurred for that particular accounting period instead of simply the amount that has been paid.
An example of an accrual ~ during the accounting period of January 1st 2002 and December 31st 2002 a phone bill is incurred for the months June to September however it goes unpaid and is not incorporated into the telephone account. This means that adjustments have to be made so that it can be included in the final accounts for that accounting period.
D. Mr. Stanley had paid a proportion of the rates for the following accounting period. Explain how this impacted on the preparation of the accounts for the current accounting period.
A prepayment is when an amount is paid in advance of the accounting period in which it is actually due. It means that the company has made an overpayment, in this particular case Mr. Stanley has overpaid on his rates. When this occurs within a companies account the amount in question is deducted from the expense account on the trial balance.
The treatment for a prepayment in the profit and loss account would be to deduct the overpayment from the expense in question to show only the amount of that expense used up in the current accounting period.
With the balance sheet aspect of the accounts the overpayment becomes a current asset as the money belongs to the firm. The overpayment will therefore appear within the current assets in the balance sheet under the heading PREPAYMENTS.
An example of a prepayment ~ insurance is paid for