Book-Keeping L1 TG

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How to Pass
Book-keeping
FIRST LEVEL
Teacher’s Guide
Keith F Bird
MSc BSc (Econ) ACIS
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First published 1999
© LCCI CET 1999
British Library Cataloguing-in-Publication Data

Bird, Keith F
How to Pass Book-keeping, First Level – 2nd ed.
Teacher’s guide
1. Book-keeping – Study and teaching
I.Title
657.2’0071
ISBN 1 86247 060 X
All rights reserved; no part of this publication may be reproduced, stored

in a retrieval system, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise without the prior written
permission of the Publisher. This book may not be lent, resold, hired out, or
otherwise disposed of by way of trade in any form of binding or cover, other
than that in which it is published, without the prior consent of the Publisher.
10 9 8 7 6 5 4 3 2 1
Typeset by the London Chamber of Commerce and Industry

Examinations Board
Printed and bound in Hong Kong by Peninsula Publishers
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Contents
Page
About the author vii
Acknowledgements vii
Introduction viii
Cross-references to How to Pass Book-keeping,
First Level (student’s book) x
Lesson
1 The accounting equation
Transactions through ‘double entry’ 1
2 Purchases, sales, and returns 11
3 Expenses: profit or loss 19
4 Balancing accounts: the trial balance 23
5 Trading and Profit & Loss Accounts 27
6 The balance sheet 32
7 Final accounts: more features 36
8 The division of the ledger 44
9 Bank facilities
Cash Book: 2 columns 49
10 Cash Book: 3 columns – cash discount 60
11 Purchases and Sales Day Books 70
12 Returns Day Books 78
13 Accruals and prepayments – expenses 88
14 Accruals and prepayments – income 99
15 Depreciation of fixed assets 105
16 Bad debts and provision for doubtful debts 120
17 Bank reconciliation statements 132
18 Petty Cash Book – imprest system 141
19 Capital and revenue expenditure 151
20 The journal 158
21 Errors in the accounts 1 168
22 Errors in the accounts 2 174
23 Final accounts and adjustments further considered
Stock valuation 178
24 Club and society accounts 188
25 The presentation of answers 198
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Contents
Appendix 1: Exercises, some worked solutions, and support

material 201
Appendix 2: Summarized answers to selected exercises 312
Appendix 3: Glossary 321
Notes 326
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About the author

Keith Bird has had over 35 years’ experience lecturing in business studies in further and
higher education and has taught professional courses at all levels. He is the author of the
student’s book How to Pass Book-keeping, First Level, published by the London Chamber of
Commerce and Industry Examinations Board (LCCIEB). He has also written several study
manuals that have been published for professional courses.
Keith Bird’s association with the LCCIEB extends over 25 years and, for much of that time,
he has served as a Chief Examiner in First Level Book-keeping and Second Level
Book-keeping and Accounts.
Acknowledgements
In the preparation of this book, my thanks are due to Derek Skidmore MSc, FCCA,
ACMA, co-author of How to Pass Book-keeping and Accounts, Second Level, for his review of
the draft of the book and for his helpful suggestions. My thanks are also due to the staff of
the LCCIEB Publishing Department for preparing this text for publication.
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Introduction
The How to Pass Book-keeping, First Level:Teacher’s Guide is closely geared to the LCCIEB
First Level Book-keeping Extended Syllabus. It is intended for a teaching course that
extends over 60 hours.There are 24 lessons concerning book-keeping, each of 2 1/4 hours’
duration. The remaining teaching time should be used for Lesson 25, which covers the
important topic of presenting examination answers, together with revision and
pre-examination preparation.
The book is addressed to the teacher. It indicates the importance of particular topics and
subject points and provides hints about how to present material. The Teacher’s Guide is
intended to complement the student’s book How to Pass Book-keeping, First Level. At the
same time, with a few exceptions, the explanations, examples, and exercises are ‘free standing’,
providing the teacher with a store of additional teaching resource. The Teacher’s Guide
should be used in combination with the student’s book and, for this purpose,
cross-references between the two books are provided on page x. Individual cross-references
are also given at certain points within the text.
The approach adopted in the Teacher’s Guide is that of keeping in mind the question ‘Why?’
At each stage, the stress should be on developing the student’s understanding of the need
for, and effect of, the various book-keeping entries, as well as of the subject as a whole. Only
by this means can inappropriate examination answers be prevented and a sound basis be
provided for applying knowledge in the business world and/or for further accounting
studies.
As the book progresses, the material becomes more difficult. The early stages of the book
assume that the student has only a limited knowledge of business and accounts. Gradually,
more elements, features, and terms are introduced that sometimes require the modification
of methods for recording transactions already learnt. For example, at first, transactions are
recorded in the ledger only. With the introduction of day books, the system of recording
transactions changes. The time spent on the ‘ledger only’ entries is not, however, wasted
because it enables the student to appreciate the relationship between the ledger and the day
books. Inevitably, some students will come to the course with some knowledge or
awareness of aspects of book-keeping and, understandably, they might question why a
particular matter is not taken account of at a certain stage.This situation might apply in the
case of the depreciation of fixed assets, which is not dealt with until Lesson 15. The
progressive nature of the course is discussed at the beginning of Lesson 2. At that stage,
the teacher might find it helpful to explain to the class that different features are to be
included as the course develops.
The text includes numerous examples, together with short reinforcement exercises.
Appendix 1 contains exercises for Lessons 1–24 and support material. Certain of the
exercises are immediately followed by worked solutions; they are marked with an asterisk
(*) both in the Appendix and in the main part of the book. The exercises are suitable for
photocopying as required.Appendix 2 contains summarized answers, where appropriate, to
questions for which solutions are not provided. These summarized answers include the
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Introduction
results of certain calculations, key account entries, and other significant figures such as gross
profit, net profit, asset totals, and trial balance totals. Other answers or parts of answers, too
detailed for inclusion, such as account or journal entries, may be established by reference
to the text of the book as well as by reference to the fully worked solutions in Appendix 1.
It is advisable to make full use of the Glossary.
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Cross-references to How to Pass Book-keeping,

First Level (student’s book)
How to Pass Book-keeping,
Teacher’s Guide First Level
Page Lesson Chapter Page
1 1 The accounting equation 1 1
Transactions through ‘double entry’ 2 9
10 2 Purchases, sales, and returns 3 15
17 3 Expenses: profit or loss 4 22
21 4 Balancing accounts: the trial balance 5 30
25 5 Trading and Profit & Loss Accounts 6 38
30 6 The balance sheet 7 49
33 7 Final accounts: more features 8 54
43 8 The division of the ledger 9 66
Vertical layout of the balance sheet 8 60
49 9 Bank facilities 10 73
Cash Book: 2 columns 11 79
56 10 Cash Book: 3 columns – cash discount 12 85
65 11 Purchases and Sales Day Books 13 96
73 12 Returns Day Books 14 104
83 13 Accruals and prepayments – expenses 15 120
94 14 Accruals and prepayments – income 15 120
99 15 Depreciation of fixed assets 16 133
113 16 Bad debts and provision for
doubtful debts 17 152
124 17 Bank reconciliation statements 18 164
132 18 Petty Cash Book – imprest system 19 180
142 19 Capital and revenue expenditure 20 189
148 20 The journal 21 201
157 21 Errors in the accounts 1
(types of error) 22 210
163 22 Errors in the accounts 2
(adjusting for errors; the effects
of errors) 22 210
167 23 Final accounts and adjustments
further considered 23 231
Stock valuation 23 237
177 24 Club and society accounts 24 246
187 25 The presentation of answers Appendices
1, 2, and 3 272–84
x
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Lesson 1: The accounting equation

Transactions through ‘double entry’
Topic summary
● The need for accounting records
● The information that needs to be recorded
● The means of obtaining resources, ie assets: ownership v. external sources of funds
● The business as an entity
● The dual effect of a business transaction
● Double-entry recording of transactions
Extended Syllabus references

1.1 Explanation and use of the terms debtor, creditor, asset, liability, capital
1.2 The accounting equation: assets = capital + liabilities and its expression in the
balance sheet
1.3 The effect upon the accounting equation of basic business transactions (including
the single-side transaction, eg use of bank balance to buy fixed assets)
1.4 The effect upon the accounting equation of the dual-type transaction, ie where
the effect upon one side of the equation is matched by a combination of 2 (or
possibly more) effects on the other side
2.1 Purpose of the use of debit and credit for the recording of transactions
2.2 The preparation of T-type accounts
2.3 Specifying a transaction/entry within an account, ie date together with, normally,
the name of the ‘other’ account/day book involved in that particular transaction/
entry
2.4 Completion of debit and credit entries recording individual transactions
The underlying purpose of this lesson is to develop recognition of the need for, and
purpose of, recording business transactions and their effects. Understanding the two-fold
aspect of any transaction (benefit and detriment, and plus and minus) is essential for a grasp
of double-entry book-keeping.
In the earlier stages of the lesson – especially in meeting the aims of Steps 1 to 3 – much
can be done by using the question-and-answer method with the class, including a brief
discussion of the students’ responses. The varied backgrounds and experiences of class
members should be drawn on whenever possible. Always relate the discussion to a
particular aim, listing points on the whiteboard or overhead projector as appropriate.
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The accounting equation
Step 1
Aim: to develop an appreciation of the need for business records of account
Following a brief introductory ‘chat’ with the class, ask the students to form pairs and to
discuss and write down answers to the question:‘Why does a business need to keep records
of account?’
At this stage, the students are likely to give broadly based answers, such as:
● to run (more) effectively and efficiently;

● to know what money is coming in and going out;
● to know what the business is earning and spending;
● to control the business: to make adjustments as necessary;
● to make decisions about the future;
● to provide information for making decisions about the future;
● to deal with the tax authorities.
Step 2
Aim: to recognize the key areas of information that need to be recorded
From the answers to the questions in Step 1, identify areas of information that will be
required; for example:
Cash: availability and movements Purchases

Amounts owed by the business Sales
Amounts owed to the business Expenses
The possessions - ‘assets’ Profit
Amount of money invested in the business Capital
Step 3
Aim: to recognize the resources needed and, broadly, the means of obtaining them:
proprietor versus external sources
While the students remain in pairs,
1 Ask them to imagine that they are establishing a business, such as a shop or factory.
Ask them to write down the resources that they would need.
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2 As the students suggest the resources, list these on the whiteboard in two categories,
those that are:
(a) measurable in money terms, eg cash, premises, machines, and motor vehicles; and
(b) less measurable, eg skills, contacts, and experience.
Show that category (a) is recorded in the accounts as assets. Category (b) is less easily
recorded, but may be, for example, as skills as part of wage payments. It will be dealt
with at a later stage.
Explain how the assets might be obtained. Show that, in establishing a business, a proprietor
might:
(a) treat his or her own motor vehicle to be for use within the business;
(b) put his or her money into the business, so that assets can be bought;
(c) borrow money, ie obtain a loan.
Emphasize that (a) + (b) = capital, ie the proprietor’s stake; and that (c) = liability.
Step 4
Aim: to understand the business as an entity and to appreciate the ‘accounting equation’
1 Explain to the students that a business is an entity that is distinct from its owner. As a
result, the accounts are to be kept for the business and they are separate from the owner’s
accounts.You may illustrate the concept like this:
invests in
Business Personal
accounts accounts
withdraws from
2 Explain, with reference to Step 3, that the money a proprietor invests to set up and run
a business is usually supplemented by borrowed money. The means of financing a
business may be expressed as ‘the accounting equation’:
Assets = capital + liability (eg a loan)

eg Assets £15,000 = capital £12,000 + liability £3,000
Alternatively, the equation may be expressed as:
Assets less liabilities = capital

eg Assets £15,000 less £3,000 = £12,000
3
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3 Ask the students to work through the following exercise, inserting the missing figure in
each of the columns.
Assets Capital Liabilities

£ £ £
(1) 2,430 1,920
(2) 3,060 1,040
(3) 2,500 780
(4) 6,530 0
(5) 5,830 4,120
Step 5
Aim: to understand the effect of business transactions; their double aspect
1 Show that the financial position of a business at any point in time – the accounting
equation – can be expressed in the form of a balance sheet, eg:
F Lim
Balance sheet at 1 March Year 3
£ £
Office furniture 800 Capital 7,000
Motor vehicle 5,300 Loan from J Black 1,000
Cash at bank 1,900
8,000 8,000
2 Explain the term ‘business transaction’.
Show, using the following example, the effect of transactions, stage by stage, upon a
balance sheet. It is important not to confuse the students with transaction moves that
are too rapid. Ensure they fully understand the effect of each transaction before you
move onto the next.
The transactions (which are defined in brackets) of F Lim in Year 3 are as follows:
(a) On 2 March, a typewriter (classed as office equipment) is bought by drawing a

cheque on the bank for £150.
(Purchase of an asset, with payment by cheque.)
(b) On 4 March, goods are bought from T Smith on credit for £500.
(Purchase of an asset on credit.)
(c) On 9 March, Lim sells some of the goods that had cost £200 for the same amount,
receiving a cheque in exchange.
(Sale of asset, with immediate payment.)
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(d) On 12 March, Lim sells some goods that had cost £200 to K Woolf ‘on credit’
for the same amount.
(Sale of asset on credit.)
(e) On 16 March, Lim sends a cheque for £300 towards the amount owing to T Smith.
(Payment of an amount owing.)
(f) On 21 March, Lim receives a cheque for £200 from his debtor, K Woolf.
(Receipt of money from a debtor.)
3 Use the following example to show the effect of transaction (a) on F Lim’s balance sheet:
F Lim
£ £
Office equipment (+ 150) 150 Loan from J Black 1,000
Motor vehicle 5,300
Cash at bank (- 150) 1,750
8,000 8,000
This example shows that only the assets have changed.
4 Use the following example to show the effect of transaction (b) on the balance sheet:
F Lim
£ £
Office equipment 150 Loan from J Black 1,000
Motor vehicle 5,300 Creditor – T Smith 500
Goods 500
Cash at bank 1,750
8,500 8,500
This balance sheet shows that both the assets and liabilities have increased.
5 Use the following example to show the effect on the balance sheet after transaction (c):
F Lim
£ £
Goods (- 200) 300
Cash at bank (+ 200) 1,950
8,500 8,500
Here, there has been a switch between two assets.
5
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6 Use the following to show the effect after transaction (d):
F Lim
£ £
Goods (-200) 100
Debtor – K Woolf (+ 200) 200
Cash at bank 1,950
8,500 8,500
From this balance sheet, a change of assets can be seen.
7 Use the following to show the effect after transaction (e):
F Lim
£ £
Motor vehicle 5,300 Creditor – T Smith (-300) 200
Goods 100
Debtor – K Woolf 200
Cash at bank (- 300) 1,650
8,200 8,200
From this balance sheet, a reduction in assets matched by a reduction in liabilities can
be seen.
8 Use the following to show the effect after transaction (f ):
F Lim
£ £
Office equipment 150 Loan from J Black 1000
Goods 100
Cash at bank (+ 200) 1,850
8,200 8,200
Here, there is a change of assets: an increase in bank and the removal of the debtor
balance from the balance sheet.
6
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9 A list of terms and their definitions follows. Explain the terms to the students.
credit sales goods sold with payment to be received by an agreed future date
debtor a person or organization to whom goods have been sold on credit and
from whom money is due
creditor a person or organization from whom goods have been bought on
credit and to whom money is owed
on account payment towards an amount owing; part payment
It is vital that students understand the meaning of terms as they are used. For the
following lessons, reference should be made to the Glossary on pages 321–5.
10 Explain that a transaction may involve a combination of assets or liabilities. For example,
a motor vehicle is bought for £6,000.The purchase is paid for by:
(a) drawing on the bank account; and

(b) a loan from Birclays Finance Limited.
Consequently:
Assets Liabilities
£ £
+ 6,000 Motor vehicle Birclays Finance Limited + 4,000
- 2,000 Bank
4,000 4,000
11 Emphasize the equation:

assets = capital + liabilities
12 Give the students each a copy of exercises T/1.1, T/1.2, and T/1.3 in the Appendix
(page 201) and ask them to work through them.
Step 6
Aim: to be able to record transactions through double entry
1 Explain the necessity of keeping separate accounts for information and control needs.
Updating the balance sheet each time a transaction occurs takes up too much time;
keeping separate accounts is a quicker and clearer method of updating records.
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2 Explain that the two-sided form of recording accounts (which has long been in use) is
to be followed:
Left-hand side Right-hand side

= debit side = credit side
(or Dr) (or Cr)
3 Set out the rules for double entry, which are as follows, on the overhead projector or
whiteboard:
Assets an increase debit

a decrease credit
Liabilities an increase credit

a decrease debit
Capital an increase credit

a decrease debit
Alternatively, you may show the following layout:
Asset account
increases decreases
+ -
Liability account
decreases increases
- +
Capital account
decreases increases
- +
4 Emphasize that the purpose of debit and credit is to allow for the two-fold effect of
each transaction. Always ensure that, for each transaction, students understand the logic
of the entries. By making sure that the logic is clear, the account entries will have mean-
ing, helping the students to avoid making mistakes.
5 Explain the form of entries for T-type accounts thoroughly. Illustrate the following layout
on the whiteboard or overhead projector:
Dr Cr
Date Details £ Date Details £
The ‘details’ column should always show the name of the matching account (ie where
the double entry is completed) eg:
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Bank
Year 6 £
1 Jul Capital 10,000
Capital
Year 6 £
1 Jul Bank 10,000
6 Work through the exercise below with the students. For each transaction:
(a) emphasize the transaction effect;

(b) stress how the double entry is achieved.
Exercise
(i) Gladys Lane sets up in business on 1 July Year 6 by placing £10,000 into a new
business bank account.
(ii) On 4 July Year 6, she buys office equipment, paying £400 by cheque.
(iii) On 7 July Year 6, she buys goods from Landau Limited for £360 on credit.
(iv) On 26 July Year 6, Gladys Lane pays the amount owing to Landau Limited by
cheque.
Solution
Bank
Year 6 £ Year 6 £
1 Jul Capital 10,000 4 Jul Office equipment 400
26 Jul Landau Ltd 360
Capital
Year 6 £
1 Jul Bank 10,000
Office equipment
Year 6 £
4 Jul Bank 400
Goods
Year 6 £
7 Jul Landau Ltd 360
Landau Limited
Year 6 £ Year 6 £
26 Jul Bank 360 7 Jul Goods 360
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7 Emphasize that entries in accounts should not be cramped together, but should be
clearly spaced without being too far apart.
8 Remind the students that, in making the entries, they need to:
(a) record the date correctly; and
(b) correctly enter the name of the related account in the ‘details’ column.
9 Stress that, in the examination, marks may be lost if account entries are poor.An example
of an avoidable error is writing the word ‘Cheque’ instead of ‘Bank’ for the name of the
matching account, when ‘Cheque’ is not the name of the account.
10 Ask the students to work through exercises T/1.4 and T/1.5 in the Appendix (page 202).
10
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Lesson 2: Purchases, sales, and returns
Topic summary
● The various meanings of the term ‘purchases’
● Account entries for purchases and sales transactions
● The return of goods: allowances
● Account entries for returns inwards and outwards

5.1 The various possible accounting meanings of the term purchases
5.2 The effects on (double-entry) accounts of purchases of goods:
5.2.1 for cash
5.2.2 on credit
5.3 The effects on (double-entry) accounts of the sale of goods/services:
5.3.1 for cash
5.3.2 on credit
5.4 The process of the return of goods previously bought or sold (or alternatively of
an allowance being made in lieu of actual return of goods)
5.5 Use of the term Returns, both inwards and outwards; the alternative terms in use
5.6 The effects on (double-entry) accounts of the return of goods (or of an allowance
being made for the defective supply of goods/services)
The approach adopted in the students’ book, How to Pass Book-keeping, First Level, is to
explain the reasons for particular book-keeping methods and to build up understanding of
the subject progressively. This approach may mean using a simplified method on a certain
matter at one stage to avoid introducing too many points at once. Later, that simplified
method might need to be modified as more features are covered. This approach applies
because this session deals with the entries concerning purchases and sales.
Step 1
Aim: to recognize the various meanings of the term ‘purchases’
1 Explain that the term ‘goods’ is used for goods bought as part of trade, for selling in
due course. The buying and selling of office furniture, motor vehicles, etc, for use in
the business, is not included under goods: they are shown separately.
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Purchases, sales, and returns
2 Goods are now to be divided into:
● purchases; and
● sales
with a separate account for each.This division gives more information and helps to keep
control of the business.
3 Describe the various meanings of the term ‘purchases’, that they are:
(a) goods bought to sell, ie as part of trading;

(b) goods bought to use in the manufacture and/or retailing of other goods.
Stress that just the word ‘purchases’ or the words ‘bought goods’ are referring to a part
of trading.
4 You may also give the students the alternative terms below.
(a) Purchases ‘for cash’ which are bought with immediate payment.The payment may
be in cash or it may be by drawing on a bank account.
(b) Purchases ‘on credit’ which are bought with payment to be made at a later date.
Step 2
Aim: to be able to record in double-entry form the purchase and the sale of goods for
cash and on credit
1 Purchase of goods for cash

Show the students the following example to illustrate the account entries made for the
purchase of goods for cash.
Example
In the account entries given below, goods were bought on 15 March Year 3 for £295
and paid for by cheque, which can be understood as immediate payment.
Purchases
Year 3 £
15 Mar Bank 295
Bank
Year 3 £
15 Mar Purchases 295
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This involves:
● addition to purchases = debit
● deduction from bank = credit
2 Purchase of goods on credit

Show the students the following example to illustrate the account entries made for the
purchase of goods on credit.
Example
In the account entries that follow, goods were bought on credit, at 19 March Year 3,
from L Johnson for £614.
Purchases
Year 3 £
19 Mar L Johnson 614
L Johnson
Year 3 £
19 Mar Purchases 614
A liability has arisen, so a credit entry is made in the account for Johnson, who is a
‘creditor’.
3 Work through the following exercise with the students.
Exercise
Year 7
3 Mar Purchased goods by cheque £915
12 Mar Purchased goods from T Watling on credit £736
30 Mar Paid by cheque the amount due to T Watling
Enter these transactions, as shown below, carefully reviewing each double entry before
moving on to the next one.
Purchases
Year 7 £
3 Mar Bank 915
12 Mar T Watling 736
Bank
Year 7 £
3 Mar Purchases 915
30 Mar T Watling 736
(continued)
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T Watling
Year 7 £ Year 7 £
30 Mar Bank 736 12 Mar Purchases 736
4 Sales
Any sale of goods is entered in a separate Sales Account.The account includes both cash
sales and credit sales. Remember to point out that the account only includes the sale of
goods that the firm trades in.
5 Sales for cash

Show the students the following example to illustrate the account entries made for sales
for cash.
Example
At 21 March Year 3, goods were sold for £312 cash.
Sales
Year 3 £
21 Mar Cash 312
Cash
Year 3 £
21 Mar Sales 312
Emphasize that the entry in the Sales Account corresponds to what, so far, has been
entered in the Goods Account, ie a credit entry.
Note
The Cash Account is for recording the receipt and payment of bank notes or coins.
Transfers between the Bank Account and the Cash Account are made periodically.
6 Sales on credit
Show the students the following example to illustrate the account entries made for sales
on credit.
Example
At 23 March Year 3, goods were sold to L Fell on credit for £260.
Sales
Year 3 £
23 Mar L Fell 260
Year 3 £
23 Mar Sales 260
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7 To reinforce the students’ understanding, show the following summary of the entries
below for a credit sale (preferably on the overhead projector):
(a) When a credit sale is made, the book-keeper should:

● debit the customer’s (debtor’s) account; and
● credit the Sales Account.
(b) When payment is received from the debtor, the book-keeper should:
● debit the Bank Account or Cash Account (depending on how the debtor pays,
whether by cheque or cash); and

● credit the debtor’s account.
Note
Point out that the Purchases Account and the Sales Account have now replaced the Goods
Account.
8 Ask the students to work through the exercise below.
Exercise
Year 7
6 Mar Sold goods for cash £327
15 Mar Sold goods to J Bean on credit £512
31 Mar Received cheque from J Bean in payment of the amount due
The transactions should be entered by the students as shown below. Review the
transactions one by one (see below), ensuring that the concept of double entry is fully
understood.
Sales
Year 7 £
6 Mar Cash 327
15 Mar J Bean 512
Cash
Year 7 £
6 Mar Sales 327
J Bean
Year 7 £ Year 7 £
15 Mar Sales 512 31 Mar Bank 512
Bank
Year 7 £
31 Mar J Bean 512
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Step 3
Aim: to understand the nature of ‘returns’ and to be able to make the required
book-keeping entries
1 Explain that purchased goods are sometimes returned to the supplier. Ask why this
might be so.
2 Explain that an allowance is made by the supplier, ie that the amount of the return is
set against the purchase amount.
3 Show that the returns are recorded in a separate account, called the Returns Outwards
Account, using this example:
At 24 March Year 3, goods are returned to L Johnson for which £70 is allowed.
Returns outwards
Year 3 £
24 Mar L Johnson 70
L Johnson
Year 3 £ Year 3 £
24 Mar Returns outwards 70 19 Mar Purchases 614
4 Explain that the £70 credit in the Returns Outwards Account offsets the £614
previously shown on the debit of purchases. Ask the students to explain the two entries
in Johnson’s account.
5 Explain that the opposite can occur: ie goods that have been sold may be returned by
a customer, for which an allowance is given. For example, on 27 March Year 3, L Fell
returns the goods sold to him on 23 March.
This occurrence is the reverse of a sale, so it is termed ‘returns inwards’. Ask the students
to show the two entries for the returns inwards.Their accounts should look like the one
below.
Returns inwards
Year 3 £
27 Mar L Fell 260
L Fell
Year 3 £ Year 3 £
23 Mar Sales 260 27 Mar Returns inwards 260
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6 Hand out copies of, or show on the overhead projector, exercise T/2.1 in the Appendix
(page 203). Ask the students to work through the exercise.
7 Review student answers, drawing attention to items (c) and (f ), in T/2.1, which involve
assets for use in the business. Neither of these will be recorded in the Purchases
Account.
Step 4
Aim: to strengthen understanding of lesson content
Below are a series of questions that you should ask the students, together with the answers.
1 Question (a)
What is the difference in wording between the two returns examples?
Answers
● The example 24 March specifically states that an allowance is made and the amount.
● The example 27 March merely states that the goods previously sold are returned.
If a question is worded as it is above, the students should assume that the amount of the
original sale is fully allowed.
2 Question (b)
What is the reason for keeping separate returns accounts instead of making the entries
in the Purchases or Sales Accounts?
Answer
The reason is to have separate totals for returns, otherwise the information would be
‘hidden’ in the Purchases or Sales Account.
3 Question (c)
What might be the various reasons for the return of goods?
Answers
The goods might be returned because:
● the wrong articles were sent;
● they were damaged in transit;
● they are not what was shown in the catalogue;
● parts do not fit.
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4 Question (d)
When might an allowance be given although the goods are not returned?
Answers
When the goods:
● are difficult to repack or transport; or

● are costly to send back.
Stress that, provided an allowance is given, the book-keeping effect is the same as if the
goods are actually returned.
5 Check that the students know the alternative names for the accounts, that they may be
called:
● returns outwards or purchases returns;

● returns inwards or sales returns.
6 Hand out copies of, or show on the overhead projector, exercises T/2.3 and T/2.4 in
the Appendix (pages 203 and 204). Ask the students to work through them.
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Lesson 3: Expenses: profit or loss
Topic summary
● The nature and types of ‘expense’
● Combination-type transactions: account entries
● Recording the withdrawal of profit by ‘drawings’
● Profit as the difference between opening and closing capital

18.1 Profit (or loss) as the difference between opening and closing capital balances;
allowing for any drawings or the introduction of additional capital
18.2 The meaning of the term drawings; the various forms of drawings
18.3 The book-keeping entries for drawings
18.4 The possible effect of drawings upon the amount of capital
This lesson is diverse in its content. All the topics are ones that can feature as elements
in examination questions. With careful explanation and the familiarity that follows from
practice, these subject areas need not be a cause of major difficulty.
Step 1
Aim: to appreciate the nature and types of business expense and the book-keeping
entries required
1 Suggest to the class a small business situation and ask what types of expense would be
incurred, such as:
● employee wages;
● rent of the premises; and
● advertising.
Point out that the aim of setting up a business is to make a profit, ie a surplus:
sales less expenses = profit
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Expenses: profit or loss
2 When you explain about recording expenses in the accounts, develop the concept of
‘paying as you go’. Illustrate the concept by contrasting, for example, renting premises
and purchasing a building, which ties up money.
3 Liken expenses such as rent to very temporary assets; for instance, a purchased asset is
debited to the asset account; similarly, an expense account is debited.
4 Explain that it is necessary to have several expense accounts, eg insurance, wages,

office cleaning, office expenses, heating and lighting. One account for each category
of expenditure helps to provide more information and improve control.
The following example illustrates the basic account entries relating to an expense item:
Example
At 28 March Year 3, insurance on a motor vehicle, costing £110 for the next 6 months,
is paid by cheque.
Insurance
Year 3 £
28 Mar Bank 110
Bank
Year 3 £
28 Mar Insurance 110
This can be explained as:
Cr = reduction of an asset (bank)

Dr = acquisition of a (temporary) asset, ie insurance ‘cover’ for a fixed period of time.
5 Copy and hand out or show exercises T/3.1 and T/3.2 in the Appendix (page 204) on
the overhead projector. Ask the students to work through them.
Step 2
Aim: to be familiar with combination-type transactions and to be able to make

appropriate book-keeping entries
1 In Lesson 1, Step 5, reference was made to the possibility of a transaction involving a

combination of assets and/or a combination of liabilities. In a combination-type
transaction, the effect on one account side will be matched by a combination of two
(or possibly more) effects on the other side. Use the following example to illustrate a
combination-type transaction.
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Example
At 14 April Year 6, a motor vehicle was purchased for £6,800 from Lagonda Garages. A
payment of £2,000 was made by cheque and the balance on credit.
Assets Liabilities
£ £
+ 6,800 Increased by amount of Creditor – Lagonda Garages + 4,800
motor vehicle
- 2,000 Bank balance is reduced
+ 4,800 + 4,800
The accounts will appear as follows:
Motor Vehicle
Year 6 £
14 Apr Bank and Lagonda
Garages 6,800
Bank
Year 6 £
14 Apr Motor vehicle 2,000
Lagonda Garages
Year 6 £
14 Apr Motor vehicle 4,800
2 Copy and hand out or show exercise T/3.3 in the Appendix (page 205) on the overhead
projector. Ask the students to work through the exercise.
Step 3
Aim: to appreciate the meaning of proprietor drawings and the account entries required
1 If the owner takes money out of the business for private use this results in a reduction
of capital. Explain that the owner may draw out money in anticipation of the profits for
the year, ie to pay for personal living expenses. If the owner’s withdrawals are more than
the business’s profits, then capital is reduced.
2 Drawings are recorded in a separate account, further enabling the accounts to provide
as much information as possible. Use the example overleaf to demonstrate this point.
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Example
At 6 April Year 3, Joe Seng, the owner, withdrew £170 in cash for his own use.
Cash
Year 3 £
6 Apr Drawings 170
Drawings
Year 3 £
6 Apr Cash 170
3 Explain that, at the end of the year, the Drawings Account will be closed off to the
Capital Account.
4 Point out that several drawings might be made over the course of the year and that the
drawings could take forms other than cash. For example, the owner may take some of
the business’s goods for personal use.
Step 4
Aim: to recognize that profit or loss may be calculated through differences in capital
1 The profit of a business for a given year might be obtained as follows:
profit for the year = number of transactions less expenses

x profit on each for the year
transaction
or as
profit = capital at end of the year less capital at start of the year
or increase of capital over the year
Alternatively, give the students the following formula:
start-of-year plus profit* = end-of-year

capital (or loss) capital
*or profit after deduction of drawings
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Lesson 4: Balancing accounts: the trial balance
Topic summary
● The balancing of accounts
● Running balance account format
● The preparation of a trial balance

3.1 The meaning of the term account balance
3.2 Balancing the T-type ledger account, including:
3.2.1 bringing the balance down for the start of the next accounting period
3.2.2 dealing with the nil balance
3.3 The significance of any particular account balance, eg a credit balance on a
creditor account, a debit balance on an expense account
3.4 The significance of the term running balance account
3.5 The preparation of accounts in running balance form
3.7 The procedure for other end-of-period balancing, and ruling off, of accounts
11.1 The purpose of the trial balance
11.2 The preparation of a trial balance from a list of account balances
This lesson deals with the practical matter of the layout of accounts, including an
alternative format. It is worthwhile giving time to this topic: marks may be lost in the
examination if accounts are presented poorly.
The lesson also discusses a straightforward method of checking that all double entries have
been completed satisfactorily.This checking is done by the preparation of a trial balance.
Step 1
Aim: to be able to balance accounts and to recognize the significance of individual balances
1 Show that the balance on an account is the amount by which one side is greater than
the other:
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Balancing accounts: the trial balance
X expense account
Dr Cr
Year 3 £ Year 3 £
Entries totalling 680 Entries totalling 600
Here, there is a debit (Dr) balance of £80. The full balancing of this account at
31 March Year 3 is as follows:
X expense account
Year 3 £ Year 3 £
Entries 680 Entries 600
31 Mar Balance c/d 80
680 680
1 Apr Balance b/d 80
The balance is first carried down (c/d) and then brought down (b/d), which should
always be done and not merely entered on one side.To fail to bring down the balance
is to break the double-entry rule.
2 Ask the students to write out and then balance the following creditor account:
K Jacques
Year 5 £ Year 5 £
7 May Returns outwards 50 3 May Purchases 620
28 May Bank 570 21 May Purchases 415
3 Explain a ‘nil’ balance:
F Wiles
Year 6 £ Year 6 £
4 July Sales 370 12 July Returns inwards 40
29 July Bank 330
370 370
Or a variation on the nil balance:
T Stone
Year 6 £ Year 6 £
9 Aug 470 26 Aug Bank 470
Point out that no totals are required in this instance; just two lines under the figures.
the Appendix (page 206). Ask the students to work through them.
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Step 2
Aim: to appreciate and to be able to apply the running-balance format
1 Emphasize that, so far, the format used for the accounts has been two-sided, ie:
Left-hand side Right-hand side

debits credits
(Dr) (Cr)
Balances are calculated at the end of a fixed period – usually monthly for debtors and
creditors; annually in some other cases; and so on.This layout does not reveal the balance
easily or quickly. However, the running-balance format, which is a three-column layout,
shows the balance after each transaction is entered. It is used by banks in the (monthly)
statements they issue to customers.
2 An example of an account in running-balance format is included in the Appendix (see

T/4.3, page 207). Point out that this example is not a specimen of the statements issued
by banks. It is an example of the bank account as kept by the customer of the bank.
3 Explain the format, emphasizing that as each transaction is entered the balance on the
account is brought up to date. Stress that the notation, either ‘Dr’ or ‘Cr’, must be shown
beside the balance figure.
4 Ask the students to show T/4.3 as a two-sided layout, ie the format previously used in
this course.Then compare running-balance format with the two-sided layout.
Exercise
Required
Using the information in T/4.2 (page 206), prepare debtor and creditor accounts in
running-balance format.
Step 3
Aim: to be able to prepare a trial balance
1 Work through exercise T/4.4 in the Appendix (page 207) with the students, following
the instructions below.
(a) Enter the transactions in appropriate accounts.
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(b) Check with the class that the total of the debit entries equals the total of the
credit entries.The total should be £27,220.
(c) Next ask the students to enter in pencil, in the margin, the balance on each account
– either debit or credit.
(d) Now list these balances; the total of the debit balances should agree with the total
of the credit balances. A trial balance has been produced.
2 Explain that the trial balance is used to check that double entry has been done correctly.
If the totals of the two sides of the trial balance are in agreement, then entries have been
made accurately. It does not, however, prove that. For example, transactions could have
been omitted entirely.This limitation will be considered further in Lesson 21 (see entry
11.5 in the Extended Syllabus).
the Appendix (page 208). Ask the students to work through them.
4 Show the class the following account, which is an example of a candidate’s solution to
an examination question:
F Leonard
Year 5 £ Year 5 £
10 Apr Returns outwards 30 6 Apr Purchases 418
10 Apr Returns outwards 30
In this case, a candidate has entered the transaction twice – a common mistake. One
entry cancels the other for returns outwards.The examiner can only conclude that the
candidate does not know how to deal with returns outwards. As a result, no marks will
be given for either entry for 10 April.
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Lesson 5: Trading and Profit & Loss Accounts
Topic summary
● Structure of income, cost, and profit
● The preparation of Trading and Profit & Loss Accounts

3.6 The transfer of a balance at period end to Trading Account or Profit & Loss
Account, as appropriate
19.1 The Trading and Profit & Loss Accounts as part of the double-entry system
19.2 The basic structure of income, costs, and profit in a business
19.5 The calculation of costs of goods sold
19.7 The difference between trading income and other income
19.8 The difference between gross profit and net profit
19.12 The double entries for expense amounts between the Profit & Loss Account
and the individual expense accounts
This lesson reviews the structure of income, cost, and profit, and their relationship to one
another. It also deals with the concluding stage of a period’s activities, which involves
establishing either a profit or a loss. Establishing a profit or loss and showing how they are
reached are achieved through ‘final accounts’, a broadly used book-keeping term that
covers, in part, the Trading and Profit & Loss Account.
Step 1
Aim: to be able to prepare a Trading and Profit & Loss Account
1 Explain the different classes of profit, that they are:
● gross profit – the excess of sales income over cost of goods sold; and
● net profit – gross profit less other costs.
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Trading and Profit & Loss Accounts
2 Draw the students attention to the structure of income, costs, and profit as it is shown
in Figure 5.1. ‘Other income’ is the income arising from sources other than normal
trading activities, eg interest earned on money lent or rent receivable.The composition
of total income is as follows:
total income = income from sales + other income

(‘trading income’)
Cost of
goods
sold
Income
from
sales
Other income
=
sales
revenue
Running
expenses
Gross
profit
Net profit
Figure 5.1 The structure of income, costs, and profit
3 Ask the students to work through 2 small exercises on the structure of costs, see T/5.1*
in the Appendix (page 209).
Step 2
Aim: to be able to prepare a Trading and Profit & Loss Account
1 To show the students how to prepare a Trading and Profit & Loss Account, give them
each a copy of the trial balance of T Avis at 31 December Year 5 to work through.The
trial balance is labelled T/5.2 in the Appendix (page 210). Work through the example
of T Avis with the students as set out below.
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2 The first stage of working through the trial balance involves preparing a Trading
Account. Preparing a Trading Account requires a calculation of the cost of goods sold,
which is:
purchases both stated at
less closing stock cost price
The closing stock has yet to be brought into the accounts. There is no opening stock
in this instance because Year 5 was the first year of trading for T Avis.
3 The significant accounts at this stage are the Purchases and Sales Accounts.These would
appear as follows:
Purchases
Year 5 £
Sundries 5,160
Sales
Year 5 £
Sundries 6,320
4 Stress the word ‘account’ in Trading and Profit & Loss Account: it is part of the double-
entry system. For every entry made in the account, there must be a corresponding entry
elsewhere in the account system.
5 Prepare the following Trading and Profit & Loss Account with the class, using the data
in T/5.2 in the Appendix (page 210):
T Avis
Trading and Profit & Loss Account
for the year ended 31 December Year 5
£ £
Purchases 5,160 Sales 6,320
Gross profit c/d 3,260 Stock at 31 December Year 5 2,100
8,420 8,420
Gross profit b/d 3,260
6 Show the double-entry effect in the Purchases and Sales Accounts:
Purchases
Year 5 £ Year 5 £
Sundries 5,160 31 Dec Trading 5,160
Sales
Year 5 £ Year 5 £
31 Dec Trading 6,320 Sundries 6,320
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7 The entry for stock (at 31 December Year 5) requires careful explanation. So far, only a
credit entry has been made.To complete the double entry, a new account is opened:
Stock
Year 5 £
31 Dec Trading 2,100
8 It has been stated that purchases less closing stock equals the cost of goods sold. To
reflect this fact, it is usual to deduct stock on the debit side in the Trading Account
instead of entering the stock on the credit side. The effect on gross profit is the same.
Therefore, the Trading Account, together with the Profit & Loss Account, becomes:
T Avis
£ £
less Stock, 31 December Year 5 2,100
Cost of goods sold 3,060
Gross profit c/d 3,260
6,320 6,320
Rent payable 700 Gross profit b/d 3,260
Office expenses 360 Rent receivable 450
Lighting and heating 420
Net profit 2,230
3,710 3,710
9 While compiling the above Profit & Loss Account, the expense and income accounts
are closed off as follows:
Rent Payable
Year 5 £ Year 5 £
Sundries 700 31 Dec Profit and loss 700
Office Expenses
Year 5 £ Year 5 £
Lighting and Heating
Year 5 £ Year 5 £
Rent Receivable
Year 5 £ Year 5 £
31 Dec Profit and loss 450 Sundries 450
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The double entry for gross profit is the credit to the Profit & Loss Account. The
double entry for net profit is a credit to the Capital Account: ie profit increases capital.
10 The Drawings Account is closed off to Capital Account.
Capital
Year 5 £ Year 5 £
31 Dec Drawings 800 1 Jan Bank 4,000
31 Dec Balance c/d 5,430 31 Dec Profit and loss:
net profit 2,230
6,230 6,230
Year 6
1 Jan Balance b/d 5,430
Drawings
Year 5 £ Year 5 £
Sundries 800 31 Dec Capital 800
Note
Many examination answers show closing stock as a credit entry in the Trading Account,
instead of as a deduction on the left-hand side. As a consequence of this error, students
lose a mark because they fail to show the cost of goods sold.
11 Copy and hand out or show exercises T/5.3 and T/5.4 in the Appendix (pages 211 and
212) on the overhead projector. Ask the students to work through them. Both exercises
involve businesses in their first year of trading. Because the businesses are new, there is
no opening stock, a topic that is dealt with in Lesson 7. Explain that the usual practice
is to value closing stock at its cost price.This method is considered further in Lesson 23.
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Lesson 6: The balance sheet
Topic summary
● The main elements of the balance sheet and its overall purpose
● The distinction between fixed assets and current assets, and between longer-term
liabilities and amounts due within 1 year (current liabilities)
● The effective grouping of assets and liabilities within the balance sheet

20.1 The function of the balance sheet and, in particular, the recognition that it stands
outside the double-entry system
20.2 The significance and use of the terms fixed assets and current assets
20.3 The difference between longer-term liabilities and amounts payable within 12 months
(current liabilities); the naming of accounts which might appear under each of
these headings
20.4 The preparation of a balance sheet in effective format
20.5 The appropriate grouping of items within the balance sheet:
20.5.1 fixed assets
20.5.2 current assets
20.5.3 capital (or proprietor’s interest)
20.5.4 longer-term liabilities
20.5.5 amounts payable within 12 months (current liabilities)
Two aspects of study concerning the balance sheet require attention. First, the students need
to be able to appreciate the meaning of the contents of a balance sheet. Second, they should
be able to prepare one that is meaningful, ie easily understood by the reader.
Step 1
Aim: to appreciate the main elements of the balance sheet and its overall purpose
1 Refer to the trial balance of T Avis at 31 December Year 5 (see page 210). If it has
not already been done, the accounts of those items that have already been closed off
(eg transferred to Profit & Loss Account) should be ticked. Those left are Capital and
Drawings, together with the Asset and Liability Accounts. These accounts and the
closing stock are shown in the following balance sheet.
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The balance sheet
T Avis
Balance sheet at 31 December Year 5
Assets £ Capital £ £
Fixtures and fittings 800 Placed in bank
account 4,000
Motor vehicle 1,600 add Net profit 2,230
Stock of goods 2,100 less Drawings 800 1,430
Debtors 750 5,430
Cash at bank 1,040 Liability
Cash in office 50 Creditors 910
6,340 6,340
2 Draw out the purpose of the balance sheet; that it is to show the financial position of
the business at the date the books are made up.
3 Compare the balance sheet with the Trading and Profit & Loss Account, which is a
record of performance over a past fixed period (usually a year).
4 Explain that the two sides of the balance sheet should agree in total if the double-entry
rule has been followed fully.
Note
The accounts that have been entered in the balance sheet have not been closed off,
ie the balances remain on the accounts. The balance sheet is only a list of balances, it is a
‘statement’. It is not itself part of the double-entry system.
Step 2
Aim: to be able to group effectively the items on a balance sheet
1 Explain why it is necessary to group balance sheet items. Grouping the items:
● gives meaning to the balance sheet, showing that it is comprised of significant elements
and is not just an array of items;
● shows long-term versus short-term liabilities;
● shows different timescales among assets, some of which can be quickly turned into
cash (‘liquidity’); others represent money tied up, possibly for many years.
2 In discussing this, refer to the balance sheet above. Using the question-and-answer
method, review the terms ‘fixed assets’ and ‘current assets’.Ask the students for examples
of each.
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The balance sheet
3 Stress that the recognized sequence of listing assets begins with the most permanent and
ends with those most easily turned into cash. Demonstrate the sequence as shown
below.
Fixed Assets Current Assets
Land and buildings from Stock

Fixtures and fittings highly Debtors increasing
Machinery fixed Bank liquidity
Motor vehicles to less Cash
fixed
Other assets will be introduced in due course.
4 Explain that, with fixed assets, the more permanent the assets are likely to be, the more
‘fixed’ they are considered to be, eg compare land and buildings with motor vehicles.
The more ‘liquid’ an asset, the more easily it can be turned into cash: eg compare the
bank balance with stock.
5 Review the normal sequence for capital and liabilities on the right-hand side of the
balance sheet.The sequence appears as follows:
● capital;
● longer-term liabilities: ie amounts payable in more than 1 year, such as a 2-year
loan (2 years to repayment from the date of the balance sheet);
● amounts due within 1 year (or ‘current liabilities’), eg creditors, bank overdraft, or
short-term bank loan.
6 Present the balance sheet of T Avis, grouping and arranging the items in the way shown
below.
T Avis
Fixed Assets £ £ Capital £ £
Fixtures and fittings 800 Placed in bank account 4,000
2,400 less Drawings 800 1,430
Current Assets 5,430
Stock 2,100 Amount due within 1 year
Debtors 750 (current liabilities)
Bank 1,040 Creditors 910
Cash 50 3,940
6,340 6,340
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The balance sheet
7 Stress the importance of a good balance-sheet layout. The items need to be suitably
grouped and also in a suitable sequence within each group. Marks are lost when a
balance sheet is presented poorly.
8 Hand out copies of, or show on the overhead projector, exercises T/6.1*, T/6.2*,
T/6.3*, and T/6.4* in the Appendix (pages 212–15).Ask the students to work through
them.
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Lesson 7: Final accounts: more features
Topic summary
● Period-end entries for returns inwards and outwards
● The different forms of carriage and how they are recorded in final accounts
● Opening and closing stock figures in the Stock Account and final accounts
● The review and application of the end-of-year procedure

3.6 The transfer of a balance at period end to Trading Account and Profit & Loss
Account, as appropriate
3.7 The procedure for other end-of-period balancing, and ruling off, of accounts
19.3 Showing returns inwards and returns outwards suitably deducted to reveal net
sales and net purchases respectively
19.6 Showing the make-up of ‘cost of goods sold’
19.9 The function of the Stock Account and the double-entry relationship between
the Trading Account and the Stock Account
19.10 End-of-period transfer of balances from the General Ledger to the Trading
Account (Purchases Account, Sales Account, Returns Outwards Account,
Returns Inwards Account)
19.11 The difference between carriage inwards and carrriage outwards and recording
them in the Trading Account and Profit & Loss Account respectively
19.13 Showing income and expenses within the final accounts, with related items
being suitably brought together
This lesson is concerned with some very practical and detailed matters that appear, from
the answers elicited in examinations, to be given limited attention during the course of
study. Carriage, in particular, would seem to be neglected. The Stock Account is also a
major point of weakness. Candidates are usually able to record opening and closing stocks
in the Trading Account – although not always in the most favourable position in the Trading
Account. However, candidates may have difficulty in correctly recording the Stock Account
itself.
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Final accounts: more features
Step 1
Aim: to be able to show period-end entries for returns inwards and outwards
1 Remind the students that the Goods Account is divided into Purchases, Sales, Returns
Outwards, and Returns Inwards Accounts. This type of division has not yet been
brought fully into the Trading Account.
Example
A trader in Year 3 has total returns outwards and returns inwards of £450 and £610
respectively.The Returns Accounts might appear as follows:
Returns Outwards
Year 3 £ Year 3 £
31 Dec Trading 450 Sundries 450
Returns Inwards
Year 3 £ Year 3 £
Sundries 610 31 Dec Trading 610
With the debit transfer (to the Trading Account) entry in the Returns Outwards
Account, the matching entry would be expected to appear to the credit of the Trading
Account. However, the entry does not appear as a credit, but as a deduction – from
purchases – on the debit side. Conversely, returns inwards appears as a deduction – from
sales – on the credit side of the Trading Account. The aim of showing returns as
deductions is to provide a neater and more informative picture of what has happened.
This might be seen in a Trading Account as follows:
J Blunt
Trading Account
£ £
less Returns outwards 540 less Returns inwards 760
9,760 20,640
less Stock at 31 Dec Year 3 2,100
Gross profit 12,980
20,640 20,640
Point out that £9,760 is the sum of the net purchases and that £20,640 is the sum of
the net sales.
Inform the students that the layout shown for returns in J Blunt’s Trading Account will
always be followed from now onwards.
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Exercise
Required
Prepare a Trading Account for F Waldron for the year ended 31 December Year 5 from
the following details:
£
Purchases 17,300
Sales 37,850
Returns inwards 1,320
Returns outwards 870
Stock at 31 Dec Year 5 3,200
Solution
F Waldron
Trading Account
£ £
less Returns outwards 870 less Returns outwards 1,320
16,430 36,530
Gross profit 23,300
36,530 36,530
Step 2
Aim: to appreciate the different forms of carriage as an expense and how they are
recorded in final accounts
1 Explain carefully the nature of carriage; that carriage is an expense incurred in, or
charge made for, the delivery of goods.
2 Make the distinction clear between carriage inwards and carriage outwards:
(a) Carriage inwards

Carriage on goods coming into the firm, ie on purchases. Instead of paying an
inclusive price for purchases that covers carriage, a separate charge is made.
Therefore, carriage is added to the cost of purchases and is included in the Trading
Account.
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(b) Carriage outwards

Carriage on goods going out of the firm, ie on sales. It is regarded as a cost of
distributing goods to customers and is entered as a separate item in the Profit &
Loss Account.
The layout of purchases including adjustments (using different figures) is as follows:
£
Purchases 12,800
add Carriage inwards 430
13,230
less Returns outwards 520
12,710
less Closing stock 1,980
The adjustments for purchases and sales may be summarized as follows:
Net sales = Sales less returns inwards

Net purchases = Purchase plus carriage inwards less returns outwards
Step 3
Aim: to be able to record opening and closing stock figures in the Stock Account and
final accounts
1 So far, these studies have been limited to the first year of trading, ie there has been no
opening-stock figure. From the second year, there will be 2 stock figures: for example,
the closing stock at 31 December Year 5 becomes the opening stock at 1 January Year 6.
2 Use the situation of T Avis as an example again (see T/7.2 in the Appendix, page 216).
T Avis has prepared a trial balance at the end of his second year of trading.Work through
the Trading and Profit & Loss Account, and the balance sheet, with the class.
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T Avis
£ £ £
Stock at 1 Jan Year 6 2,100 Sales 13,050
Purchases 9,260 less Returns inwards 480
12,570
add Carriage inwards 430
9,690
less Returns outwards 340 9,350
11,450
12,570 12,570
Rent payable 1,100 Gross profit b/d 3,570
Carriage outwards 380
Net profit 1,340
4,020 4,020

£ £ £ £
Fixed Assets Capital
Fixtures and fittings 900 Balance at 1 Jan Year 6 5,430
2,500 less drawings 1,100 240
Current Assets 5,670
Stock 2,450
Debtors 1,170 Amount due within 1 year
Bank 1,230 Creditors 1,750
Cash 70 4,920
7,420 7,420
3 Show the Stock Account for T Avis for his first and second years as follows:
Stock
Year 5 £ Year 5 £
31 Dec Trading 2,100 31 Dec Balance c/d 2,100
Year 6 Year 6
1 Jan Balance b/d 2,100 31 Dec Trading 2,100
31 Dec Trading 2,450 31 Dec Balance c/d 2,450
Year 7
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4 Explain that the Stock Account is used only to carry the figure for the balance of stock
from one year to the next. No transactions are entered into this account. It is a
‘holding’ account only.
5 Draw attention to the entry at 31 December Year 5 (encircled).This entry is frequently

entered at 1 January Year 6. The correct way to enter it is as 31 December Year 5
initially and then to carry it down, as shown above.
6 Ask the students to work through the following exercise:

Exercise
Stock at 31 Mar Year 6 £31,680
Stock at 31 Mar Year 7 £34,270
Required
Show the Stock Account for the period 31 March Year 6 to 1 April Year 7.
Note
The stock at 1 April Year 6 is the same as the stock at 31 March Year 6.
Solution
Stock
Year 6 £ Year 6 £
31 Mar Trading 31,680 31 Mar Balance c/d 31,680
Year 7
1 Apr Balance b/d 31,680 31 Mar Trading 31,680
Year 7
31 Mar Trading 34,270 31 Mar Balance c/d 34,270
1 Apr Balance b/d 34,270
Step 4
Aim: to review and to be able to apply the end-of-year procedure
1 Review the end-of-year procedure by showing Figure 7.1 (overleaf) on the overhead
projector. See also T/7.5 in the Appendix (page 218).
2 Draw the students’ attention to points (a) to (c) overleaf, which are highlighted by
Figure 7.1.
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(a) The accounts for which balances are recorded in the balance sheet have not been
‘closed off ’. They retain their balances, ready for the next trading period or year.
The balance sheet is merely a list of items and is not part of the double entry.
(b) Transferring a balance, eg for purchases or insurance, into the Trading Account or
Profit & Loss Account is part of double entry. Each amount is being carried in the
final accounts instead of in the ledger account. The various amounts are
channelled through the final accounts to establish a net profit (or net loss).
(c) The net profit, to complete the double entry, is credited to the Capital Account
(debit the Profit & Loss Account and credit the Capital Account) and so the process
re-emerges in the ledger accounts.
Purchases
Sales
Returns outwards account balances
Returns inwards (b)
transferred to Trading Account
Opening stock
Closing stock
Gross profit to
Profit & Loss Account
(b)
Expense accounts account (b)
balances Profit & Loss Account
Other income transferred to
accounts
Net profit to
Capital Account
(c)
(a)
Drawings Account Capital Account
Cash/bank accounts Balanced, ie

Debtor/creditor accounts balances c/d (a)
Asset accounts on each account
(a)
Balance sheet
Figure 7.1 The end-of-year procedure
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3 The preparation of final accounts is an important element of the First Level

Book-keeping Syllabus. It is therefore important that students become practised at
systematically answering final accounts questions at an early stage. Encourage the
students to adopt the following method when answering such examination questions:
(i) to read through the question to get an overall understanding, especially noting the
‘required’ part of the question;
(ii) to go through the trial balance (or any alternative list of balances) and to place next
to each item a code representing the final account in which it appears;
(iii) to tick each item or figure as it is recorded in the final account concerned.
4 Illustrate this method of answering final accounts by applying it to the trial balance of
T Avis at 31 December Year 6 (see below). Leave the codes out and ask the students to
enter them alongside the items in the trial balance.
T Avis
Trial balance at 31 December Year 6
Dr Cr
£ £
Purchases 9,260 T
Sales 13,050 T
Carriage inwards 430 T
Debtors 1,170 BS
Creditors 1,750 BS
Rent payable 1,100 P/L (exp)
Office expenses 590 P/L (exp)
Lighting and heating 610 P/L (exp)
Rent receivable 450 P/L (inc)
Returns inwards 480 T
Returns outwards 340 T
Carriage outwards 380 P/L (exp)
Fixtures and fittings 900 BS
Motor vehicle 1,600 BS
Cash at bank 1,230 BS
Cash in office 70 BS
Stock at 1 January Year 6 2,100 T
Drawings 1,100 BS
Capital 5,430 BS
21,020 21,020
Key:
BS balance sheet P/L (exp) Profit & Loss Account (expenditure)
T Trading Account P/L (inc) Profit & Loss Account (income)
Note
Stock at 31 December Year 6 was valued at £2,450 T, BS.
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Lesson 8: The division of the ledger
Topic summary
● The reasons for dividing the ledger and recognizing the usual divisions
● The different types of ledger account
● The possible subdivisions of the ledger
● Producing a balance sheet with a vertical format

4.1 The function of the ledger
4.2 The various possible reasons for subdividing the ledger
4.3 How the ledger might be subdivided, eg Sales Ledger, Purchases Ledger, Cash
Book, General Ledger
4.4 Alternative names for the different ledgers, eg Debtors Ledger, Creditors Ledger,
Nominal Ledger
4.5 The possible use of a Private Ledger
4.6 The naming of (ie classification of ) the different types of ledger account and
explaining the accounts within it
4.7 The distinction between personal, real, and nominal accounts
4.8 How the Sales Ledger might be subdivided
4.9 From a list of accounts, or from transaction details, the naming of the ledger(s) in
which each would be recorded
The ledger is the set of accounts of business.These accounts may be kept in a book or series
of books (as in a manual system) or on computer disc. Dividing the ledger and classifying
accounts commonly give students difficulty. Careful explanation and plenty of practice can
help students to achieve success in this topic.
Step 1
Aim: to appreciate the reasons for dividing the ledger and to recognize the usual divisions
1 Outline the possible or likely divisions of the ledger. Encourage the students to identify
the possible advantages of a division, and the reasons for the division, by asking them
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The division of the ledger
questions. For example, you could ask the students what advantages there could be to
having a separate ledger for customers (ie debtors).The possible divisions of the ledger
may be as shown below.
Accounts To be found in the following ledger

(a) customers’ personal accounts, Sales Ledger
ie Debtor Accounts (or Debtor Ledger)
(b) suppliers’ personal accounts, Purchases Ledger
ie Creditor Accounts (or Bought Ledger or Creditor Ledger)
(c) the receiving and paying Cash Book (developed in Lesson 9)
out of money
(d) the remaining accounts General Ledger (or Nominal Ledger)
(unless a Private Ledger exists)
(e) accounts requiring confidentiality, Private Ledger
eg Capital Account
Draw the students’ attention to the alternative names for the ledgers that are given in
brackets.
Point out that not all firms have a Private Ledger.The purpose of a Private Ledger is to
maintain confidentiality, with access limited to only a few members of staff.
2 Explain that the reasons for dividing the ledger are that:
• smaller units are managed more easily;

• the division provides useful information because parts of the ledger are specialized;
• it helps to keep control of the various accounts.

Exercise
Required
State into which ledger each of the following items should be posted:
(i) D Light – Customer Account

(ii) Fixtures and Fittings Account
(iii) F Masters – Supplier of Goods Account
(iv) Wages Account.
Solution
(i) Sales Ledger (or Debtor Ledger)
(ii) General Ledger (or Nominal Ledger)
(iii) Purchases Ledger (or Bought or Creditor Ledger)
(iv) General Ledger (or Nominal Ledger).
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Step 2
Aim: to be able to distinguish between the different types of ledger account
1 Point out that distinguishing between types of account is commonly referred to as the
‘classification of accounts’, which is the arrangement of accounts into distinct classes.
ACCOUNTS
Impersonal
Personal (of things rather than
of people)
Debtors Capital Real Nominal
Creditors Drawings Asset accounts Income and

(including expense
cash and bank) accounts
Figure 8.1 The classification of accounts
2 Hand out copies of, or show on the overhead projector, exercises T/8.1* and T/8.2* in
the Appendix (pages 220 and 221). Ask the students to work through them.
3 Draw the students’ attention to the difference between:
(a) the Sales Ledger the ledger containing debtor accounts

and
the Sales Account the account in the General Ledger which records the income
receivable from the sale of goods, whether for cash or on credit
(b) the Nominal Ledger an alternative name for the General Ledger
and
the Nominal Account a name for the various income and expense accounts
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Step 3
Aim: to recognize the various possible subdivisions of the ledger
1 Review the possible sub-divisions of the ledger. Use the students’ experience to review
this topic by asking them questions. For example, you could ask the students why the
Sales Ledger might be divided according to sales territories/areas and what advantages
might result from this. Suggest that those who are in employment try to find out how
the ledger is divided or subdivided within the organizations they work for.
A large Sales Ledger might be subdivided for any of the reasons stated in point 2 on
page 45. The ways in which the Sales Ledger can be divided are:
(a) alphabetically – by the customers’ names;

(b) numerically – in which each customer is allotted a number;
(c) geographically (or territorially) – by area or region, eg by sales territories;
(d) on a product basis – by product categories;
(e) by type of customer, eg trade customers, as distinct from private individuals, or
according to the level of credit allowed.
2 Hand out copies of, or show on the overhead projector, exercise T/8.3* in the
Appendix (page 221). Ask the students to work through the exercise.
Step 4
Aim: to be able to produce a balance sheet with a vertical format
1 Stress that a vertical format is not required for the First Level Book-keeping
examination. Explain, however, that a vertical layout offers more scope for presentation,
especially when more detail needs to be included concerning fixed assets. More space
is provided by this layout, which can greatly help candidates.
2 The balance sheet of T Avis at 31 December Year 6 is presented overleaf in vertical

format. See also T/8.4 in the Appendix (page 222).
3 Point out that it is usual to deduct ‘Amounts due within 1 year’ (current liabilities) from
current assets to obtain ‘net current assets’.
Note
Knowledge of ‘working capital’ (net current assets) is not required by the First Level
syllabus.Therefore, students who omit the words ‘net current assets’ will not be penalized.
However, encourage the students to lay out their work well.
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T Avis
£ £
Fixed Assets
Fixtures and fittings 900
Motor vehicle 1,600
2,500
Current Assets
Stock 2,450
Debtors 1,170
Bank 1,230
Cash 70
4,920
less Amounts due within 1 year
Creditors 1,750
Net current assets 3,170
5,670
Financed by:
Capital – balance at 1 Jan Year 6 5,430
add Net profit 1,340
less Drawings 1,100 240
5,670
Appendix (page 223). Ask the students to work through the exercise. Remind the
students to apply the examination method outlined in Lesson 7 (page 43).
5 Explain that after the total amount of fixed assets and net current assets has been
established, the ‘Amount due in more than 1 year’ is deducted.This way of positioning
entries is preferred by the LCCIEB to the alternative of placing longer-term liabilities
as an addition underneath capital.
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Lesson 9: Bank facilities

Cash Book: 2 columns
Topic summary
● Basic matters concerning methods of payment and cash and bank records
● The use of a 2-column Cash Book
● The significance of a bank overdraft and its effect on the Bank Account
● The book-keeping relationship between the Bank Current Account and the Bank
Deposit Account

7.1 The main types of bank account and their key features
7.2 The key aspects of the following methods of payment and receipt of money, and
the differences between them:
7.2.1 cash
7.2.2 cheque
7.2.3 credit transfer
7.2.4 standing order
7.2.5 direct debit
7.3 Significance of the term bank overdraft: how an overdraft might arise
7.4 The differences between:
7.4.1 interest receivable (by the customer) on a bank account
7.4.2 interest payable on a bank loan or overdraft
7.4.3 bank charges as charged by a bank for operating an account
7.5 Naming of and use of the following abbreviations:
7.5.1 DD or D/D – direct debit
7.5.2 CT or C/T – credit transfer
7.5.3 STO or S/O – standing order
7.5.4 Div – dividend
7.6 Significance of the following terms:
7.6.1 bank paying-in book
7.6.2 banker’s order
7.6.3 cheque book counterfoils/stubs
7.6.4 counter credits
7.6.5 drawer
7.6.6 drawee
7.6.7 remittance
(continued)
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Bank facilities Cash Book: 2 columns
Extended Syllabus references (continued)

8.4 Transfers between the cash and bank accounts (contra entries)
8.6 The variations of entry arising on and from the sale of goods for cash, eg the
immediate banking of cash as against the delayed banking of cash
8.7 The book-keeping entries required on the transfer of funds between the Bank
Current Account and the Bank Deposit Account
8.17 The periodic balancing of the Cash Book, bringing the balance down for the
start of the next period
A detailed knowledge of bank facilities is not required for the LCCIEB First Level
Book-keeping examination.There is, however, a need to know:
• the nature of 2 types of bank account: the Current Account and the Deposit Account;
• the main methods of payment through a bank, eg cheque or credit transfer;
• the process of cheque clearance (in outline);
• how the bank account affects the Cash Book.
Reconciliation between the bank statement and the Cash Book is dealt with in Lesson 17
(page 132).
You can obtain literature from a bank, that describes the accounts that are available, and
methods of payment, together with specimen paying-in slips, for example.
Step 1
Aim: to be able to apply knowledge of bank facilities to answering basic questions on

methods of payment and cash and bank records
Many students will be aware of bank facilities and may have first-hand experience of
holding a bank account. This knowledge can be drawn upon by asking the students
questions at appropriate points in the lesson. For example, you could ask them about the
type of bank accounts they have, and if any features vary from those of the 2 basic types of
account.You could also ask what factors might delay the clearance of a cheque.
1 Bank accounts
Ensure that students are aware of the 2 main types of bank account: the Current
Account and the Deposit Account. Review the key features of each:
Deposit Account normally for earning interest on the balance; withdrawals are
infrequent
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Current Account a ‘working account’ for regular banking and withdrawal of money;
generally interest is earned on the balance only if the balance is
kept above a certain minimum
2 Cheques
The students should be told the following about cheques:
• what their purpose is;

• who the parties to a cheque are.
Illustrate this information about cheques by displaying Figure 9.1 on the overhead
projector.
instructs Bank
to pay to
Drawer
Payee
or to drawer himself
Figure 9.1 The interaction of the parties to a cheque
Note The delay in clearance will increase if P Sempster (the payee) delays paying the cheque into his account.
In the simplified form of cheque shown below:
● T Royle is the drawer, ie the party making payment;

● Albion Bank,York east is the drawee, ie the party upon whom the cheque is drawn
and where T Royle has his bank account;
● P Sempster is the payee, ie the party to whom the cheque is payable.
Albion Bank plc 7 May Year 4

York East branch
Pay P Sempster
Three hundred and sixty pounds £360-30
and thirty pence
T Royle
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Explaining what the different cheque numbers are will be useful in making cash-book
entries and, later on, in preparing bank-reconciliation statements (see the student’s book
How to Pass Book-keeping, First Level, pages 74–5).
3 Paying-in slip
Tell students that the paying-in slip is used for paying cash or cheques into a bank
account. It is often referred to in questions requiring the preparation of a Cash Book.
4 Cheque clearance
Explain what cheque clearance is. A cheque is cleared when the drawee bank has
indicated that it will pay the amount stated on the cheque. Emphasize that there is a
time delay before the 2 accounts involved (drawer’s and drawee’s) are adjusted. For
example, in the journey of a drawn cheque illustrated in Figure 9.2, a cheque is drawn
by T Royle (an account holder at Albion Bank,York East branch) payable to P Semster
(who holds an account at Derbyshire Bank, Chester branch) – also in the Appendix:
T/9.1 (page 225).
Year 4 T Royle (drawer)
7 May cheque T Royle credits

sent to bank account
P Sempster (payee)
receives cheque P Sempster debits
bank account
8 May pays cheque into

account with
Derbyshire Bank
Chester branch
9 May cheque
sent to
10 May Derbyshire Bank

clearance centre
sent (with other
cheques) to
10 May Albion Bank

clearance centre
11 May Albion Bank charged against

York East branch account of T Royle
Figure 9.2 The journey of a ‘drawn’ cheque
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5 Other payment methods

The 3 methods of which candidates need to be aware are:
(a) credit transfer used for:

(i) single settlement, eg payment of one bill; or
(ii) multiple settlement, eg one instruction to the bank to make a
number of payments to different accounts (of persons or
organizations).
(b) standing order for regular payments:

• of fixed amounts;
• at stated dates;
• to certain persons or firms.
(c) direct debit ‘credit transfer in reverse’: initiated by the creditor, although with
the written agreement of the debtor:
• for either fixed or variable amounts;
• when the time intervals between payments vary.
6 Counter credits
This term literally means the recognition of credit at the bank counter. It relates to
payments into a bank account. Counter credits may cover a number of cheques, etc
amounting to the sum stated.
7 Explain the following terms:
• interest receivable (by the customer) on a bank account – normally only if the
balance is above a certain minimum;
• interest payable on a bank loan or overdraft; and
• bank commission (charges), which are charged by a bank for operating an account.
Note
Explain the terms:
bank loan an amount made available for an agreed period; interest is charged on
the full amount of the loan regardless of how much is drawn.
bank overdraft an overdraft occurs when withdrawals exceed deposits; it may be with
or without prior agreement with the bank; interest is charged from
day to day on the varying balance.
8 Give each student a copy of the multiple-choice questions (T/9.2 in the Appendix,
page 226). Ask the students to work through them.
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Step 2
Aim: to be able to prepare a 2-column Cash Book
Answers to examination questions requiring the preparation of a Cash Book are often
weak.The weakness may, in part, be due to candidates’ unfamiliarity with presenting their
work in columnar form.
1 Explain that, in a 2-column Cash Book, related accounts, cash and bank, are merely
positioned beside each other. Practice in answering questions requiring columnar form
should solve any difficulty the students might have.
2 Show the students cash and bank accounts, as they have been introduced so far on the
overhead projector, eg:
Cash
Year 2 £ Year 2 £
1 Sep Balance b/d 43 5 Sep Cleaning 18
7 Sep Sales 116 11 Sep K Mills 37
26 Sep R Layburn 51 19 Sep Postage 19
30 Sep Balance c/d 136
210 210
1 Oct Balance b/d 136
Bank
Year 2 £ Year 2 £
1 Sep Balance b/d 726 4 Sep Rent 240
8 Sep T Wells 315 16 Sep T Laite 176
12 Sep Office furniture 290 20 Sep Insurance 215
25 Sep J Telby 85 28 Sep V Barnes 167
30 Sep Balance c/d 718
1,416 1,416
1 Oct Balance b/d 718
3 Show the 2 accounts combined. Make sure you enter the items in correct date order.
Carefully tick () the original items as they are entered in the newly presented Cash
Book.
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CASH BOOK
Cash Bank Cash Bank
Year 2 £ £ Year 2 £ £
1 Sep Balances b/d 43 726 4 Sep Rent 240
7 Sep Sales 116 5 Sep Cleaning 18
8 Sep T Wells 315 11 Sep K Mills 37
12 Sep Office furniture 290 16 Sep T Laite 176
25 Sep J Telby 85 19 Sep Postage 19
26 Sep R Layburn 51 20 Sep Insurance 215
28 Sep V Barnes 67
30 Sep Balance c/d 136 718
210 1,416 210 1,416
1 Oct Balance b/d 136 718
Stress the importance of entering the items in date order.
5 Ask the students why it is necessary to keep a separate record in the Cash Book.There
are two answers:
(a) A golden rule in accounting is to separate, if possible, the handling of, or dealing
with, money from other aspects. This action lessens the chance of an employee
taking advantage of the system.
(b) The volume of work in dealing with the receipt and payment of money might also
justify a separate record.
6 Ask the students why it is necessary to keep cash and bank accounts together in
columnar format.The answer is that they are so closely related that transfer sometimes
takes place between them.
7 Explain that the transfer of cash into the bank would result in:
● cash reduced – credit cash

● bank increased – debit bank.
8 Illustrate how the transfer of cash into the bank would appear in the Cash Book:
CASH BOOK
Cash Bank Cash Bank
Year 4 £ £ Year 4 £ £
12 Feb Cash C 270 12 Feb Bank C 270
The ‘C’ means contra, which is used where a double entry is complete within the Cash
Book.
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9 Cash might also be taken out of the bank. Show the Cash Book as it would appear
when money is withdrawn from the bank account to increase office cash:
CASH BOOK
Cash Bank Cash Bank
Year 4 £ £ Year 4 £ £
15 Mar Bank C 120 15 Mar Cash C 120
11 Check that the students are making the entries correctly in the answer to exercise
T/9.4. In particular check that:
(a) each transaction is dated;

(b) transactions are entered in strict date order;
(c) the appropriate wording is entered in the middle ‘details’ column, which always
contains the name of the corresponding account, ie where the double entry is
completed.
12 Ask the students if they can spot any bad business practice being followed by
W Towcester. The answer is that there is some bad business practice. W Towcester is
keeping too much cash in the office at one time, which is a security risk. On 6 April,
£470 cash was received for sales, none of which was banked until 9 April.
13 Explain that for reasons of security, the general practice is to bank cash, if possible, on
the day of receipt. If cash is banked on the day that it is received, the account entries
should be recorded as if a cheque had been banked immediately. For example, on 9 May
Year 6,W Towcester receives £590 in cash from sales and banks the cash the same day.
The account entry for this transaction would be as follows:
CASH BOOK
Cash Bank Cash Bank
Year 6 £ £ Year £ £
9 May Sales 590
14 Point out that some book-keepers record the entry for cash sales that are banked, first
as a debit in the cash column and then separately bank the amount. If the entry has been
recorded in this way, the initial entry must be followed by a complete set of contra
entries such as credit cash/debit bank. For examination purposes, the method shown in
W Towcester’s Cash Book above – direct entry in the debit bank column – is strongly
recommended. This method prevents complications and confusion as to the double
entry is less likely. A common fault in answers to examination questions on this topic
is failing to make the complete contra, which loses marks.
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15 Explain that there is an alternative way of recording cash sales that are banked. This
alternative is used when part of the cash received from sales is banked (on the same day)
and the remainder is retained as office cash. For example, 5 June Year 6, £985 is received
from cash, £900 of which was banked on the same day. This transaction would be
recorded as follows:
Method A
CASH BOOK
Cash Bank Cash Bank
Year 6 £ £ £ £
5 Jun Sales 85 900
If treated as 2 transactions, the entry would be recorded as follows:
Method B
CASH BOOK
Cash Bank Cash Bank
Year 6 £ £ Year 6 £ £
5 Jun Sales 985 5 Jun Bank C 900
5 Jun Cash C 900
Method A is to be preferred. It is simpler and less prone to error.
Step 3
Aim: to be aware of the significance of a bank overdraft and its effect on the bank account
1 Explain that a bank overdraft might arise because:

• the bank has agreed that the account may be overdrawn, subject to a limit;
• the customer (intentionally or otherwise) has drawn more out of the account than it
contains.
2 Tell the students that the effect of an overdraft is to create a ‘minus’ or negative balance
from the customer’s viewpoint.The balance changes from debit to credit and from asset
to liability (the amount owed to the bank).
3 Illustrate the significance of a bank overdraft and its effect by referring in the Appendix,
page 229 to the Cash Book of F Swaine (see T.9.5/A). If a cheque for £9,000 had been
drawn from F Swaine’s account on 30 November Year 5, the Cash Book would appear
as follows:
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F Swaine
CASH BOOK
Cash Bank Cash Bank
Year 5 £ £ Year 5 £ £
1 Nov Capital 12,000 3 Nov Bank C 11,500
3 Nov Cash C 11,500 5 Nov Motor vehicle 4,200
8 Nov Sales 860 10 Nov Wages 270
17 Nov Bank C 130 13 Nov Purchases 1,040
20 Nov T Dart 315 15 Nov Carriage 43
23 Nov Sales 210 700 17 Nov Cash C 130
30 Nov Balance c/d 1,455 18 Nov Wages 290
28 Nov Drawings 150
29 Nov F Glubb 460
30 Nov S Royal 9,000
30 Nov Balance c/d 87
12,340 14,830 12,340 14,830
1 Dec Balance b/d 87 1 Dec Balance b/d 1,455
4 Point out that:
● The credit balance for bank will appear in the balance sheet of F Swaine as a liability,
ie under the heading of ‘Amounts due within 1 year’.
● Cash never has a credit balance. Negative cash is an impossibility.
Particularly stress the second point; this will help prevent students from wrongly showing
a concluding credit balance for cash.
Step 4
Aim: to appreciate the book-keeping relationship between the bank Current Account
and the bank Deposit Account
Remind the students that the bank Current Account is very much a working account that
is used for regular banking and withdrawal of money. The Deposit Account, however, has
money paid into it or withdrawn from it infrequently.The Current Account is recorded in
the Cash Book; the Deposit Account is kept in the General Ledger because entries are
infrequent. Thus, if there were a transfer on 12 April Year 4 of £2,000 from the Current
Account into the Deposit Account, the entries would be recorded as follows:
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CASH BOOK
Cash Bank
Year 4 £ £
12 Apr Bank
Deposit a/c 2,000
General Ledger
Bank Deposit Account
Year 4 £
12 Apr Bank
(Current a/c) 2,000
If there were a withdrawal from the bank Deposit Account into the bank Current Account
the entries would, of course, be the reverse of those shown above.
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Lesson 10: Cash Book: 3 columns – cash discount
Topic summary
● The significance of cash discount
● Account entries in respect of cash discount
● Preparing the 3-column Cash Book, including entries for discounts, and posting
discount totals to the General Ledger

8.2 Use of the 3-column Cash Book (the bank columns recording the Bank Current
Account only)
8.3 The posting of individual transactions from the Cash Book to the ledger
8.5 The differences in book-keeping entries regarding the withdrawal of funds from
the bank, as between:
8.5.1 that for use in the business – a contra entry
8.5.2 that for private use – drawings
8.8 Cash discount as part of the terms of sale
8.9 The impact of cash discount upon the seller (discount allowed) and the buyer
(discount received) respectively
8.10 The double-entry effect of discount allowed and discount received respectively
8.11 The purpose and use of discount columns in the Cash Book
8.18 The periodic posting of discount-column totals from the Cash Book to the
Discount Allowed and Discount Received Accounts in the General Ledger
One of the topics that causes students difficulty is discounts. ‘Cash discount’ is a rather
misleading term: it is really an allowance given to encourage payment within a certain
period of time. Understanding what cash discount means is the key to solving at least part
of the students’ difficulty. A debtor is entitled to a cash discount only when the payment
condition is met.
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Cash Book: 3 columns – cash discount
Step 1
Aim: to appreciate the significance of cash discount
1 Discuss the purpose of cash discount. Explain that its purpose is to induce prompt or
early payment by a customer who has been sold goods on credit. By receiving payment
early, the seller is able to use the money to purchase and then sell more goods. Cash
discount, as part of the seller’s ‘terms of sale’, also serves to attract the would-be
purchaser.The terms of sale might state, for example, that:
● a period of credit of one month is allowed;

● if payment is made within 10 days of buying the goods, a cash discount of 2% will
be allowed.
2 Explain that the term ‘cash discount’ is misleading; it is an allowance given to encourage
the purchaser to pay an account within a certain period of time. The allowance is
calculated as a percentage (%) of the price of the goods. For example, if the price of the
goods is £250 and the cash discount for payment within 10 days is 2%, then:
£
Amount of cash discount: 250 x 2/100 = £5
Net amount to be paid 245
3 Stress that the buyer of goods (on credit) is not automatically entitled to a cash discount.
It is conditional, although it may be part of the terms of sale, ie the buyer has to meet
certain conditions to receive the discount. For example, he or she must:
(a) pay by a certain date (10 days after the date of sale, in the example above)
(b) pay in a duly acceptable form (eg in cash or with a cheque drawn on a reputable
bank).
It is the first of these two conditions with which students will be concerned. If, in the
example above, the purchaser pays the account 13 days after the date of purchase, then
he or she foregoes any entitlement to cash discount and must pay the full list price,
ie £250.
4 Copy and hand out, or display on the overhead projector, the simple examples below.
Ask the students to work through them.
Example (a)
On 3 June Year 6, X sells goods on credit to Y for £480. The terms of sale allow a
period of credit of one month but, if payment is made within 7 days of purchase, a cash
discount of 2 1/2 % will be allowed. Y pays the account on 8 June Year 6. Y is
entitled to the cash discount because he or she has paid the account within the
conditional 7-day period.
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£
Selling price 480
less 21/2% cash discount 12
Payment made 468
Example (b)
On 7 August Year 6, A sells goods on credit to B for £350. The terms of sale allow a
period of credit of one month but, if payment is made within 14 days of purchase, a
cash discount of 2 1/2% will be allowed. B pays the account on 5 September Year 6.
B settles the account after a lapse of more than 14 days, foregoing entitlement to the
cash discount. He or she has to pay the full list price of £350. However, B has taken
advantage of most of the period of credit, which expires on 7 September Year 6.
In Example (a), for X, the seller/creditor, the discount is described as ‘discount allowed’;
for Y, the purchaser/debtor, the discount is described as ‘discount received’. This
situation can be illustrated thus:
Sale of goods on credit debtor discount allowed

Purchase of goods on credit creditor discount received
Firms, as both buyers and sellers of goods, can be both ‘allowers’ and ‘receivers’ of cash
discount.
5 Make it clear to the students that the term ‘cash’ covers payments in actual cash, and
through the banking system.
Step 2
Aim: to be able to make account entries in respect of cash discount
1 Discount allowed
Remind the students that discount allowed represents discount from the seller’s
viewpoint. Illustrate discount allowed with the example below.
Example
On 1 July Year 3, L Green owes A Brown, a trader, £100. The terms of sale allows a
2 1/2 % discount for payment within 14 days. L Green meets this condition and so pays
£100 less the £2.50 discount = £97.50
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In account terms, the transaction would appear as follows:
Transaction effect Book-keeping action

(a) Cash + £97.50 Debit Cash Account
Debtor: L Green - £97.50 Credit L Green
(b) Discount allowed + £2.50 Debit discount allowed
Debtor: L Green - £2.50 Credit L Green
Point out that Discount Allowed is an expense account of A Brown and is kept in
the General Ledger. It also represents a ‘holding’ account, which holds the balance of
the discount allowed until it is transferred to the Profit & Loss Account at the end of the
period.
Illustrate the account on the overhead projector or board as follows:
CASH BOOK
Cash Bank Cash Bank
Year 3 £ £
9 Jul L Green 97.50
L Green
Year 3 £ Year 3 £
1 Jul Balance b/d 100 9 Jul Cash 97.50
9 Jul Discount allowed 2.50
Discount Allowed
Year 3 £
9 Jul L Green 2.50
Hand out copies of, or show on the overhead projector, the following exercise and ask
the students to work through it.
Exercise
On 2 May Year 5, B Hall, a trader, sells goods worth £720 on credit to F Trill.The terms
of sale allow a 2 1/2% cash discount for payment within one month. F Trill pays his
account by cheque on 30 May Year 5.
Required
Record these transactions in the books of B Hall.
Solution
CASH BOOK
Cash Bank Cash Bank
Year 5 £ £ £ £
30 May F Trill 702
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F Trill
Year 5 £ Year 5 £
2 May Sales 720 30 May Bank 702
30 May Discount allowed 18
Discount Allowed
Year 5 £
30 May F Trill 18
2 Discount received
Remind the students that discount received represents discount from the buyer’s
viewpoint, ie by receiving cash discount the buyer pays less to settle the account.
Illustrate discount received with the example below.
Example
A Brown the trader (see page 62) is now a debtor who owes T Wells the sum of £500
at 1 July Year 3. The terms of sale allow 2% cash discount for payment within 14 days
and A Brown meets this condition.Thus, A Brown pays only
£500 less the £10 discount = £490
In account terms, the transaction would appear as follows:
Transaction effect Book-keeping action

(a) Bank - £490 Credit bank account
Creditor: T Wells - £490 Debit T Wells
(b) Creditor: T Wells - £10 Debit T Wells
Discount received + £10 Credit discount received
Point out that discount received is an income (or ‘revenue’) account of A Brown and is
kept in the General Ledger. It also serves as a ‘holding’ account, which holds the
balance of the discount received until it is transferred to the Profit & Loss Account at
the end of the period.
Illustrate the account entries on the overhead projector or board as follows:
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CASH BOOK
Cash Bank Cash Bank
£ £ Year 3 £ £
10 Jul T Wells 490
T Wells
Year 3 £ Year 3 £
10 Jul Bank 490 1 Jul Balance b/d 500
10 Jul Discount received 10
Discount Received
Year 3 £
10 Jul T Wells 10
Hand out copies of, or display on the overhead projector, the following exercise. Ask
Exercise
On 3 June Year 5, B Hall buys goods worth £840 on credit from Laken Ltd.The terms
of sale allow 3 3/4 % cash discount for payment within one month. B Hall pays the
account by cheque on 29 June Year 5.
Required
Record this transaction in the books of B Hall.
Solution
The amount of cash discount = £840 × 3 3/4 /100 = £31.50

Therefore the amount to be paid = £840 - £31.50 = £808.50
CASH BOOK
Cash Bank Cash Bank
Year 5 £ £
29 Jun B Hall 808.50
Laken Ltd
Year 5 £ Year 5 £
29 Jun Bank 808.50 29 Jun 840
29 Jun Discount received 31.50
Discount Received
Year 5 £
29 Jun Laken Ltd 31.50
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Step 3
Aims: to be able to prepare a 3-column Cash Book, including entries for discounts; and
to be able to post discount totals to the General Ledger
1 Explain the disadvantage of going to the General Ledger every time an entry is made
for cash discount. It makes less work to have discount columns in the Cash Book.The
discount entry can then be made when entering either the receipt or payment of
money.
2 Show the Cash Book entries for A Brown that would be recorded in place of those
shown on pages 63 and 65.
CASH BOOK
Disc Disc
All’d Cash Bank Rec’d Cash Bank
Year 3 £ £ £ Year 3 £ £ £
9 Jul L Green 2.50 97.50 10 Jul T Wells 10 490
Point out that the entries in the personal (debtor/creditor) accounts are unchanged.
Because these entries remain unchanged, discount amounts can be collected in the
discount columns and the totals transferred periodically into the General Ledger as
shown below.
total of left-hand discount column to total of right-hand discount column to
Discount Allowed Account Discount Received Account

(debit side) (credit side)
3 Explain that when payment is made by cheque, it is common practice to include the
number of each cheque in the Cash Book. If cheque numbers are included in a
question, these numbers should be stated in the answer beside the name of the payee in
brackets. Cheque numbers appear only on the credit side of the Cash Book, ie in respect
of cheques drawn by the firm for which the entries in the Cash Book are being
recorded. It is sufficient for the students to show the last 3 numbers only, eg a payment
of £315 by cheque number 235212 to F Smith would appear as:
CASH BOOK
Dr Cr
Disc Cash Bank
Year 4 £ £ £
17 Feb F Smith (212) 315
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4 Display exercise T/10.1 in the Appendix (page 230) on the overhead projector. Work
through it with the class. This exercise illustrates the use of the 3-column Cash Book,
as well as the immediate postings to ledger accounts and the end-of-the-month
transfer of column totals to the respective discount accounts.
Solution to T/10.1
CASH BOOK
Disc Disc
All’d Cash Bank Rec’d Cash Bank
Year 5 £ £ £ Year 5 £ £ £
1 May Bal’s b/d 93 1,040 13 May Stationery 56
11 May R Vine 7 343 18 May T Dole (214) 7 273
24 May A Croft 11 429
28 May Bank C 80 21 May Insurance (215) 190
28 May Cash (216) C 80
30 May W Kone (217) 9 291
31 May Bal’s c/d 117 978
18 173 1,812 16 173 1,812
1 Jun Bal’s b/d 117 978
SALES LEDGER
A Croft
Year 5 £ Year 5 £
1 May Balance b/d 440 24 May Bank 429
440 440
R Vine
Year 5 £ Year 5 £
1 May Balance b/d 350 11 May Bank 343
350 350
PURCHASES LEDGER
T Dole
Year 5 £ Year 5 £
18 May Bank 273 1 May Balance b/d 280
18 May Discount received 7
280 280
W Kone
Year 5 £ Year 5 £
30 May Bank 291 1 May Balance b/d 300
30 May Discount received 9
300 300
(continued)
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GENERAL LEDGER
Stationery
Year 5 £
13 May Cash 56
Insurance
Year 5 £
21 May Bank 190
Discount Allowed
Year 5 £
31 May Sundries 18
Discount Received
Year 5 £
31 May Sundries 16
5 Direct the students’ attention to the following points in the Cash Book and ledgers
shown above, that:
● the total of each discount column is transferred – to the same side (Dr or Cr) in the
ledger;
● there is no balancing of discount columns;
● prompt postings are made of other items, eg to personal accounts, stationery, or
insurance;
● use of the word ‘sundries’ in each discount account.
Note
Explain that the word ‘sundries’ has a general application and has been used elsewhere
in this text. In this subject, it means a number of entries amounting to the sum stated.
6 Common errors made by candidates

Draw the attention of students to the following points as they work through the
exercises listed on page 69.
(a) The reversal of entries: payments debited and income credited.

(b) When recording money received from cash sales that is banked the same day
candidates may fail to do the full contra (see Lesson 9, page 49). They make the
entry in Dr cash but then either debit or credit the bank column.
(c) Showing a credit balance of cash.This type of entry is the equivalent of a deficit of
cash, which is impossible. If a Cr cash balance emerges there is something wrong
with the entries.
(d) Sometimes discount columns have been omitted from the Cash Book when the
entries should be included.
(e) Cash discount added to the amount of a cheque.
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(f ) The discount columns are balanced, ie a balance is found between the totals of the
2 columns.
(g) When the candidates post entries to the discount accounts (in the General Ledger)
they may make one of two errors; they:
● post individual items, which is quite wrong and defeats the purpose of having the
discount columns;
● post the column totals to the wrong side of each discount account.
7 Give the students each a copy of exercise T/10.2 in the Appendix (page 231) and ask
them to work through it. However, before they start work on the exercise, point out
that sometimes a payment or receipt of money to or from a debtor or creditor is
described as being ‘in settlement of the amount due’ or ‘in settlement of a debt’.These
terms indicate that a cash discount has been either received or allowed. For example a
cheque for £720 received in settlement of an amount of £750 means that a cash
discount of £30 has been allowed, and this amount should be recorded in the discount
allowed column of the Cash Book.
Hand out copies of exercises T/10.3 and T/10.4 in the Appendix (pages 232–3) to the
class and ask the students to work through them. Both these exercises are from past
LCCIEB First Level Book-keeping papers. They require information from different
sources to be brought together. For example, for T/10.3, information from the bank
paying-in book, cheque-book counterfoils, and record of movements of cash is
required.Tell the students that they must keep the entries in strict date order. In T/10.3
certain information picked up from the bank statement is to be entered after an initial
balancing.
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Lesson 11: Purchases and Sales Day Books
Topic summary
● The invoice or copy invoice as the source document for credit purchases or sales
● The preparation of a Sales Day Book for a given period and posting entries to
ledger accounts
● The function of the Sales Day Book
● The book-keeping significance of trade discount and how it contrasts with cash
discount
● The preparation of a Purchases Day Book for a given period and posting entries to
ledger accounts

5.7 Use of the term source document: in particular, the part played in book-keeping by
the invoice and the credit note
5.8 The significance of trade discount
5.9 The calculation of trade discount, from list price to obtain net price
6.1 The function of Purchases, Sales, Returns Outwards, and Returns Inwards Day
Books
6.2 The alternative names used for these various day books
6.3 The recording of individual transactions in the day books
6.4 Making individual postings from the day books to personal accounts
6.5 Making postings of period day-book totals to the Purchases, Sales, and Returns
Accounts in the General Ledger
8.12 The differences between trade discount and cash discount and the different
book-keeping effects
Day books is a topic that sometimes results in the loss of examination marks.The problem
arises largely from failure of students to understand the function of the day books. So often,
day books are prepared as if they are ledger accounts.
Entries in the day books require an authorized source such as an invoice or copy invoice.
Trade discount also has to be considered.
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Purchases and Sales Day Books
Step 1
Aim: to recognize the invoice or copy invoice as the source document for credit
purchases or sales
1 Explain that when goods are sold on credit, the seller will send an invoice to the buyer,
setting out:
● the parties to the transaction

● details of the goods sold
● their prices
● the ‘terms of sale’.
2 Show a specimen invoice (Figure 11.1) on the overhead projector.
INVOICE
Tempster & Fall

25 The Square
Northbridge NT3 5WR 7 April Year 4
Invoice no 5622
To: R Maundy
17 The Luttens
Wednesbury WD4 3ET
Quantity Description Unit price Total

£ £
40 Moveable shelves 7 280.00

20 Lockable containers 12 240.00
10 Storage cabinets 20 200.00
720.00
12
less trade discount at 12 / % 90.00
630.00
Terms: 21/2% cash discount for payment within 30 days
Figure 11.1 A specimen invoice
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If possible, obtain actual invoices for the students to see.
3 Explain that the seller will pass a copy of the outgoing invoice to his or her book-keeper.
The copy invoice will then be the basis of entry into the accounts, ie it will be the
‘source document’.
Step 2
Aim: to be able to prepare a Sales Day Book for a given period and to post entries to
ledger accounts
1 On the board or overhead projector, show the Sales Day Book of Tempster & Fall,
below, and:
● explain that the sources of the entries are copy invoices;

● show the postings to the ledger one by one;
● show clearly how the double entry is achieved.
SALES DAY BOOK

Invoice no Amount
Year 4 £
2 Apr A Trumble 5621 433
7 Apr R Maundy 5622 630
20 Apr W Trent 5623 290
26 Apr F Skane 5624 375
To Sales Account 1,728
Point out that invoice numbers might not be included in some examination questions,
and so the ‘invoice no’ column would be left out.
2 The double entry for Tempster & Fall’s transactions is achieved as follows:
(a) the individual amounts are posted to the debtor accounts as soon as possible, ie they
are debit entries;
(b) the total of the credit sales for April Year 4 is transferred at the end of the month to
the credit of the Sales Account in the General Ledger.
SALES LEDGER
Dr A Trumble
Year 4 £
2 Apr Sales 433
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R Maundy
Year 4 £
7 Apr Sales 630
W Trent
Year 4 £
20 Apr Sales 290
F Skane
Year 4 £
26 Apr Sales 375
GENERAL LEDGER
Sales Cr
Year 4 £
30 Apr Sundries 1,728
Check that the total of the 4 debit entries is equal to the amount of the credit entry.
Step 3
Aim: to appreciate the functions of the Sales Day Book
1 Discuss the function of the Sales Day Book. Explain that it is used for:
● recording credit sales;

● carrying transaction detail instead of the Sales Account.
Emphasize that, usually, only credit sales are entered in the day book: cash sales will
continue to be entered directly into the Sales Account.1
2 Illustrate the procedure for credit sales by displaying Figure 11.2 on the overhead
projector.
Copy invoice (source document)
SALES DAY BOOK
daily posting monthly posting

of total to
Customer accounts GENERAL LEDGER –

(DEBIT) Sales Account
(CREDIT)
Figure 11.2 Credit sales procedure
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Stress that the entry in the day book is not part of double entry: it is a note only – a
form of memorandum. The amounts of credit sales are held in the day book
throughout each month. At the end of each month the total is transferred to the Sales
Account. Thus, during the month, the debit part of each credit sale has been entered
but not the credit part. The double entry is complete when the monthly total is
transferred.
3 Ask the students what the advantages are of having a Sales Day Book. The answers
should be that:
● fewer items need to be passed through the double-entry system;

● accounting work can be divided among staff, with one person looking after the day
book and another the ledger.
4 The day book seems to have limited detail recorded for each transaction. Ask the
students if it really helps the ledger that much.The answer is that it is true that day book
entries nowadays are much briefer than in the past. Much of the detail is shown on the
copy invoice, which can be referred to if necessary. The file of copy invoices can be
regarded as supporting the day book. Present-day practice still means that the ledger is
helped by not having to carry a lot of detail.
5 Explain that in a computer-based account system, the information included in the

manually based Sales Day Book would be recorded to enable many functions to be
performed. Thus, the amount of monthly credit sales could be known quickly.
Information may also be readily available on the amounts outstanding on individual
customer accounts, on the regularity of payments by customers, etc. The print-out of
invoices for despatch to customers and other documents could also be part of an
integrated system.
6 Hand out copies of or display exercise T/11.1 in the Appendix (page 234) on the
overhead projector and ask the students to work through it.
Step 4
Aim: to appreciate the book-keeping significance of trade discount and how it contrasts
with cash discount
1 Explain the nature of trade discount and its effect on selling price. Trade discount is
normally an allowance to traders for buying in bigger quantities. Any one trader might
offer different levels of discount, eg 10%, 121/2 %, or 15%, according to the quantity or
amount (in £) of an order.
2 If possible, show examples of trade discount in catalogues or price lists issued by traders.
Refer to the trade discount shown on the invoice illustrated on page 71. Show that the
entry in the Sales Day Book for R Maundy is £630 (see page 72), ie the net figure on
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the invoice after the trade discount is deducted. From this example, the
students will see that trade discount is not recorded in the accounts. However, cash
discount is recorded in the accounts: the buyer still has to meet the condition of
paying the account by a certain date.
3 Hand out copies of or display the following exercise on the overhead projector and ask
Exercise
On 5 January Year 7, K Johnson sells goods on credit to V Lympne, at a list price of
£750 and quantity (trade) discount of 20%. A cash discount of 21/2 % is allowed if the
account is settled within 30 days of the invoice date. V Lympne pays the account by
cheque on 31 January Year 7.
Required
In the books of K Johnson, show the relevant entries in:
(i) the Sales Day Book
(ii) the ledger account of V Lympne.
Solution
In the books of K Johnson:
SALES DAY BOOK
Year 7 £
5 Jan V Lympne 600
SALES LEDGER
V Lympne
Year 7 £ Year 7 £
5 Jan Sales 600 31 Jan Bank 585
31 Jan Discount allowed 15
600 600
Note
The trade discount does not appear in any account and need not appear in the Sales Day
Book, ie it is sufficient to show the net figure after the deduction of the trade discount.
4 Explain that cash discount does not, as some students think, appear in the Sales Day
Book. It does, however, appear on the credit side of V Lympne’s account – because
Lympne has paid the account within the required 30 days.
5 Hand out copies of or display on the overhead projector exercise T/11.2 in the
Appendix (page 234) and ask the students to work through it.
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Step 5
Aim: to be able to prepare a Purchases Day Book for a given period and to post entries
to ledger accounts
1 Explain that purchases on credit are treated on a similar basis to credit sales. First, they
are listed in a Purchases Day Book. Illustrate the procedure for credit purchases by
displaying Figure 11.3 on the overhead projector.
Invoice
PURCHASES DAY BOOK
monthly posting daily posting

of total to
GENERAL LEDGER – PURCHASES LEDGER –

Purchases Account Supplier Accounts
(DEBIT) (CREDIT)
Figure 11.3 Procedure for credit purchases
2 Show the following Purchases Day Book of R Maundy on the board or overhead
projector:
PURCHASES DAY BOOK
Invoice no Amount
Year 4 £
7 Apr Tempster & Fall 980 630
14 Apr S Clegg 981 416
20 Apr T Roman 982 528
23 Apr B Porter 983 364
To Purchases Account 1,938
3 Show the students how to post the transactions recorded in the Purchases Day Book to
the ledger accounts:
PURCHASES LEDGER
Tempster & Fall
Year 4 £
7 Apr Purchases 630
S Clegg
Year 4 £
14 Apr Purchases 416
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T Roman
Year 4 £
B Porter
Year 4 £
GENERAL LEDGER
Purchases
Year 4 £
30 Apr Sundries 1,938
Point out that the sale to R Maundy, in the Sales Day Book of Tempster & Fall,
becomes a purchase in the Purchases Day Book of R Maundy.The amount is the same.
4 Inform the students that each entry in the Purchases Day Book is made from an invoice
received from the seller. Compare this procedure with that for the copy invoice from
which entries are made in the seller’s day book.
5 Display exercise T/11.3 in the Appendix (page 235) on the overhead projector, or hand
out copies of it to the students. Ask the students to work through the exercise.
Note
Advise the students that they need to be familiar with the alternative names for the 2 day
books dealt with in this lesson to complete the exercise. The alternative names are given
below:
Sales Day Book or Sales Journal

Purchases Day Book or Purchases Journal
6 Common errors made by candidates concerning day books

Draw the attention of the students to the following points.
(a) The day books are shown in account format, which demonstrates a basic
misunderstanding of the function of the day book.
(b) The transactions that have been recorded in the day books are repeated, line by
line, in the Purchases Account and/or Sales Account. Only period totals are
supposed to be posted to the Purchases and Sales Accounts.
(c) The deduction of cash discount in the day books.
7 Display exercise T/11.4 in the Appendix (page 236) on the overhead projector or hand
out copies of it to the students. Ask them to work through the exercise. This exercise
should help to reinforce the students’ knowledge about the 3-column Cash Book.
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Lesson 12: Returns Day Books
Topic summary
● The credit note or copy credit note as the source document for returns entries
● The function of the Returns Inwards and Returns Outwards Day Books
● The preparation of a Returns Inwards Day Book for a given period and posting
entries to the ledger accounts
● The preparation of a Returns Outwards Day Book for a given period and posting
● The use of the term ‘book of prime entry’
● The reinforcement of learning and practice in regard to the use of day books

5.7 Use of the term source document: in particular, the part played in book-keeping by
the invoice and the credit note
6.1 The function of Purchases, Sales, Returns Outwards, and Returns Inwards Day
Books
6.2 The alternative names used for these various day books
6.3 The recording of individual transactions in the day books
6.4 Making individual postings from the day books to personal accounts
6.5 Making postings of period day-book totals to the Purchases, Sales, and Returns
Accounts in the General Ledger
6.6 The reason for maintaining separate Returns Accounts instead of entering to the
credit or debit, respectively, of Purchases or Sales Account
8.1 The dual role of the Cash Book as a book of prime entry and an integral part of
the double-entry record
Returns, previously introduced in Lesson 2, page 11, should be treated with care by
candidates. Candidates’ examination answers often show confusion between inward and
outward returns, as well as about the relevant price to apply to the returned goods.
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Returns Day Books
Step 1
Aim: to recognize the credit note or copy credit note as the source document for returns
entries
1 Explain further the process of returns, both inwards and outwards, and various possible
reasons for the seller granting an allowance. The reasons might include, for example:
● the wrong goods were sent;

● the goods were damaged before arrival;
● the goods did not match those described in catalogues, etc;
● some of the goods were faulty, for which a part allowance may be made.
Stress that the seller grants, and the buyer receives, an allowance against the relevant
invoice, whether or not the goods are actually returned.
2 Explain that when making the allowance, the seller will send a credit note to the buyer.
A copy of the credit note will be passed to the seller’s book-keeper and this serves as
the basis of the account entries. An example of a credit note is shown in Figure 12.1,
which you can show on the overhead projector.
CREDIT NOTE
Tempster & Fall

25 The Square
Northbridge NT3 5WR 18 April Year 4
Credit note no 529
To: R Maundy
17 The Luttens
Wednesbury WD4 3ET
Reference invoice no 5622 dated 7 April Year 4
Quantity Description Unit price Total

£ £
10 Lockable containers 12 120.00
less trade discount at 121/2% 15.00
Damaged in transit 105.00
Figure 12.1 An example of a credit note
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Returns Day Books
Relate this credit note to the invoice shown on page 71 in Lesson 11: where trade
discount was deducted on the invoice, this must be deducted at the same rate on the
credit note.
Step 2
Aim: to appreciate the function of the Returns Inwards and Returns Outwards Day
Books
1 Show that, when the seller has agreed to make an allowance against the return of goods,
the procedure (in outline) is as illustrated in Figure 12.2.
Seller issues
CREDIT NOTE
Sent to COPY CREDIT NOTE
CUSTOMER
RETURNS INWARDS
DAY BOOK
RETURNS OUTWARDS (of seller)
DAY BOOK
(of customer)
Figure 12.2 The procedure on the return of goods
2 Explain that the functions of Returns Inwards and Returns Outwards Day Books are:
● to record credit returns;
● to carry transaction detail instead of the ledger accounts.
Effectively, the entries in the day books represent a reversal of purchase and sales entries.
3 Point out that the Returns Day Books serve basically the same purpose as the 2 day
books considered in Lesson 11. They serve to reduce the detail recorded in the ledger
and allow staff to specialize in the work they do. In addition, by having separate books
for returns, more information is available than if set-off entries (ones that have the effect
of reducing the amount of a previous entry) were made in either the Purchases Day
Book or Sales Day Book. If the entries were made in the other day books, there would
be a danger of information on returns being hidden.
4 Ask the students why a firm needs to have detailed records of returns.
The answer is that the record is important for dealing with individual customers or
suppliers. It is also important for a supplier knowing how to improve the supply of
goods or for a purchaser knowing which firms are the better suppliers.
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Returns Day Books
Step 3
Aim: to be able to prepare a Returns Inwards Day Book for a given period and to post
1 Show the Returns Inwards Day Book of Tempster & Fall, below, on the board or
overhead projector.
RETURNS INWARDS DAY BOOK

Credit note no Amount
Year 4 £
11 Apr A Trumble 528 87
18 Apr R Maundy 529 105
26 Apr W Trent 530 42
To Returns Inwards Account 234
2 Record the following postings to ledger accounts, entry by entry:
SALES LEDGER
A Trumble
Year 4 £ Year 4 £
2 Apr Sales 433 11 Apr Returns inwards 87
R Maundy
Year 4 £ Year 4 £
W Trent
Year 4 £ Year 4 £
GENERAL LEDGER
Returns Inwards
Year 4 £
30 Apr Sundries 234
Note
The 3 debit entries in the Sales Ledger Accounts were previously posted from the Sales
Day Book of Tempster & Fall, shown in Lesson 11, page 72.
3 Point out that the double entry in the Tempster & Fall example is achieved by the debit
of £234 in the Returns Inwards Account being matched by the total of the 3 credit
entries in the customer accounts.
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Returns Day Books
4 Figure 12.3 illustrates the part played by the Returns Inwards Day Book in the account
system. Show the figure on the overhead projector.
Seller issues
CREDIT NOTE
COPY CREDIT NOTE
entered in
RETURNS INWARDS Memorandum

DAY BOOK only
daily
postings
end-of-month
posting of total
Customer
Returns Inwards GENERAL (debtor)
Account LEDGER accounts
SALES
LEDGER
Figure 12.3 The returns inwards procedure
5 Explain that the double entry is made by means of:
(a) prompt postings to the customer accounts = credit;

(b) end-of-month posting of the total to the Returns Inwards Account = debit.
6 Hand out copies of, or show on the overhead projector, exercise T/12.1 in the
Step 4
Aim: to be able to prepare a Returns Outwards Day Book for a given period and to post
to the ledger accounts
1 Show the Returns Outwards Day Book of R Maundy (below) on the board or
overhead projector:
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Returns Day Books
RETURNS OUTWARDS DAY BOOK

Credit note noAmount
Year 4 £
9 Apr J Jolly 2178 127
18 Apr Tempster & Fall 529 105
24 Apr N Nathan 1165 38
To Returns Outwards Account 270
2 Record the following postings to ledger accounts, entry by entry:
PURCHASES LEDGER
J Jolly
Year 4 £
Tempster & Fall

Year 4 £ Year 4 £
18 Apr Returns outwards 105 7 Apr Purchases 630
N Nathan
Year 4 £
GENERAL LEDGER
Returns Outwards
Year 4 £
30 Apr Sundries 270
3 Point out that the 3 debit entries in the Purchases Ledger equal, in total, the amount of
the end-of-month credit entry in the Returns Outwards Account.
Note
The credit entry in Tempster & Fall’s account was previously posted from the Purchases
Day Book of R Maundy, shown in Lesson 11 (page 76). The accounts of Jolly and
Nathan would, in practice, have credit entries for purchases previously made.
4 Figure 12.4 (overleaf) illustrates the part played by the Returns Outwards Day Book in
the account system. Show the figure on the overhead projector.
5 Explain that the double entry is made by means of:

(a) prompt postings to supplier accounts = debit;
(b) end-of-month posting of total to Returns Outwards Account = credit.
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Returns Day Books
Appendix (page 237). Ask the students to work through it.
Buyer receives
CREDIT NOTE
entered
in
RETURNS OUTWARDS Memorandum

DAY BOOK only
daily end-of-month
postings posting of total
Returns Outwards GENERAL

Account LEDGER
Supplier
(creditor)
accounts
PURCHASES
LEDGER
Figure 12.4 The returns outwards procedure
Step 5
Aim: to be familiar with the use of the term ‘book of prime entry’
Explain that the term ‘book of prime entry’ means the stage in the book-keeping system
where a transaction is recorded for the first time, before it is entered in the ledger.The term
includes the 4 day books already considered. The Cash Book can serve 2 roles. Thus, for
cash sales or cash purchases, it is a book of prime entry but, as part of the ledger, it is also
a component of the double-entry system.
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Returns Day Books
Step 6
Aim: to reinforce learning and practice in regard to the use of day books
1 Display exercise T/12.3 in the Appendix (page 238) on the overhead projector and
work through it with the class. The exercise involves preparation of all 4 day books,
together with the postings to the ledger accounts.
Note
When a question states ‘Returned goods to £26’, it can be assumed, unless stated
otherwise, that the seller has agreed to make an allowance.
In the case of returned goods, when a trade discount has previously been allowed at the
purchases or sales stage, the amount of the discount (or a due proportion, when only
some of the goods are returned) must be deducted at the ‘returns’ stage.This applies to
the transactions on 8, 15, 19, 27, and 30 October Year 6 in exercise T/12.3.
Solution to T/12.3
PURCHASES DAY BOOK
Year 6 £
3 Oct R Varney 420
17 Oct T Langton 296
24 Oct R Varney 272
To Purchases Account 988
SALES DAY BOOK

Year 6 £
5 Oct K Petts 357
11 Oct J Beaver 448
21 Oct K Petts 544
To Sales Account 1,349
RETURNS OUTWARDS DAY BOOK

Year 6 £
8 Oct R Varney 56
27 Oct T Langton 37
30 Oct R Varney 34
To Returns Outwards Account 127
RETURNS INWARDS DAY BOOK

Year 6 £
15 Oct K Petts 102
19 Oct J Beaver 72
To Returns Inwards Account 174
(continued)
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Returns Day Books
PURCHASES LEDGER
R Varney
Year 6 £ Year 6 £
8 Oct Returns outwards 56 3 Oct Purchases 420
(Cr £602)
T Langton
Year 6 £ Year 6 £
(Cr £259)
SALES LEDGER
K Petts
Year 6 £ Year 6 £
5 Oct Sales 357 15 Oct Returns inwards 102
21 Oct Sales 544
(Dr £799)
J Beaver
Year 6 £ Year 6 £
11 Oct Sales 448 19 Oct Returns inwards 72
(Dr £376)
GENERAL LEDGER
Purchases
Year 6 £
31 Oct Sundries 988
Sales
Year 6 £
31 Oct Sundries 1,349
Returns Outwards
Year 6 £
31 Oct Sundries 127
Returns Inwards
Year 6 £
31 Oct Sundries 174
Check that the total creditor balances of £861 (£602 + £259) = purchases of
£988 less returns outwards of £127, and that the total debtor balances of £1,175
(£799 + £376) = sales of £1,349 less returns inwards of £174.
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Returns Day Books
Appendix (page 239). Ask the students to work through it. This question is mainly a test
of knowledge about discounts; the entries are straightforward.The points below might
be helpful for the students.
(a) The trade discount should be deducted in each case from the list price and only the
resulting net figure should be entered in the day book. Cash discount is calculated
on the net purchase or sales figure.1 It should be deducted from the net figure only
if payment is made within the required period.
Required Payment Cash

payment date date discount
B Stevens 17 Jan 30 Jan No
F Robins 26 Jan 18 Jan Yes
J New 27 Jan 22 Jan Yes
P Harper 5 Feb
K Burton 2 Feb
(b) Traders allow cash discount to encourage prompt or early payment.
Appendix (page 240).Ask the students to work through it. In this question, a minimum
level of purchase is necessary to qualify for a trade discount.
Common errors made by candidates in dealing with returns

Draw the following common errors to the attention of the students:
(a) confusion between returns inwards and returns outwards;

(b) failure to deduct trade discount when this had been allowed in the original
purchase or sale transaction;
(c) day books shown in account form;
(d) transactions repeated, individually, in the General Ledger Account (ie in either the
Returns Outwards Account or the Returns Inwards Account).
Note
Advise the students that they need to be aware of the alternative names for the 2 day books
dealt with in this lesson.The alternative names are:
Returns Inwards Day Book or Sales Returns Day Book

Returns Outwards Day Book or Purchases Returns Day Book
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Lesson 13: Accruals and prepayments –

expenses
Topic summary
● The meaning of expense accruals and the necessary entries or adjustments in an
expense account for expense accrual
● The meaning of expense prepayment and the necessary entries or adjustments in
an expense account for expense prepayment
● Adjustments for expense accruals and prepayments in final accounts

13.1 The nature of an accrual
13.2 End-of-period adjustments in expense accounts for accruals
13.3 The meaning of an expense prepayment
13.4 End-of-period adjustments in expense accounts for prepayments
13.5 Adjustments for end-of-period expense accruals and expense prepayments in the
Profit & Loss Account and balance sheet
20.7 The appropriate inclusion of prepayments and accruals under ‘current assets’ and
‘amounts payable within 12 months’ respectively
Accruals and prepayments is a topic that book-keeping students often find difficult. It is an
important topic: first, because it may be the main subject of a question; second, because it
can also occur in other topics in an examination, particularly in the adjustments of final
accounts. Therefore explain accrual and prepayments carefully, and make sure that the
students have plenty of practice in answering questions on this topic.
Step 1
Aim: to understand expense accruals and to be able to make the necessary entries or
adjustments in an expense account
Expense accrual
1 Explain that the term ‘accrual’ refers to an amount that is owing. An expense accrual is
an amount payable, in respect of an account period, that remains unpaid at the end of
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Accruals and prepayments – expenses
that period.The students’ aim is to relate the expenses to the periods (usually years) in
which the benefit is obtained from the expenditure, whether or not the expense
accounts have been paid.This may require making adjustments in the expense accounts.
2 Illustrate accrual by showing the example below on the overhead projector or board.
Example
Jacqui Tillot commenced in business at 1 January Year 3. She pays £500 rent ‘in arrears’
at the end of each quarter. At 31 December Year 3, the fourth quarter’s rent is still
unpaid. Her Rent Account appears as follows:
Rent
Year 3 £
31 Mar Bank 500
30 Jun Bank 500
30 Sep Bank 500
3 Ask the students what is wrong with this example.
4 The problem with the example is that this Rent Account records the rent for only 3
quarters; the rent for the fourth quarter will probably be paid early in Year 4. Left as it
is, the account gives a misleading picture for Year 3 because Jacqui has benefited from
the use of the premises for 4 quarters in that year. The true charge for the rent for
Year 3 is:
4 quarters at £500 per quarter = £2,000
Jacqui Tillot’s Profit & Loss Account for Year 3 should show £2,000. The £500 in
respect of the fourth quarter should be treated as a liability. The account would then
appear as:
Rent
Year 3 £ Year 3 £
31 Mar Bank 500 31 Dec Profit & loss 2,000
30 Jun Bank 500
30 Sep Bank 500
31 Dec Balance c/d 500
2,000 2,000
Year 4
1 Jan Balance b/d 500
5 Show the correct Rent Account (above) on the overhead projector or board.
6 Explain that the £2,000 credit entry is matched by a debit of that amount to the Profit
& Loss Account. The ‘correct’ charge for the year is thus made in the Profit & Loss
Account. The £500 balance carried down at 31 December Year 3 is matched by the
credit brought down at 1 January Year 4. This credit balance represents a liability and
appears as such in the balance sheet at 31 December Year 3.
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7 Show the students that early in Year 4, Jacqui Tillot’s Rent Account might appear as
follows:
Rent
Year 4 £ Year 4 £
18 Jan Bank 500 1 Jan Balance b/d 500
This illustrates that the overdue rent is paid on 18 January, which clears the account.
8 It is essential that the students grasp the meaning of these account entries. Review the
key entries, which show that:
● the transfer to the Profit & Loss Account is the due amount of rent for Year 3 – not
what has actually been paid. The transfer ensures that the ‘true’ charge is made in
the Profit & Loss Account;
● the credit balance (brought down) at 1 January Year 4 represents the amount owing at
that date, which would appear as a liability in the balance sheet at 31 December Year 3;
● the debt is cleared early in Year 4.
9 Ask the students to work through the following exercise.

Exercise
Douglas Miller commenced in business at 1 October Year 5. He paid monthly staff
salaries in arrears by cheque as follows:
Year 5 £
31 Oct 1,200
30 Nov 1,200
At 31 December Year 5, salaries for December amounting to £1,400 were unpaid.
Required
Prepare the Salaries Account for the 3 months ending 31 December Year 5, duly balanced
at that date.
Solution
Salaries
Year 5 £ Year 5 £
31 Oct Bank 1,200 31 Dec Profit & loss 3,800
30 Nov Bank 1,200
31 Dec Balance c/d 1,400
3,800 3,800
Year 6
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Step 2
Aim: to understand expense prepayment and to be able to make the necessary entries in
an expense account
Expense prepayment
1 Explain that the term ‘expense prepayment’ is a payment made in advance of the
account period to which it refers.A prepayment is the opposite of an accrual. However,
the transfer to the Profit & Loss Account in the expense account will still be credited.
The difference is in the balance, which is brought down as a debit balance, ie as an asset.
2 Illustrate prepayment on the overhead projector or board with the following example.
Example
James Jewell commenced in business at 1 January Year 7. He paid his rent quarterly and
in advance by cheque as follows:
Year 7 £
2 Jan 450
28 Mar 450
26 Jun 475
1 Oct 475
28 Dec 475
Required
Show the Rent Account for Year 7, duly balanced at 31 December Year 7.
Solution
Rent
Year 7 £ Year 7 £
2 Jan Bank 450 31 Dec Profit & loss 1,850
28 Mar Bank 450 31 Dec Balance c/d 475
26 Jun Bank 475
1 Oct Bank 475
28 Dec Bank 475
2,325 2,325
Year 8
3 Review the example’s solution by drawing attention to the following points:

● the transfer to the Profit & Loss Account includes 2 quarters’ rent at £450 (£900)
plus 2 quarters’ rent at £475 (£950), which results in a total transfer of £1,850;
● the balance (£475) brought down at 1 January Year 8 will appear as an asset in the
balance sheet of James Jewell at 31 December Year 7.
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4 Explain that, so far, the examples given have had no opening balance since they
illustrate the first year of trading. It is more usual to have an opening balance as well as
a closing balance.
5 Emphasize the rule about prepayment and accrual:

if a prepayment, the opening balance = Debit
if an accrual, the opening balance = Credit
Example
From the following details, prepare John Sim’s Insurance Account for the year ended
31 December Year 6. Balance the account at the year end, showing the transfer to the
Profit & Loss Account.
Year 6
1 Jan The balance on the account is £80, representing one quarter’s insurance paid
in advance
23 Mar The amount of £190 is paid by cheque, which covers the insurance for the
half-year ended 30 September Year 6
29 Sep The amount of £210 is paid by cheque, which covers the insurance for the
half-year ended 31 March Year 7
Solution
Insurance
Year 6 £ Year 6 £
1 Jan Balance b/d 80 31 Dec Profit & loss 375
23 Mar Bank 190 31 Dec Balance c/d 105
29 Sep Bank 210
480 480
Year 7
Note
The transfer to the Profit & Loss Account is made up of:
£
Jan–Mar 80
Apr–Sep 190
Oct–Dec 105
375
Explain that the remaining £105 has been paid in advance for the quarter ended
31 March Year 7 and is carried down as an asset (debit) balance.
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6 Point out that expense accounts involving accrual, prepayment, or both (and including
an opening balance) are made up of 4 elements:
(i) the amount either accrued or prepaid at the beginning of the year;
(ii) the amount paid during the year;
(iii) the amount to be transferred to the Profit & Loss Account, ie the ‘true’ cost for
the year;
(iv) the amount owing or prepaid at the end of the year.
These elements may be shown as a single example (see Figure 13.1).The example may
be described as a situation of initial accrual and closing prepayment. If 3 of the elements
are known, the fourth can be found by preparing an expense account based on the
relevant structure.The diagrams can be adapted to each situation. Each situation will be
determined by, first, the particular combination of opening and closing balances, such
as initial prepayment and closing accrual (see point 8 below); and, second, the respective
amounts of the 4 elements as outlined in point 6 above.
Amount accrued b/d
Amount paid Transfer to

during year Profit & Loss Account
Amount prepaid c/d
Amount prepaid b/d
Figure 13.1 A pictorial example of an expense account
7 Display the example on the overhead projector. The basic structure can be copied on
to a transparency and used as the master diagram, and sample figures can be copied on
to a number of other transparencies. Insert the figures progressively by placing the
transparencies on top of one another.
8 Ask the students to construct simple diagrams (like the one above) that show the
following situations, which should all relate to expense:
(a) initial accrual and closing accrual
(b) initial prepayment and closing prepayment
(c) initial prepayment and closing accrual
(d) initial accrual and closing prepayment.
The students may find it helpful to practise constructing simple diagrams (in
double-entry account form) that position the various items.
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Another form of prepayment

9 Explain that a prepayment could take the form of items purchased for use in the
business, which are separate from ordinary ‘purchases’ that are for resale. Purchases for
use in the business might include stationery, packing materials, or cleaning materials.
Any stock of such items at the end of an accounting period represents a form of
prepayment.
Draw the students’ attention to the following points:

● allowance must be made for stock at the end of an accounting period in the figure
charged to the Profit & Loss Account;
● the value placed on the stock must be carried down as a balance on the expense
account.
10 Illustrate the two points above with the following example.
Example
Stationery bought in the year ended 31 December Year 3 cost £2,750. The stock of
stationery held at 31 December Year 3 is worth £250
Required
Prepare the Stationery Account for the year ended 31 December Year 3.
Solution
The amount used is £2,750 - £250 = £2,500. This total is charged to the Profit &
Loss Account and the amount remaining (stock) is carried forward as an asset balance.
Stationery
Year 3 £ Year 3 £
Jan–Dec Sundries 2,750 31 Dec Profit and loss 2,500
2,750 2,750
Year 4
Stress that any such balance should not be included with the stock-in-trade, but should
be shown separately as part of the item ‘prepaid expenses’.
11 Copy and hand out or display the following exercise on the overhead projector. Ask
Exercise
Cleaning materials bought in the year ended 31 December Year 4 cost £870.The stock
of cleaning materials at 31 December Year 4 is worth £130. The cleaning materials
bought in the year ended 31 December Year 5 cost £920. The stock of cleaning
materials at 31 December Year 5 is worth £150.
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Required
Show the Cleaning Materials Account for the 2 years ended 31 December Year 5.
Note
The stock at 31 December Year 4 (the closing stock) is also the stock at 1 January Year 5
(the opening stock).
Solution
Cleaning Materials
Year 4 £ Year 4 £
Jan–Dec Sundries 870 31 Dec Profit & loss 740
870 870
Year 5 Year 5
Jan–Dec Sundries 920 31 Dec Balance c/d 150
1,050 1,050
Year 6
Note
The charge to the Profit & Loss Account is calculated as:
Year 4 Purchased stock at £870 less closing stock at £130 = £740

Year 5 Opening stock at £130 plus purchased stock at £920 = £1,050
less closing stock at £150 = £900
12 Explain that the financial period or year of the firm does not always correspond with
that of the supplier of services. Adjustments to deal with this mismatch may be
necessary at the end of the accounting period.
Example
At 1 January Year 5, the Insurance Account has a balance of £90 (Dr). The insurance
premium was paid by cheque £330 on 28 April Year 5 for the (insurance) year to
30 April Year 6.
Required
Show the Insurance Account for the year ended 31 December Year 5, duly balanced at
that date.
Note
It can be concluded that the debit balance at 1 January Year 5 relates to Insurance for
the 4 months ended 30 April Year 5. The charge for the remaining 8 months of the
financial year is calculated as the due proportion of the annual premium: £330 × 8/12
= £220. The remaining £110 is carried forward as a prepayment. The charge to the
Profit & Loss Account for insurance for Year 5 is: £90 + £220 = £310.
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Insurance
Year 5 £ Year 5 £
1 Jan Balance b/f 90 31 Dec Profit & loss 310
28 Apr Bank 330 31 Dec Balance c/d 110
420 420
Year 6
13 Copy and hand out or display exercise T/13.1* in the Appendix (page 241) on the
overhead projector.Work through it with the class. Exercise T/13.1 concerns 3 expense
accounts: 2 accounts (rent and insurance) have opening prepayment balances, ie debits;
the other (advertising) has an opening accrual balance, ie credit. You should first
calculate the amount of the charge for Year 4 for each expense. In examination answers,
if workings are shown clearly, marks can be awarded for what is correct.
It is clear that the monthly rent is £230 from January to September and £250 from
October to December.
Period of rent (Year 4)

Prepayment balance 1 Jan Yr 4 = Jan
Payment 28 Feb = Feb, Mar
31 May = Apr, May, Jun
31 Aug = Jul, Aug, Sep
30 Sep = Oct
Thus the accrual of 2 months’ rent at 31 December Year 4 is 2 × £250 = £500.

With regard to insurance:
● the initial prepayment of £65 covers the period 1 January to 31 August;
● the charge for the period 1 September to 31 December Year 4 is the due part of the
premium paid on 31 August Year 4, ie £180 × 4/12 = £60;
● the other £120 is carried forward as a prepayment for Year 5.
Therefore the total insurance charge for Year 4 is £65 + £60 = £125.
The following are major weaknesses shown by candidates in answers to exercise T/13.1
(an LCCIEB past examination question):
● failure to calculate correctly the charge to the Profit & Loss Account in the Rent
Account;
● charging an incorrect proportion to the Profit & Loss Account from the insurance
premium paid on 31 August Year 4;
● being confused about applying double-entry rules, which is sometimes done
inconsistently.
Draw the students’ attention to these weaknesses as appropriate.
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Step 3
Aim: to be able to make necessary adjustments for accruals and prepayments in final
accounts
1 Remind the students that, at the financial year end, some expenses will be paid in
advance of the forthcoming year, while other expenses will be in arrears, ie ‘accrued’.
This often occurs because the firm’s financial year and the payment year for the expense
do not correspond. Adjustments may therefore be necessary when preparing final
accounts.
2 This topic can be developed with reference to the final accounts of T Avis in Lesson 7
(page 40).
3 The following adjustments are to be made in relation to the balances included in the
trial balance of T Avis at 31 December Year 6:
● rent payable prepaid – £100

● lighting and heating accrued – £60.
4 Trading and Profit & Loss Account

The effect of the adjustments is limited to the Profit & Loss Account, so only that need
be shown on the overhead projector.
T Avis
£ £
Rent payable (1,100 - 100) 1,000 Gross profit 3,570
Lighting and heating (610 + 60) 670
Net profit 1,380
4,020 4,020
The effect has been to increase the net profit of the adjustments:
£
Net profit before adjustment 1,340
add Rent payable prepaid 100
1,440
less Lighting and heating accrued 60
Net profit after adjustment 1,380
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5 Balance sheet
To illustrate the remaining effects of the adjustments mentioned in point 3 (page 97),
show the following balance sheet on the board or overhead projector:
T Avis
Fixed Assets £ £ £
Motor vehicle 1,600
2,500
Current Assets
Stock 2,450
Debtors 1,170
Prepayment 100
Cash at bank 1,230
Cash in office 70
5,020

Creditors 1,750
Accrual 60 1,810
3,210
5,710
Financed by:
Capital – balance at 1 Jan Yr 6 5,430
5,710
Note
Period-end prepayments should be shown under current assets, and positioned after
‘debtors’ but before ‘bank’. If there is more than one prepayment, these do not have to
be listed individually. It is advisable, however, to record the separate amounts (in brackets)
beside the total figures.Then candidates can be sure of obtaining marks for the parts that
are correct.
6 Point out that period-end accruals should be shown under ‘amounts due within 1 year’.
If there is more than one accrual, the individual amounts should be shown.
7 Copy and hand out or display exercises T/13.2, T/13.3, T/13.4 in the Appendix
(pages 243–5). Ask the students to work through them.
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Lesson 14: Accruals and prepayments – income
Topic summary
● The meaning of income accrual and the entries necessary in an Income Account
● The meaning of income prepayment and the entries necessary in an Income
Account
● The preparation of an expense account that includes two areas of expense with
distinctive balances

13.7 The nature of income accrual
13.8 End-of-period adjustments in income accounts for income accrual
13.9 The meaning of income prepayment
13.10 End-of-period adjustments in income accounts for income prepayment
13.11 Adjustments for end-of-period income accrual and income prepayment in the
13.12 The recording of 2 areas of expense within the one expense account, with
distinctive balances, eg the Rent & Rates Account
20.7 The appropriate inclusion of prepayments and accruals under ‘current assets’ and
‘amounts payable within 12 months’ respectively
Many students experience difficulty with the concept of income accrual and prepayment.
Careful explanation of this topic is essential and students should be encouraged to practise
working through exercises.
Step 1
Aim: to understand income accrual and to be able to make the necessary entries in an
Income Account
Income accrual
1 Explain that the topic of income accrual deals with income such as rent receivable or
commission rather than sales revenue. Accrual means that income due for the financial
year has not been received by the end of the year. Outstanding sales revenue is allowed
for by being shown as debit balances on customer personal accounts.
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Accruals and prepayments – income
2 Point out that as the income is earned in a given year, it should be included as income
for that year, even though payment has not yet been received.
3 Tell the students that, in the Income Account, the accrual should be:
● included in the transfer to the Profit & Loss Account;

● carried down as a debit balance (representing an amount to be received early in the
next period).
Explain to them also that, in the balance sheet, the accrual should be shown as a
current asset.
4 Illustrate income accrual by displaying the following example on the overhead

projector or board.
Example
Edward Smith is a trader and, in addition to his normal business income from the sale
of goods, he receives a commission on services he carries out. During the year ended
31 December Year 6, he received commission as follows:
Year 6 Relating to the quarter ended £

30 Mar 31 March Year 6 512
2 Jul 30 June Year 6 470
4 Oct 30 September Year 6 630
The amount due, but not yet received, for the quarter ended 31 December Year 6 was
£580.
The account for Year 6 should appear as follows:

Commission Receivable
Year 6 £ Year 6 £
31 Dec Profit & loss 2,192 30 Mar Bank 512
2 Jul Bank 470
4 Oct Bank 630
2,192 2,192
Year 7
5 Explain that although accrued income should be included with the current assets in the
balance sheet, it is common practice in business to include it with debtors. In an
examination answer, however, it is safer to show accrued income as a distinct item
otherwise a mark may be lost.
6 Copy and hand out or show the following exercise on the overhead projector or board.
Ask the students to work through it.
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Exercise
Hilary Truelove receives rent from subletting business premises. During the year ended
31 December Year 5, she received the following payments:
Payment received by
Year 5 cheque for quarter ending £
3 Apr 31 March Year 5 650
29 Jun 30 June Year 5 650
11 Oct 30 September Year 5 675
The amount due for the quarter ended 31 December Year 5 was received on 14 January
Year 6.
Required
Show the Rent Receivable Account for the year ended 31 December Year 5, complete
with year-end balancing and with as many entries as possible for Year 6.
Solution
Rent Receivable
Year 5 £ Year 5 £
31 Dec Profit & loss 2,650 3 Apr Bank 650
29 Jun Bank 650
11 Oct Bank 675
2,650 2,650
Year 6 Year 6
1 Jan Balance b/d 675 14 Jan Bank 675
Step 2
Aim: to understand income prepayment and to be able to make the necessary entries in
an Income Account
Income prepayment
1 Point out that in the case of income prepayment the income has been received in
advance of the next financial year.
2 Tell the students that, in the Income Account at the end of the financial year, the
advance payment should be:
● deducted from the amount of income for the year;
● carried down as a credit balance.
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Explain to them also that, in the balance sheet, the prepayment should be shown under
‘amounts due within 1 year’.
3 Illustrate income prepayment by showing the following example on the overhead

projector or board.
Example
Rent is received on sublet premises as follows:
Year 7 Payment for quarter ending £

12 Jan 31 March Year 7 250
6 Apr 30 June Year 7 250
4 Jul 30 September Year 7 250
29 Sep 31 December Year 7 250
21 Dec 31 March Year 8 250
The unadjusted income for Year 7 is 5 × £250 = £1,250.

The adjusted or true income is 4 × £250 = £1,000.
The fifth payment really relates to Year 8 and should be carried forward into that year.
The account for Year 7 should appear as follows:
Rent Receivable
Year 7 £ Year 7 £
31 Dec Profit & loss 1,000 12 Jan Bank 250
31 Dec Balance c/d 250 6 Apr Bank 250
4 Jul Bank 250
29 Sep Bank 250
21 Dec Bank 250
1,250 1,250
Year 8
4 Explain that the £250 received in advance should be shown in the balance sheet under
‘amounts due within 1 year’ and described as ‘rent received in advance’.
5 Copy and hand out or show on the overhead projector exercises T/14.1 and T/14.2 in
the Appendix (pages 247–8). Ask the students to work through them.
Step 3
Aim: to be able to prepare an account that includes two areas of expense, with distinctive
balances
1 Explain that, as candidates, the students might be required to prepare an expense

account that includes two areas of expense, eg Rent & Rates Account.
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2 Illustrate this type of acccount by showing the example below on the overhead
projector or board.
Example
At 1 January Year 4, £780 of rates were prepaid and £2,700 of rent payable was
accrued. During Year 4, the following payments were made:
£
Rent 8,700
Rates 3,120
At 31 December Year 4, £780 of rates were prepaid and £3,200 of rent was owing.
The following amounts were due to be paid for Year 4:
£
Rent 9,200
Rates 3,120
The combined Rent & Rates Account would appear as follows:
Rent & Rates

Year 4 £ Year 4 £
1 Jan Balance b/d (rates) 780 1 Jan Balance b/d (rent) 2,700
Jan–Dec Bank (rent) 8,700 31 Dec Profit & loss
Bank (rates) 3,120 rent 9,200
rates 3,120
31 Dec Balance c/d (rent) 3,200 31 Dec Balance c/d (rates) 780
15,800 15,800
Year 5 Year 5
1 Jan Balance b/d (rates) 780 1 Jan Balance b/d (rent) 3,200
3 Emphasize strongly that different categories of expense should be combined only if the
examination questions require it.
4 Copy and hand out or show exercise T/14.3* in the Appendix (page 249) on the
overhead projector. Ask the students to work through it. T/14.3* is a question
requiring the preparation of a combined type of expense account.
5 Common errors made by candidates concerning income and expense accounts

Candidates sometimes:
(a) lack a grasp of the rules of double entry, eg payments credited to the expense
account and income debited to the Rent Receivable Account;
(b) adjust actual individual payments or income in some instances, instead of
apportioning expense or income at the end of the period;
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(c) make entries inconsistently, often within the same account, eg payments are partly
debited or partly credited within an Insurance Account; income is partly debited or
partly credited within the Rent Receivable Account;
(d) make adjustments according to the calendar year instead of according to the firm’s
financial year;
(e) overbalance accounts – each time an entry is made (in extreme cases);
(f ) interpret ‘show transfers to the Profit & Loss Account’ as meaning that a Profit &
Loss Account is required rather than the transfer of entries within each income or
expense account.
6 Copy and hand out or show exercises T/14.4, T/14.5 and T/14.6 in the Appendix
(pages 250–3) on the overhead projector.Ask the students to work through them. Point
out that they should look out for differences between the financial year and the calendar
year, particularly when working through T/14.5.
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Lesson 15: Depreciation of fixed assets
Topic summary
● The need to allow for fixed asset depreciation
● The calculation of depreciation by the straight line method and the reducing
balance method
● The purpose, meaning, and significance of a ‘provision’
● The account entries for fixed asset depreciation
● Suitable entries in the Profit & Loss Account and balance sheet in respect of fixed
asset depreciation
● The calculation of depreciation on fixed assets bought or sold during the course of
a financial year
● The account entries for the disposal of a depreciated fixed asset

14.1 The nature of depreciation of fixed assets and the need for making provision in
the accounts (with the awareness that this is not the putting by of cash for
replacement)
14.2 The basis of the straight line (or fixed instalment) method of depreciation
14.3 Calculation of the amount of annual depreciation and the effect on the book
value of a fixed asset, using the straight line method
14.4 The accounting entries for straight line method depreciation, using a Provision
for Depreciation Account
14.5 The basis of the reducing balance (or diminishing balance) method of depreciation
14.6 Calculation of the amount of annual depreciation and the effect on the book
value of a fixed asset, using the reducing balance method
14.7 The accounting entries for the reducing balance method of depreciation, using a
Provision for Depreciation Account
14.8 A comparison, through basic calculation, between use of the straight line
method and use of the reducing balance method
14.9 The accounting entries relating to the sale or scrapping of a depreciated fixed
asset, using an Asset Disposal Account
14.10 The entries in the Profit & Loss Account and balance sheet relating to fixed
assets and their depreciation
14.11 Significance of the terms aggregate depreciation and net book value and their use in
the balance sheet
20.6 The effective presentation of fixed assets to show, if appropriate: cost, aggregate
depreciation, net book value
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Depreciation of fixed assets
Depreciation of fixed assets, like accruals and prepayments, is a topic that might occur as a
question in its own right or as an element in a question, particularly on final accounts.The
First Level Syllabus is concerned with two depreciation methods only:
(i) the straight line method

(ii) the reducing balance method.
This lesson is important also in that it introduces the concept of the provision. Failure to
understand a provision is often a major cause of failure in the examination.
Step 1
Aim: to understand the need to allow for fixed asset depreciation
1 Explain why and how the value of fixed assets usually falls over a period of time; that
their fall in value may be due to:
● being used (‘wear and tear’)

● the availability of newer superior or more efficient assets, eg the newer assets might
run more cheaply or use less fuel.
2 Point out that if fixed assets never fall in value and could, at a later date, be sold for the
price they were purchased at, there would be no ‘usage cost’ of owning the fixed assets
(although interest could not be earned on the money paid for the fixed asset, effectively
a cost). They do, however, generally fall in value, so that by failing to take account of
this:
● profit would be overstated

● fixed assets in the balance sheet would be overstated in value.
3 Explain that if fixed assets are hired, a charge for hiring would appear in the Profit &
Loss Account. However, for assets that are owned, depreciation is charged, much like a
charge for owning the assets.
4 Discuss the varying ways in which depreciation applies, eg leases on premises as opposed
to ownership of motor vehicles.
5 Emphasize that depreciation, as recorded, is the estimate of the fall in value of fixed
assets over a period of time. Illustrate this point with the following example.
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Example
original cost of less estimated disposal = amount of

asset or sale amount depreciation
£15,000 £1,500 = £13,500
6 Explain that the calculation for depreciation is necessarily an estimate because:
● of the problem of estimating the ‘working life’ of an asset, ie the number of years of
use
● the amount that will be received on eventual sale of the asset, is being estimated,
perhaps several years ahead
7 Point out that, often, simplified methods of measurement are used, therefore any
resulting figure is necessarily an estimate. For example, a motor vehicle that is purchased
on 1 January Year 4 for £9,000, for use in a business, is estimated to have a working life
of 4 years. At the end of that time it is believed that it will be sold for £1,000.The fall
in value – the cost of ownership and use of the asset – is: £9,000 - £1,000 = £8,000.
This will have to be ‘written down’ over the period of 4 years until it is sold.
Step 2
Aim: to be able to calculate depreciation by the straight line method and the reducing
balance method
1 Point out that the LCCIEB First Level Book-keeping is concerned with only two
methods of calculating depreciation: the straight line and reducing balance methods.
2 The straight line method

This is also known as the ‘fixed instalment method’.The calculation follows from what
was stated in Step 1 about estimation, point 6 above. It involves:
● an estimate of the number of years of use (working life);

● an estimate of the eventual sale (disposal) value;
● the original cost less sale value = total amount to be written down;
● total amount to be written down = annual depreciation charge.
number of years
Illustrate the straight line method by showing the examples below on the overhead
projector or board.
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Example (a)
A machine, bought for £20,000, is estimated to have a working life of 6 years and to
have a sale value at the end of the 6 years of £2,000. The annual depreciation charge
would be:
£20,000 - £2,000 = £3,000
6
Note
The same result would be obtained by depreciating the total amount to be written
down (£18,000) by 162/3% each year.
Example (b)
Calculate the annual depreciation charge in each of the following cases:
(i) a motor vehicle, bought for £10,500, is estimated to have a working life of 5 years
and to have a resale value at the end of that time of £1,500;
(ii) a machine bought for £32,000 is estimated to have a working life of 8 years and at
the end of that time to have a zero resale value.
Solution
(i) £10,500 - £1,500 = £1,800 per annum
5
(ii) There is no resale value (sometimes termed ‘scrap value’) and so the original cost is
the total amount to be written down.
£32,000 = £4,000 per annum

8
3 Reducing balance method

This method is also known as the ‘diminishing balance method’. Explain that a fixed
percentage is written off the reduced balance each year. The reduced balance is the cost
of the asset less depreciation to date.
Illustrate this method by showing the example below on the overhead projector or board.
Example
A machine is bought for £15,000 and depreciation is to be provided at 40%. The
calculations for the first 4 years would be as follows:
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£
Cost of machine 15,000
Year 1 depreciation (40%) 6,000
9,000
Year 2 depreciation (40% of £9,000) 3,600
5,400
3,240
1,944
Note that the amounts charged as depreciation fall quite strikingly. Depreciation in Year 1
is nearly three times that of Year 3 and over 4.6 times that of Year 4.
4 Ask the students what advantage the reducing balance method has compared with the
straight line method. The answer should be that, in the early years, when repair bills
should be low, the depreciation charges are greatest. In later years, when repair bills are
likely to rise, depreciation charges are low. This has the effect of smoothing out charges
over the life of the asset. With the straight line method, depreciation charges are
relatively high in later years when repair bills increase.
5 Copy and hand out or show exercise T/15.1 in the Appendix (page 253) on the
overhead projector. Ask the students to work through the exercise.
Step 3
Aim: to have a basic understanding of the purpose, meaning, and significance of a

‘provision’
1 Much of the problem experienced by candidates in answering questions involving

depreciation result from a failure to understand the purpose and significance of a
‘provision’. Explain that a provision is an amount built up by charges in the Profit &
Loss Account to provide for a fall in value of certain assets. A provision for depreciation
is one example. Such a provision builds up when a charge is made year by year for the
estimated depreciation.
2 Point out that any provision is not like a fund of cash: the charge(s) in the Profit & Loss
Account creating or increasing a provision do not ensure that cash is conserved for the
eventual replacement of the asset. However, creating a provision has the advantage of:
● helping to ensure that profits are not overstated, ie provision takes into account the
cost of owning and using fixed assets;
● helping to ensure that the values of fixed assets are cautiously stated as the provision
is deducted in the balance sheet from the amount of the fixed asset.
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A provision is usually shown in the balance sheet as a deduction from the amount of
the relevant asset.
3 Describe how the net book value of an asset at a particular balance sheet date is not the
amount for which it could be sold at that date, ie depreciation calculations are based
upon the business as a ‘going concern’. It is assumed that the business will continue to
operate for at least the period over which depreciation provisions are being built up. If,
however, the future of a business is in considerable doubt, the net realizable value of
assets might fall below the net book value, so requiring extra depreciation to be charged
to the Profit & Loss Account.
Step 4
Aim: to be able to make book-keeping entries relating to fixed asset depreciation
1 Tell the students that it is usual to show the depreciation of fixed assets as follows:
● the fixed asset account is kept at cost, without any adjustment for depreciation;
● a separate provision for depreciation account is maintained that accumulates the
amount of depreciation year by year.
2 Emphasize that the LCCIEB requires this method to be used in examination answers.
Far too many candidates make the mistake of recording depreciation in both the Asset
Account and the Provision Account. In doing so, they break the rules of double entry.
3 Illustrate the correct method of showing the depreciation of fixed assets by displaying
the example below on the overhead projector or board.
Example
A machine, purchased by cheque for £80,000 on 1 January Year 1, is expected to have
a working life of 4 years, after which it will be sold for £5,000. The financial year ends
on 31 December.
The straight line method is calculated as follows:
£80,000 - £5,000 = £75,000 = £18,750 per annum

4 4
The reducing balance method is based in this instance on a 50% write down.
Note
Any questions requiring the use of this method will state the percentage rate of the
write down to be applied.
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The calculation for the reducing balance method is as follows:
£
Year 1 depreciation 40,000
40,000
20,000
10,000
5,000
The accounts for each of the methods appears as follows:
Machine
Year 1 £
1 Jan Bank 80,000
Straight line method
Provision for depreciation on machine

Year 1 £ Year 1 £
31 Dec Balance c/d 18,750 31 Dec Profit & loss* 18,750
Year 2 Year 2
31 Dec Balance c/d 37,500 1 Jan Balance b/d 18,750
31 Dec Profit & loss* 18,750
37,500 37,500
Year 3 Year 3
56,250 56,250
Year 4
* or Depreciation expense
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Reducing balance method
Provision for depreciation on machine

Year 1 £ Year 1 £
31 Dec Balance c/d 40,000 31 Dec Profit & loss* 40,000
Year 2 Year 2
60,000 60,000
Year 3 Year 3
70,000 70,000
Year 4
Note
In reality, a firm would use only one method.The two are shown here for comparison.
An examination question might require both methods to be shown. The provision
accounts are left open in Year 4 to deal with the sale of the machine. This feature will
be dealt with in Step 7.
4 Draw the students’ attention to the key points illustrated by the example:
● the Asset Account has a debit balance (unchanged in amount and the same for the two
depreciation methods);
● provision for depreciation has a credit balance;
● the provision for depreciation builds up (accumulates) the amounts of depreciation
year by year;
● the difference between the asset balance and the provision balance is the ‘book value’
or ‘net book value’ of the asset.
5 Common error made by candidates concerning depreciation

The common error is to show the provision for depreciation with a debit balance,
which is fundamentally wrong. Emphasize that a provision account always has a credit
balance.
6 Underline the fact that a provision exists because the charge to the Profit & Loss
Account creating it (or increasing it) lessens the net profit and thus lessens the addition
to the Capital Account. Instead of being part of Capital Account (Cr balance), the
amount is shown as a provision (Cr balance).
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Step 5
Aim: to be able to make suitable entries in the Profit & Loss Account and balance sheet
in respect of fixed asset depreciation
1 Point out that the provision accounts, shown in Step 4 in the details column, state ‘Profit
& loss’ or ‘Depreciation expense’.The use of a Depreciation Expense Account to carry
the debits of asset write down is standard practice. The account serves as a collection
point for depreciation charges and is especially useful when a business has a number of
depreciation provision accounts. At the end of the year the total of the Depreciation
Expense Account is transferred to the Profit & Loss Account and therefore only one
entry has to appear there. The use of a Depreciation Expense Account is therefore an
indirect way of achieving the same result as a direct debit to the Profit & Loss Account.
The LCCIEB will accept either entry. First Level candidates may find the further stage
in the process (ie recording depreciation in a Depreciation Expense Account) somewhat
confusing.
2 The Profit & Loss Account

Creating or increasing a depreciation provision results in the double entry appearing as
follows:
● the Profit & Loss Account is debited (or the Depreciation Expense Account for later
transfer to the Profit & Loss Account);
● the Provision for Depreciation Account is credited.
3 Balance sheet
Usually leads to each fixed asset (or class of fixed asset) being shown at cost less total
depreciation to date, resulting in the net book value.
4 Show the following typical layout of fixed assets in a balance sheet on the overhead
projector or board.
Accumulated Net book
Fixed Assets Cost depreciation value
£ £ £
Premises 120,000 120,000
Fixtures and fittings 9,500 4,200 5,300
Motor vehicles 17,800 5,200 12,600
147,300 9,400 137,900
The total of the net book value, £137,900, is to be added in due course to the other
assets in the balance sheet.
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5 Copy and hand out or display the following exercise on the overhead projector.Ask the
students to work through the exercise.
Exercise
On 1 April Year 5, L Johns purchased a machine for £30,000. He decided to depreciate
it at the rate of 40% using the reducing balance method. He keeps a provision for
depreciation account.
Required
Show, as an extract, how the asset would appear in the balance sheet of L Johns at 31
March Year 8.
Solution
L Johns
Balance sheet (extract) at 31 March Year 8
Fixed Assets Cost depreciation value
£ £ £
Machine 30,000 23,520 6,480
Step 6
Aim: to be able to calculate depreciation on fixed assets bought or sold during the course
of a financial year
1 Explain that sometimes fixed assets are either bought or sold during the course of a
financial year and the instructions given in the examination question need to be
followed with care.The question will state what to do when a fixed asset is purchased
part of the way through a firm’s financial year. There are various ways in which
candidates can answer the question, including:
(a) charging depreciation for the part of the year the asset is owned, eg if the financial
year ends on 31 December, then for a fixed-asset purchase on 1 May the charge for
the year to 31 December would be 8/12 of the annual amount of depreciation;
(b) charging a full year’s depreciation for assets purchased in the first half of the
financial year and charging a half year’s depreciation for those purchased in the
second half of the financial year;
(c) providing depreciation for the whole year on assets held at the end of the year.
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The following example illustrates the calculation of depreciation on fixed assets

purchased during the course of the financial year.
Example
The financial year of Sands & Co ends on 31 December. During Year 1, the following
fixed assets were purchased:
Date of purchase Cost

Fixed Assets £
Motor vehicle 5 February Year 1 9,000
Fixtures and fittings 11 September Year 1 6,000
The assets are depreciated using the following bases:
Motor vehicles 40% per annum, using the reducing balance method
Fixtures and fittings 20% per annum, using the straight line method
The policy for assets purchased during the year is as follows:
● a full year’s depreciation is charged for assets purchased in the first half of the financial
year;
● a half year’s depreciation is charged for assets purchased in the second half of the
financial year.
Required
In a statement, show the amount of the depreciation on each asset for each of the years
ended 31 December Year 1 and 31 December Year 2.
Solution
Depreciation Motor vehicles Fixtures and fittings
£ £
Year 1 3,600 600
Year 2 2,160 1,200
2 For asset sales during a financial year there are also different ways of dealing with
depreciation, eg:
(a) ignoring part periods and calculating a full period’s depreciation only on those
assets owned at the end of the period.Thus, assets sold during the period will have
no provision for depreciation made for that last period; whereas assets bought
during the period will have a full period’s depreciation provision;
(b) calculating the depreciation provision according to the proportion of time the asset
was owned (probably calculated to the nearest whole month);
(c) making no provision for depreciation on assets sold in the first half of the financial
year and half the annual provision for assets sold in the second half of the year.
3 Copy and hand out or show exercises T/15.4 and T/15.5 in the Appendix (page 255–6)
on the overhead projector. Ask the students to work through the exercises.
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Step 7
Aim: to be able to make book-keeping entries concerning the disposal of a depreciated

fixed asset
1 Identify the 3 elements involved in the sale of a fixed asset, which are
● the original cost of the asset

● the depreciation provided to date
● the sale proceeds
Explain that there is often a ‘profit’ or a ‘loss’ arising out of the sale: the original
calculations regarding the working life and sales value of the asset were only estimates.
2 Review the book-keeping entries regarding the disposal of an asset.The entries are:
● the original cost of the asset

(i) Dr Disposals Account
(ii) Cr Fixed Asset Account
● the depreciation provided to date
(i) Dr Provision for Depreciation Account

(ii) Cr Disposals Account
● the sale proceeds
(i) Dr Bank/Cash Account

● loss on sale
(i) Dr Profit & Loss Account

● profit on sale
(i) Dr Disposals Account

(ii) Cr Profit & Loss Account.
3 Illustrate the calculation and account entries for an asset sold at a profit by displaying
the example below on the overhead projector.The data are taken from the example in
Step 4 on page 111.The straight line method has been used to calculate depreciation.
Example
The machine is sold on 31 December Year 3 for £27,200. At that date, the Provision
for Depreciation Account has a credit balance of £56,250.
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The calculation for profit/loss appears as follows:
£
less Provision for
depreciation to 31 Dec Yr 3 56,250
23,750
Sale price 27,200
Profit on sale 3,450
The book-keeping entries, excluding bank account, are:
Machine
Year 1 £ Year 1 £
1 Jan Bank 80,000 31 Dec Balance c/d 80,000
Year 2 Year 2
1 Jan Balance b/d 80,000 31 Dec Balance c/d 80,000
Year 3 Year 3
1 Jan Balance b/d 80,000 31 Dec Disposal of machine 80,000
Provision for depreciation of machine

Year 3 £ Year 3 £
31 Dec Disposal of
machine 56,250 1 Jan Balance b/d 37,500
56,250 56,250
Disposal of machine
Year 3 £ Year 3 £
31 Dec Machine 80,000 31 Dec Prov for deprec’n –
machine 56,250
31 Dec Profit & loss
(profit on sale) 3,450 31 Dec Bank 27,200
83,450 83,450

£
Profit on sale of machine 3,450
4 Illustrate the calculation and account entries for an asset sold at a loss by displaying the
example overleaf on the overhead projector.
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Example
Using the same data and the same disposal date, this time the machine is sold for
£22,100.
The calculation for profit/loss is as follows:
£
less provision for depreciation to
31 December Year 3 56,250
23,750
Sale price 22,100
Loss on sale 1,650
Machine
Year 1 £ Year 1 £
1 Jan Bank 80,000 31 Dec Balance c/d 80,000
Year 2 Year 2
1 Jan Balance b/d 80,000 31 Dec Balance c/d 80,000
Year 3 Year 3
1 Jan Balance b/d 80,000 31 Dec Disposal of machine 80,000
Provision for depreciation of machine

Year 3 £ Year 3 £
31 Dec Disposal of machine 56,250 1 Jan Balance b/d 37,500
56,250 56,250
Disposal of Machine
Year 3 £ Year 3 £
31 Dec Machine 80,000 31 Dec Prov for deprec’n –
machine 56,250
31 Dec Bank 22,100
31 Dec Profit & loss
(loss on sale) 1,650
80,000 80,000

£
Loss on sale of machine 1,650
In the examples above, a full year’s depreciation has been charged in the year of disposal,
ie Year 3.
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5 Point out that the so-called profit or loss on disposal is only a depreciation adjustment.
In practice, it is usual for profit or loss to be added to depreciation, which in the first
instance of the disposal, would be:
£18,750 less £3,450 = £15,300 for the year
If the policy is to charge no depreciation in the year of disposal, then (again in the first
instance) the calculation would be:
£
Cost 80,000
less Accumulated depreciation 37,500
Net book value 42,500
Sale of the machine 27,200
Loss/depreciation 15,300
6 Explain that loss is really another word for depreciation.
7 Common errors made by candidates regarding depreciation

Draw the students’ attention to the errors they should avoid, such as:
(a) recording depreciation to the credit of both the Provision Account and the Asset
Account, breaking the rules of double entry;
(b) using the Provision Account as merely a calculating stage: ie entering the amount
to the credit of the Provision Account, and then transferring it to the Asset Account
(Dr provision, Cr asset);
(c) debiting depreciation to the Provision Account;
(d) failing to accumulate the depreciation from year to year;
(e) failing to follow the instruction regarding the due proportion of annual
depreciation where the asset is purchased during the year;
(f) wording account entries poorly.
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Lesson 16: Bad debts and provision for

doubtful debts
Topic summary
● The meaning of ‘bad debts’ and the effect of writing off a debt
● Recording the writing off of customer debts
● The function of the provision for doubtful debts and the creation of such a provision
● The increase or decrease of the provision for doubtful debts and making book-keeping
entries accordingly
● The effect on debtors of a doubtful debts provision (i) within a balance sheet or
(ii) as a balance sheet extract
● Making specific provision for the non-recovery of certain debts as well as a general
provision for doubtful debts
● Recording the recovery of debts previously written off

15.1 The process of debts becoming irrecoverable and being written off, in whole or
in part
15.2 The accounting entries for writing off individual debtor balances, in whole or
in part, using a Bad Debts Account
15.3 The end-of-period transfer of total debts written off from the Bad Debts
Account to the Profit & Loss Account
15.4 The reasons for the creating of, and subsequent adjusting of, a provision for
doubtful debts
15.5 Given certain data, the creating of a provision for doubtful debts and the
adjusting of it, as necessary, for subsequent accounting periods
15.6 The entries in the Profit & Loss Account and balance sheet relating to the
provision for doubtful debts
15.7 Making specific provision for certain bad debts as well as general provision for
doubtful debts
15.8 The accounting entries relating to the recovery of debts previously written off
15.8.1 if recovered within the same financial period in which the debt was
written off; and/or
15.8.2 if recovered after the year of writing off
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Bad debts and provision for doubtful debts
Writing off amounts due from debtors (‘bad debts’), in whole or in part, is not usually a
great problem for LCCIEB book-keeping students. They can have more difficulty with
creating and/or adjusting a provision for doubtful debts, which arises largely from the
failure to grasp the concept of the provision. Careful explanation and illustration is therefore
required.
The recovery of debts that have been written off is often neglected in book-keeping studies
and yet it is a relatively straightforward exercise.
Step 1
Aim: to appreciate the meaning of ‘bad debts’ and the effect of writing off a debt
1 Explain that a bad debt is an amount that a firm is unable, for a number of reasons, to
collect from a customer; it is a debt beyond any hope of recovery. The amount is
written off in the firm’s accounts as being ‘irrecoverable’. Sometimes, however, a debtor
will pay part of the amount owing and the balance of the debt will be written off.
2 Tell the students that the aim in writing off bad debts is to ensure that the figure shown
in the balance sheet for debtors represents the total of collectable debts, ie that the
figure for debtors is not overstated.
3 Point out that writing debts off involves charging the amount written off in the Profit
& Loss Account.The effect of charging this amount is to reduce the net profit for the
year in question.As the net profit is reduced, so the addition to capital is lessened, which
is matched by the reduction in the total of the current assets.
4 Outline the fact that the frequency with which debts are written off may vary. For
example, they may be written off:
● at intervals throughout the year

● yearly (e.g. as part of a year-end review)
● as the need arises.
Step 2
Aim: to be able to record the writing off of customer debts
1 Explain that the role of the Bad Debts Account is to be a collection point for amounts
written off, which are later transferred in total to the Profit & Loss Account.
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2 Illustrate the role of the Bad Debts Account by displaying the example below on the
overhead projector or board.
Example
T Jackson and J Grand are debtors whose balances are outstanding. In the annual review
of debtors on 31 December Year 7, the following accounts are shown in the Sales
Ledger:
T Jackson
Year 7 £ Year 7 £
1 Jan Balance 530 13 Apr Bank 90
J Grand
Year 7 £
11 Mar Sales 415
T Jackson has managed to pay part of the amount due, but it is now clear that he will
be unable to pay the balance due.The decision is made to write off this balance and the
whole amount due from J Grand.
T Jackson
Year 7 £ Year 7 £
1 Jan Balance 530 13 Apr Bank 90
31 Dec Bad debts 440
530 530
J Grand
Year 7 £ Year 7 £
11 Mar Sales 415 31 Dec Bad debts 415
Bad Debts
Year 7 £ Year 7 £
31 Dec T Jackson 440 31 Dec Profit & loss 855
31 Dec J Grand 415
855 855

£
Bad debts 855
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3 Set out the rule below for bad debt entries on the overhead projector or board:
(a) Dr Bad Debts Account

Cr Individual debtor accounts (or ‘debtors’ if only a total figure is stated in the
question)
(b) Dr Profit & Loss Account
Cr Bad Debts Account
4 Copy and hand out or show the exercise below on the overhead projector or board.Ask
the students to work through the exercise.
Exercise
During the year ended 31 December Year 4,W Glossop had written off debts due from
customers that amounted to £1,306. On 31 December Year 4, he received a cheque for
£73 from J Hinge in part payment of the amount of £295 that was due. W Glossop
believed that it was now unlikely that any further payment would be received from this
debtor and that the balance of the debt should be written off.
Required
Show the following accounts for the year ended 31 December Year 4:
(i) J Hinge
(ii) Bad Debts
(iii) Profit & Loss – as an extract.
Solution
J Hinge
Year 4 £ Year 4 £
1 Jan Balance 295 31 Dec Bank 73
31 Dec Bad debts 222
295 295
Bad debts
Year 4 £ Year 4 £
Jan–Dec Sundries 1,306 31 Dec Profit & loss 1,528
31 Dec J Hinge 222
1,528 1,528
Profit & Loss Account (extract)

£
Bad debts 1,528
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Step 3
Aim: to be able to understand the function of the provision for doubtful debts and to be
able to create such a provision
1 Explain the practice of firms allowing for a certain number of debts becoming ‘bad’, i.e.
irrecoverable. It is never certain which debtors will be unable to pay, but experience
makes it possible to calculate the total amount of debts that will need to be written off
approximately, eg 2% of total debtor balances. A provision for doubtful debts is then
created and maintained. Draw attention to the term ‘doubtful’.The calculation is really
a broad estimate and is not the result of a close analysis of the position of individual
debtors.
2 Distinguish the provision for doubtful debts from writing off bad debts.The procedure
for creating a provision for doubtful debts is as follows:
(a) a gross debtors’ figure is calculated by totalling the balances on individual debtor
accounts;
(b) individual debtor balances may have to be written off;
(c) the provision for doubtful debts is calculated on the total of remaining debtor
balances.
3 Illustrate this procedure with the following on the overhead projector or board.
£
Gross debtors (at 31 Dec Yr 5) 38,360
less Bad debts written off 960
37,400
less Provision for doubtful debts at 3% 1,122
36,278
The account entries appear as follows:

£
Provision for doubtful debts 1,122
Provision for Doubtful Debts

Year 5 £
31 Dec Profit & loss 1,122
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4 Explain that, like any provision, a provision for doubtful debts remains in the books until
it is changed.The provision is likely, in practice, to be reviewed annually because:
● if the provision is kept at a certain percentage of debtors, the amount of the provision
has to be adjusted as the total of debtors changes;
● it may be considered desirable from time to time to change the percentage rate.
5 Copy and hand out or display the following exercise on the overhead projector.Ask the
students to work through the exercise.
Exercise
At 31 December Year 3, Ellen Tamworth has debtors totalling £25,130. During Year 3,
she has written off £540 of debts. She decides to write off a further £330 of debts. In
addition, she creates a provision for doubtful debts of 4% of the remaining debtors.
Required
Show the following accounts for the year ended 31 December Year 3:
(i) Bad Debts

(ii) Provision for Doubtful Debts
(iii) Profit & Loss – as an extract.
Solution
Working:
£25,130 - £330 = £24,800

4% of £24,800 = £992
Bad debts
Year 3 £ Year 3 £
Jan–Dec Debtors 540 31 Dec Profit & loss 870
31 Dec Debtors 330
870 870

Year 3 £
31 Dec Profit & loss 992

£
Bad debts 870
Provision for doubtful debts 992
Note
Point out that the £540 was written off ‘during Year 3’ and is therefore removed before
31 December Year 3.Thus, only £330 has to be deducted from debtors.
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Step 4
Aim: to be able to increase or decrease the provision for doubtful debts and make
book-keeping entries accordingly
1 Make it clear that the provision, once created, carries on as it is in the book until it is
either increased or reduced.
2 Increase in the provision

Continuing with the last example, it is supposed that, at 31 December Year 4, the
amount of debtors after writing off bad debts is £29,400. The 4% rate is unchanged.
The calculation is:
£
4% of £29,400 1,176
less Amount of existing provision 992
Increase in provision 184
The book-keeping entries are:

£
Increase in provision
for doubtful debts 184

Year 3 £ Year 3 £
31 Dec Balance c/d 992 31 Dec Profit & loss 992
Year 4 Year 4
31 Dec Balance c/d 1,176 1 Jan Balance b/d 992
1,176 1,176
Year 5
Stress that only the increase in the provision is debited to the Profit & Loss Account.
3 Decrease in the provision

It is supposed that, at 31 December Year 5, the amount of debtors after writing off bad
debts is £26,800.The 4% rate is unchanged.
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The calculation is:
£
4% of £26,800 1,072
less Amount of existing provision 1,176
Decrease in the provision 104
The book-keeping entries are:

£
Reduction in provision for
doubtful debts 104

Year 3 £ Year 3 £
Year 4 Year 4
31 Dec Balance c/d 1,176 1 Jan Balance b/d 992
1,176 1,176
Year 5 Year 5
31 Dec Profit & loss 104 1 Jan Balance b/d 1,176
31 Dec Balance c/d 1,072
1,176 1,176
Year 6
Step 5
Aim: to be able to show the effect on debtors of a doubtful debts provision (i) within a
balance sheet or (ii) as a balance sheet extract
1 Explain that the provision, although having a credit balance, is always deducted from
debtors in the balance sheet.
2 Relate this deduction to the deduction of a provision for depreciation from the
relevant fixed asset.The principle of obtaining a figure net of the provision is the same.
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3 Illustrate a doubtful debts provision within a balance sheet on the overhead projector
with the following:
Current Assets £ £
Debtors 36,800
less Provision for doubtful debts 1,840 34,960
4 Inform the students that if a balance sheet extract is required, then a suitable heading
should be included, eg:
F Lucas
Balance sheet (extract)
at 30 September Year 6
Debtors 41,300
5 Copy and hand out or display the following exercise on the overhead projector or
board. Ask the students to work through the exercise.
With reference to Step 4, show each of the following as balance sheet extracts:
(a) The debtors at 31 December Year 4, following the example on page 125.
(b) The debtors at 31 December Year 5, following the examples on pages 126 and 127.
Solutions
(a) Balance sheet (extract) at 31 December Year 4
Debtors 29,400
(b) Balance sheet (extract) at 31 December Year 5

Debtors 26,800
6 Copy and hand out or show exercises T/16.1 and T16.2 in the Appendix
(pages 257–8). Ask the students to work through them.
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Step 6
Aim: to be able to make specific provision for the non-recovery of certain debts as well
as a general provision for doubtful debts
1 Explain that some firms create 2 categories of debt provision.

(a) After writing off known bad debts, a specific provision is made on a few debtors
when there is a high chance that they will become bad debts. They are not yet
known as bad debts but information suggests they might become so. The full
amount of each high-risk debt might be included in the provision.
(b) A general provision is made on the remaining balance of debtors. The provisions
dealt with in Steps 3 and 4 are known as general provisions.
The calculation involving both a specific provision and a general provision might be as
follows:
£
Gross amount of debtors 32,970
32,100
less Specific provision
(ie the total of certain high-risk debts) 1,100
31,000
less general provision at 3% 930
30,070
The balance sheet is shown as follows:
Current Assets £
Debtors 32,100
less Provision for bad and doubtful debts 2,030
30,070
Step 7
Aim: to be able to record the recovery of debts previously written off
1 Debts that have been written off are sometimes recovered, ie the debtor may, after all,
be able to pay part of the original debt. Point out that it is necessary to distinguish
between:
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(a) debts recovered within the same year as the debt was written off;
(b) recovery after the year the debts were written off.
2 Explain that if the debts are recovered within the same financial year as the debt was
written off, the entries would be:
Dr debtor which reinstates the debt (or part of it) on the debtor’s account
Cr bad debts which effectively cancels the previous write off
Dr cash/bank
Cr debtor which clears the account
Taking the year as a whole, the debtor is a late payer rather than a bad debtor.The credit
on the Bad Debts Account reduces the balance of bad debts to the sum of debts written
off and still not received by the year end.
3 If recovered after the year of write off, demonstrate that the entries would be:
Dr debtor
Cr bad debts recovered
Dr cash/bank
Cr debtor
At the end of the year of recovery, the balance on the bad debts recovered account
would be transferred to the Profit & Loss Account:
Dr bad debts recovered
Cr Profit & Loss Account
4 Advise the students that the LCCIEB believes that, on recovery of a debt (or part of it)
that was previously written off, the amount should be reinstated in the account of the
debtor.The debtor has made the effort to clear the debt, even if later than anticipated,
and this should be recognized in the account. In any case, decisions about granting
credit in the future should not be decided by account entries alone.
5 Copy and hand out or show exercises T/16.4 and T/16.5 in the Appendix
(pages 260–1) on the overhead projector. Ask the students to work through them.
6 Common errors made by candidates relating to bad debts and provision for
doubtful debts
Draw the students attention to common errors, which include:
(a) not appreciating that the purpose of the Bad Debts Account is to store the
amounts of debt written off during a trading period;
(b) wrongly transferring each amount written off to the Profit & Loss Account; it is
the period total that should be transferred;
(c) failure to grasp the meaning of the provision: an especially common mistake is to
enter the whole of the latest provision amount in the Profit & Loss Account,
regardless of any existing provision;
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(d) the provision account showing a debit balance;

(e) incorrect calculation of the provision, which should be a percentage of the debtor
balance after any further bad debts have been written off;
(f ) taking bad debts that have been written off to the provision for doubtful debts
account (see the Extended Syllabus, paragraph 15.3) ‘Bad Debts Account should
not be written off against the Provision Account’;
(g) poor wording of entries in Bad Debts Account and Provision for Doubtful Debts
Account.
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Lesson 17: Bank reconciliation statements
Topic summary
● The need for reconciling the Cash Book with the bank statement
● Updating the Cash Book from the bank statement
● Preparing a bank reconciliation statement
● The meaning and effects of a cheque being dishonoured
● Reconciling the Cash Book and bank statement where a bank overdraft is involved
● Drafting a bank statement from the data provided

8.13 The periodic updating of the Cash Book from the bank statement
8.14 The possible reasons for the dishonouring of a cheque and its signficance
8.15 The book-keeping entries arising on the dishonouring of a cheque
9.1 The need for periodic reconciliation between the balance in the bank statement
and the balance in the Cash Book (Bank Current Account)
9.2 The updating of the Cash Book (bank column) with as yet non-recorded items
which are revealed in the bank statement
9.3 Understanding of and use of the terms:
9.3.1 unpresented cheques (or cheques drawn, not yet presented)
9.3.2 cheques paid in (lodged ), not yet credited
9.4 The preparation of a statement reconciling the balance in the Cash Book (Bank
Current Account) with that shown in the bank statement, in respect of items
still causing a difference
9.5 From data provided, the drafting of a bank statement
Knowledge of bank facilities and practice with the Cash Book (see Lessons 9 and 10) are
an essential basis for answering questions relating to bank reconciliation. Candidates are
often unaware of the purpose of the bank statement and of what should be done by the
customer on receiving it from the bank. Only when the Cash Book has been brought up
to date should bank reconciliation begin formally.
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Bank reconciliation statements
Step 1
Aim: to understand the need for reconciling the Cash Book with the bank statement
1 Outline the records used to keep the bank and account holder up to date with a bank
account:
● the Cash Book: the firm’s record of transactions with the bank;
● the bank statement: issued by the bank at regular intervals, eg monthly or weekly, it
is the bank’s record of the firm’s account.
2 Explain that differences will arise between the two records, due to:
● timing differences, eg a cheque being paid into the account that the bank has not yet
recorded;
● the Cash Book not yet showing items that appear on the bank statement, ie the
account holder can update the Cash Book by including items from the bank statement.
3 Explain and discuss with students the main timing differences. Link the discussion with
Lesson 9, focusing in particular on how cheque clearance can affect timing. For example:
● a drawn cheque may not be recorded on a bank statement until 2-3 days after it has
been drawn; the time delay is increased if the payee delays paying the cheque into his
or her bank account;
● amounts paid into the bank may not yet be included in a current bank statement
because the amounts were paid into a different branch of the account holder’s bank;
alternatively, they may have been paid in late in the banking day and crediting could
be further delayed if the next day(s) are not working days.
Step 2
Aim: to be able to update the Cash Book from the bank statement
1 Tell the students that when the bank statement has been received, they should:
(a) compare the Cash Book with the bank statement, tick () off the items that
correspond (which might include most items in both sets of record), and look
carefully for any mistake made by the bank or the customer;
(b) look for any items in the bank statement that should be entered in the Cash Book
before it is (finally) balanced; the items relate to transactions that have already taken
place and that should no longer cause any difference between the two records; such
items include:
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● various means of bank transfer, eg credit transfer, standing order, direct debit – for
either the payment or receipt of money (see Lesson 9,‘Other payment methods’,
page 53);
● bank charges for operating the account or interest charged for a bank overdraft;
● interest paid by the bank to the account holder, which applies to some bank
accounts if the account balance is over a certain minimum figure.
2 Illustrate how to update the Cash Book from the bank statement by showing the
example below on the overhead projector or board.
Example
It is supposed that Alec Simmons’ Cash Book for August Year 4 appears as follows:
CASH BOOK (bank columns)

Year 4 £ Year 4 £
1 Aug Balance b/d 790 5 Aug R Clapton (316) 280
3 Aug J Slade 125 14 Aug W Rigden (317) 406
9 Aug T Medway 363 26 Aug B Tallon (318) 190
19 Aug N Thorne 95 29 Aug P Gaul (319) 315
30 Aug L Nathan 156 31 Aug Balance c/d 338
1,529 1,529
31 Aug Balance b/d 338
The above represents only a preliminary (first) balancing. An alternative practice is not
to record a balance at this stage, but to keep a separate note of the preliminary balance.
Alec Simmons receives the following bank statement:
Year 4 Paid out Paid in Balance

£ £ £
1 Aug Balance b/f 790 Cr
5 Aug J Slade 125 915 Cr
7 Aug Credit transfer (C/T): K Jordan 96 1,011 Cr
8 Aug R Clapton (214316) 280 731 Cr
10 Aug Direct debit (D/D):
Midshire Gas Co 62 669 Cr
11 Aug T Medway 363 1,032 Cr
17 Aug W Rigden (214317) 406 626 Cr
20 Aug N Thorne 95 721 Cr
22 Aug Credit transfer (C/T): Wilders Ltd 310 1,031 Cr
27 Aug Standing order (S/O):
DVS Publications 174 857 Cr
31 Aug Balance c/f 857 Cr
Note
Show that the reconciliation of the 2 balances should be carried out by:
● ticking () the items that appear in both the Cash Book and bank statement and
watching out for errors;
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● entering the unticked items on the bank statement into the Cash Book and checking
for errors;
● balancing the Cash Book finally to provide the updated balance;
● using the unticked items in the Cash Book to prepare the bank reconciliation statement.
The updated Cash Book appears as follows:
CASH BOOK (bank columns)

Year 4 £ Year 4 £
1 Aug Balance b/d 790 5 Aug R Clapton (316) 280
3 Aug J Slade 125 14 Aug W Rigden (317) 406
9 Aug T Medway 363 26 Aug B Tallon (318) 190
19 Aug N Thorne 95 29 Aug P Gaul (319) 315
30 Aug L Nathan 156 31 Aug Balance c/d 338
1,529 1,529
31 Aug Balance b/d 338 31 Aug Midshire Gas Co –
31 Aug K Jordan – direct debit (D/D) 62
credit transfer (C/T) 96 31 Aug DVS Publications –
31 Aug Wilders Ltd – standing order (S/O) 174
credit transfer (C/T) 310 31 Aug Balance c/d 508
744 744
1 Sep Balance b/d 508
Note
Point out that the items obtained from the bank statement are entered at the last date
of the period, ie 31 August Year 4.
Step 3
Aim: to be able to prepare a bank reconciliation statement
1 Emphasize that only the final stage of reconciliation is recorded in the bank reconciliation
statement, ie after the Cash Book has been updated.
2 Display the reconciliation for the data regarding Alec Simmons shown overleaf on the
overhead projector or board.
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Alec Simmons
Bank reconciliation statement
at 31 August Year 4
£ £
Balance as per Cash Book 508
add Unpresented cheques:
B Tallon (318) 190
P Gaul (319) 315 505
1,013
less Cheque paid in, not yet credited:
L Nathan 156
Balance as per bank statement 857
3 An alternative way of showing the reconciliation would be to start with the bank
statement balance. If so, the items appear in reverse order to those shown above. The
bank reconciliation statement for Alec Simmons would then be:
Alec Simmons
at 31 August Year 4
£ £
Balance as per bank statement 857
add Cheque paid in, not yet credited:
L Nathan 156
1,013
less Unpresented cheques:
B Tallon (318) 190
P Gaul (319) 315 505
Balance as per Cash Book 508
4 Ensure that the students are able to prepare a bank reconciliation statement in both
ways: starting either with Cash Book balance or the bank statement balance.
5 Common errors made by candidates concerning bank reconciliation

statements
Draw the students’ attention to the common errors, which are:
● failing to update the Cash Book before preparing the bank reconciliation statement;
● attempting the wrong ‘reconciliation’, eg attempting to reconcile the closing bank
statement balance with the opening Cash Book balance, which is sometimes done
even though the students have updated the Cash Book.
6 Copy and hand out or show exercises T/17.1, T/17.2, and T/17.3 in the Appendix
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Step 4
Aim: to understand the meaning and effects of a cheque being dishonoured
1 Explain that the meaning and significance of a cheque being dishonoured is that the
drawer’s bank refuses to accept (ie to honour) the cheque.
2 Tell the students that a cheque may be dishonoured because:

(a) the cheque has been prepared incorrectly, which may not have been noticed before;
(b) the cheque may have become ‘stale’ (ie too old to be accepted by the paying bank);
a cheque is usually considered stale 6 months after the date on the cheque, although
practice varies;
(c) the drawer has insufficient funds in his or her bank account.
3 Illustrate the effects of a cheque being dishonoured by showing the example below on
the overhead projector or board.
Example
It is supposed that on 9 July Year 8 a cheque for £3,000 is received from J Fargo in
settlement of a debt.
Bank
Year 8 £
9 Jul J Fargo 3,000
J Fargo
Year 8 £ Year 8 £
1 Jul Balance b/f 3,000 9 Jul Bank 3,000
On 14 July Year 8, the bank returns the cheque marked ‘refer to drawer’. The bank
account needs to be adjusted and the debt reinstated on Fargo’s account.
Bank
Year 8 £ Year 8 £
9 Jul J Fargo 3,000 14 Jul J Fargo – cheque
dishonoured 3,000
J Fargo
Year 8 £ Year 8 £
1 Jul Balance b/f 3,000 9 Jul Bank 3,000
14 Jul Bank – cheque
dishonoured 3,000
J Fargo is once again a debtor.
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Step 5
Aim: to be able to reconcile the Cash Book and bank statement where a bank overdraft
is involved
Candidates tend to find reconciling the Cash Book and bank statement more difficult if the
procedure involves a bank overdraft. The measure of the problem depends upon the stage
at which the overdraft arises. If, for instance, the Cash Book opens with an overdraft, this
overdraft might be turned into a positive balance once the Cash Book is updated. The
positive balance removes the difficulty of dealing with the overdraft. An overdraft is
problematic, however, when it exists at the stage of formal reconciliation, ie after the Cash
Book has been updated.
Example
The example that follows can be used to show the students how to produce a bank
reconciliation statement when an overdraft is involved.The following Cash Book has been
updated from the bank statement at the bottom of the page.
CASH BOOK
Year 6 £ Year 6 £
3 Apr J Drake 57 1 Apr Balance b/f 715
18 Apr L Trim 203 9 Apr R Upton (572) 96
29 Apr A Simes 59 17 Apr T Gunge (573) 115
30 Apr Balance c/d 694 25 Apr P Skate (574) 87
1,013 1,013
30 Apr T Lofter – 30 Apr Balance b/d 694
credit transfer (C/T) 68 30 Apr Uplands Services –
30 Apr Balance c/d 796 direct debit (D/D) 142
30 Apr Bank interest 28
864 864
1 May Balance b/d 796
Bank statement
Year 6 Paid out Paid in Balance
£ £ £
1 Apr Balance b/f 715 O/D
4 Apr J Drake 57 658 O/D
11 Apr Credit transfer (C/T): T Lofter 68 590 O/D
13 Apr R Upton: 217572 96 686 O/D
18 Apr L Trim 203 483 O/D
23 Apr Direct debit (D/D): Uplands Services 142 625 O/D
30 Apr Bank interest 28 653 O/D
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Note
‘O/D’ on the bank statement means that the account is overdrawn.
In this case, not only is the opening Cash Book balance overdrawn but an overdraft also
exists at the stage of formal reconciliation. The bank reconciliation statement might be
shown as follows:

at 30 April Year 6
£ £
Balance per Cash Book – overdraft (796)
add Unpresented cheques:
T Gunge (573) 115
P Skate (574) 87 202
(594)
less Cheque paid in, not credited: A Simes 59
Balance per bank statement – overdraft (653)
Note
The addition is serving to reduce the overdraft and any deduction serving to increase it.
Alternatively, the bank reconciliation statement might be shown as follows:

at 30 April Year 6
£ £
Balance per Cash Book – overdraft 796
add Cheque paid in, not yet credited: A Simes 59
less Unpresented cheques: 855
T Gunge (573) 115
P Skate (574) 87 202
Balance per bank statement – overdraft 653
Step 6
Aim: to be able to draft a bank statement from the data provided
1 Display the following example of a bank statement on the overhead projector.
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Westshires Bank
12 High Street
Crampton
Shropshire CR3 5TU
Mr Roger Dolby
Account No. 75643
Date Year 4 Particulars Paid out Paid in Balance

£ £ £
1 May Balance b/f 716.00 O/D
3 May R Tenby: 200136 92.00 808.00 O/D
5 May C/T – R Beale 405.00 403.00 O/D
8 May L Scales 392.00 11.00 O/D
12 May D/D – Selsby Services 125.50 136.50 O/D
14 May L Germaine: 200137 33.00 169.50 O/D
17 May C/T – F Renoir 253.50 84.00 Cr
20 May L Pinter 141.00 225.00 Cr
22 May S/O – Loxby
Publications 174.00 51.00 Cr
24 May A Croft: 200138 207.00 156.00 O/D
27 May L Scales 367.00 211.00 Cr
31 May Interest 32.00 179.00 Cr
Key:
C/T credit transfer
D/D direct debit
O/D overdrawn
S/O standing order
2 Point out that bank statements are prepared in running balance format, so that the
‘balance’ column is automatically updated as each transaction is entered.
3 Explain that bank statements have become more ‘user friendly’ in recent years.Thus the
headings of Dr and Cr above the amount columns – confusing for many bank
customers – have been replaced by some banks by ‘paid out’ and ‘paid in’.
4 Make it clear that, in the ‘particulars’ column, it is now common for cheques drawn on
the bank to be entered on the bank statement by cheque number only. In examination
questions, there will be sufficient information provided to link the items. In bank
reconciliation statements, it is desirable to include names and cheque numbers (if
applicable) wherever possible.
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Lesson 18: Petty Cash Book – imprest system
Topic summary
● The purpose and uses of petty cash
● The principle and working of the imprest system
● Recording the opening imprest and individual payments in the Petty Cash Book
● Totalling and balancing the Petty Cash Book and recording the reimbursement of
the float at the period end
● The purpose of the petty-cash analysis columns and making double-entry postings
to the ledger
● Responding to questions involving (i) variations within the Petty Cash Book and
(ii) the part played by the Petty Cash Book in the double-entry system
● Preparing a Cash Book with analysis of expenditure

8.16 The use of simple columnar analysis (of expenditure) within the Cash Book
10.1 The possible need for one (or more) Petty Cash Book(s) as subsidiary to the
main Cash Book
10.2 Petty cash as a system for effecting minor disbursements
10.3 The use of sequentially numbered vouchers and their authorization for payment
10.4 The practice of setting a limit to the amount allowed in reimbursement per
claim/voucher
10.5 The basis of the imprest system; periodic reimbursement of the (controlled) float
10.6 The recording of incidental receipts of money into petty cash, other than the
periodic reimbursement of the float
10.7 The balancing of the Petty Cash Book and the book-keeping entries relating to
the reimbursement of the float, as well as in respect of any adjustment of the
float
10.8 The analysis of petty cash outlay, the totalling of the analysis columns, and the
posting of these totals as required to appropriate ledger accounts
10.9 The dual role of the Petty Cash Book as a book of prime entry and an integral
part of the double-entry record
The students should understand the function of the Petty Cash Book, its relationship to the
Cash Book itself, its part in the double-entry system, and the practical way in which it is
operated (including the imprest system).The means of analysing expenditure that is used in
a Petty Cash Book can be applied also to the main Cash Book, which is covered in Step 7.
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Petty Cash Book – imprest system
Step 1
Aim: to appreciate the purpose and uses of petty cash
1 The students will often have had experience of using petty cash, even if only as a user
or beneficiary. Draw upon their experience when discussing the purpose and uses of
petty cash. Emphasize that in numerous cases many of the disbursements will be to
members of staff, ie reimbursing them for payments already made on behalf of their
employer, such as travelling expenses. A limit, such as a maximum of £50, may be
placed on the amount of any individual payment from petty cash.
2 Point out that the Petty Cash Book is a means of lessening the load on the main Cash
Book.The Petty Cash Book is concerned with minor payments, while the Cash Book
is for recording payments above a certain figure and for entering the receipt of money.
3 Explain that, by having analysis columns (where petty cash outlay is classified) beside
the total payments column, expenditure can be recorded under different headings, such
as postage or ‘travelling’. This analysis can provide useful information and can be used
to save time and effort when making account entries. The role of analysis columns is
explained in greater detail in Step 5 (page 146).
Step 2
Aim: to understand the principle and working of the imprest system
1 Explain the basis of the imprest system. The petty cashier starts each week or month
with a certain amount of money, called the imprest amount or ‘float’. As payments are
made during the week or month, the amount of money decreases. At the end of the
period (or the beginning of the next one), the fund of cash is made up by the main
cashier to the imprest amount.
2 Illustrate the principle and working of the imprest system by showing the example
below on the overhead projector or board.
Example
£
Amount of cash at first made available to the petty cashier 100
Amount spent during the month 79
Amount left in cash ‘float’ at month-end 21
Amount reimbursed from main Cash Book 79
Float topped up ready for next month 100
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3 Point out that if at any time the size of the float proves to be insufficient for the demands
placed upon it, the imprest amount may be increased, either temporarily or permanently.
4 Acquaint the students with the use of vouchers to control payments from petty cash.
An employee must present a voucher with a request for petty cash. Each voucher must
be signed by someone in authority to formally authorize the payment. The vouchers
should be numbered and filed in numerical order.Vouchers help to make an imprest
system of petty cash self-regulating:
the total of voucher amounts for the period + the balance of cash = the float
Step 3
Aim: to be able to record the opening imprest and individual payments in the petty cash
book
1 Show that for first setting up the float (with reference to the figures in Step 2) the
book-keeping entries would be:
Dr Petty cash £100
Cr Cash/bank £100
Entries for reimbursing (or topping up) the float in the example in Step 2 would be:
Dr Petty cash £79
Cr Cash/bank £79
2 Illustrate how to record individual petty-cash payments by displaying the information

below and the analysed Petty Cash Book that follows it.
Example
Year 4
1 Nov The cashier gives £200 in cash to the petty cashier as the starting
imprest of petty cash
Voucher no £
4 Nov Postage 1 3.70
6 Nov Cleaning expenses 2 14.60
9 Nov Stationery 3 5.30
11 Nov T Fallon – travel expenses 4 11.80
14 Nov Cleaning expenses 5 16.20
18 Nov Payment of the amount owing to
J Wilds in the Purchases Ledger 6 31.10
21 Nov Postage 7 4.50
24 Nov Stationery 8 9.40
27 Nov Refund of overpayment by debtor,
W Costain 9 40.30
29 Nov R Ward – travel expenses 10 13.90
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The Petty Cash Book appears as follows:
PETTY CASH BOOK

Voucher Travel
Receipts Date Details no Total Postage Stationery Cleaning expenses Ledger
£ Year 4 £ £ £ £ £ £
200.00 1 Nov Cash
4 Nov Postage 1 3.70 3.70
6 Nov Cleaning
expenses 2 14.60 14.60
9 Nov Stationery 3 5.30 5.30
11 Nov T Fallon –
travel 4 11.80 11.80
14 Nov Cleaning
expenses 5 16.20 16.20
18 Nov J Wilds
(creditor) 6 31.10 31.10
21 Nov Postage 7 4.50 4.50
27 Nov W Costain
(debtor) 9 40.30 40.30
29 Nov R Ward –
travel 10 13.90 13.90
3 Inform the students that columns headed from ‘postage’ to ‘ledger’ are the analysis
columns.
4 Emphasize the following points about the Petty Cash Book:

(a) the ‘date’ and ‘details’ columns are shared by both Dr and Cr sides;
(b) the ‘receipts’ column represents the debit side and the ‘total’ column the credit side;
(c) the voucher numbers are entered in sequence, in this instance starting with ‘1’; from
the beginning of December Year 4, the voucher numbers will start with ‘11’;
(d) each item is entered in the ‘total’ column and in the appropriate analysis column;
(e) the column headed ‘ledger’ is used for other ledger postings not covered by the
other analysis columns.
Step 4
Aim: to be able to total and balance the Petty Cash Book and record reimbursement of
the float at the period end
1 Show that the columns are totalled at the end of the period. The total of the ‘total’
column should agree with the total of all the analysis columns.
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In line with common practice, reimbursement of money paid out takes place on the
first day of the next period. This time, the cashier hands a cheque to the petty cashier
for the amount of the reimbursement.
2 Display the Petty Cash Book as it would now look on the overhead projector or board.
PETTY CASH BOOK

Voucher Travel
Receipts Date Details no Total Postage Stationery Cleaning expenses Ledger
£ Year 4 £ £ £ £ £ £
200.00 1 Nov Cash
4 Nov Postage 1 3.70 3.70
6 Nov Cleaning
expenses 2 14.60 14.60
11 Nov T Fallon –
travel 4 11.80 11.80
14 Nov Cleaning
expenses 5 16.20 16.20
18 Nov J Wilds
(creditor) 6 31.10 31.10
21 Nov Postage 7 4.50 4.50
27 Nov W Costain
(debtor) 9 40.30 40.30
29 Nov R Ward –
travel 10 13.90 13.90
150.80 8.20 14.70 30.80 25.70 71.40
30 Nov Balance c/d 49.20

200.00 200.00
49.20 1 Dec Balance b/d

150.80 1 Dec Bank
3 Show the students that, if reimbursements were made on the last day of the period, the
previous balancing would be laid out as follows:
Receipts Date Total

£ £
150.80
150.80 30 Nov Bank
30 Nov Balance c/d 200.00
350.80 350.80
200.00 1 Dec Balance b/d
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Note
The total of all the analysis columns should equal the total of the ‘total’ column.
4 Display the Cash Book entries relating to the period-end reimbursements of petty cash
shown above.
CASH BOOK
Cash Bank
Year 4 £ £
1 Nov Petty cash 200.00
1 Dec Petty cash 150.80
Step 5
Aim: to appreciate the purpose of the petty-cash analysis columns and be able to make
the double-entry postings to the ledger
1 Explain the existence of analysis columns in the Petty Cash Book means that the
expenditure is grouped (classified) under different expenditure headings. If the
classifications were not made, then each item would have to be posted individually to
an expense account to ensure double entry. The credit entry in petty cash, remember,
merely records a fall in the cash float.
2 Point out that the analysis columns serve as collection points, which are similar, in
principle, to the discount columns in the Cash Book. At the end of each period, the
total of each analysis column is posted to an appropriate expense account in the General
Ledger.An exception to this procedure is the total of the ‘ledger’ column: it is not posted
anywhere. Instead, the individual entries are posted directly to the relevant personal
accounts as soon as possible. The existence of that total, however, is useful for
crosschecking the column totals.
3 Demonstrate that the analysis columns are posted to the ledger accounts as follows:
GENERAL LEDGER
Postage
Year 4 £
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Stationery
Year 4 £
Cleaning
Year 4 £
Travel expenses
Year 4 £
PURCHASES LEDGER
J Wilds
Year 4 £ Year 4 £
18 Nov Petty cash 31.10 1 Nov Balance b/f 31.10
SALES LEDGER
W Costain
Year 4 £ Year 4 £
27 Nov Petty cash 40.30 1 Nov Balance b/f 40.30
Step 6
Aim: to be able to respond to questions involving (i) variations within the Petty Cash
Book; and (ii) the part played by the Petty Cash Book in the double-entry system
1 Sometimes, employees of the firm or members of the public pay small sums of money
to use the services of the firm, ie there is income from sources other than sales. An
example of this type of transaction might be paying for the private use of the telephone.
This money might be paid into petty cash, temporarily increasing the float. One way of
recording this transaction is to enter it in the receipts column (debit) with suitable
explanation in the details column.When totalling and balancing at the end of the period,
an allowance must be made for this amount.The appropriate expense account must be
credited with the amount (see exercise T/18.3* in the Appendix, page 269).
2 An increase in the float would usually take place at the time of reimbursement, ie at the
beginning or end of a period.The amount received from cash or bank would then be
the amount of the reimbursement, plus the increase in the float. Increase of the float
also arises in exercise T/18.3*. Copy and hand out or show exercise T/18.3* on the
overhead projector.Work through the exercise with the students.
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3 An examination question might require the preparation of the Petty Cash Book for 2
periods, and totalling and balancing at the end of each period. Preparation for 2 periods
is required in exercise T/18.4 in the Appendix (page 271), a question from a past paper.
The period covered in the situation given is 2 weeks. It should be noted that the exercise
states that the Petty Cash Book is to be balanced and the analysis columns totalled at
the end of each week. Some candidates balanced the account at the end of each week
but then wrongly provided one total only for each analysis column.
Part (b) of T/18.4 is a test of the students’ insight into a practical situation. It provides
scope for some discussion with the students, which should take place before any
‘solution’ is handed to them.
4 Copy and hand out or show exercise T/18.4 on the overhead projector. Ask the students
to work through the exercise.
5 Common errors made by candidates concerning the Petty Cash Book

Errors that are commonly made include:
● faulty balancing at period-end and incorrect reimbursement of the float;

● poor balancing when there is more than one period to record, eg 2 separate weeks,
and, especially, poor recording of separate (weekly) totals for the analysis columns;
● faulty recording of double entry in the Cash Book in respect of reimbursement;
● failing to keep to instructions regarding the headings of analysis columns;
● faulty posting of period totals to General Ledger accounts.
Step 7
Aim: to be able to prepare a Cash Book with analysis of expenditure
1 Advise the students that an alternative to using a Petty Cash Book and float is to record
all disbursements, including minor ones, in the Cash Book itself.The practice of having
columns for analysing expenditure can be applied to the Cash Book just as it can to the
Petty Cash Book.The same principle of analysing items can be applied also to income,
but the LCCIEB First Level syllabus is restricted to the analysis of expenditure.
2 Explain that there might be, eg, 5 regular classes of expenditure recorded in the analysis
columns.Anything apart from these regular expenses could be entered in a ‘ledger’ column.
3 Illustrate the preparation of a Cash Book with analysis columns by showing the example
below on the overhead projector.
Example
J Kilbride, trader, maintains a 2-column Cash Book with additional columns for the
analysis of expenditure. Expenditure is analysed under the following headings: Wages,
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Stationery, Cleaning, Postage,Travelling, Ledger. On 1 March Year 6, she had a balance

of £65 in cash and a bank balance of £2,030 (Dr). The following transactions took
place in March Year 6:
3 Mar Withdrew £130 in cash from bank for office

5 Mar Purchased stationery for £43 in cash
8 Mar Received cheque for £250 from L Dunster
9 Mar Paid £67 for travelling expenses in cash
11 Mar Withdrew £350 in cash from bank for office
12 Mar Paid £230 in wages in cash
14 Mar Sales for cash £440
15 Mar Paid £300 cash into bank
16 Mar Paid £95 by cheque for cleaning
17 Mar Paid £27 for postage in cash
18 Mar Sent cheque for £315 to T Smart
21 Mar Paid £52 for travelling expenses in cash
23 Mar Paid £195 in wages by cheque
25 Mar Purchased stationery for £17 in cash
27 Mar Paid £31 for postage in cash
28 Mar Cash sales £216
30 Mar Paid £230 for machinery repairs by cheque
31 Mar Paid £180 in wages in cash
Required
Prepare for J Kilbride the Cash Book for March Year 6. Balance the Cash Book at 31 March
Year 6 and bring down the balances. (The answer is shown overleaf.)
The transaction recorded in the ‘ledger’ column would be posted directly, and as soon as
possible, to the ledger accounts concerned.Thus, the account of T Smart would be debited
at 18 March Year 6 with £315; the Machinery Repairs Account would be debited at
30 March Year 6 with £230.The column totals would be posted to the 5 expense accounts
in the General Ledger at the end of each month.
Note
For checking purposes:
The total of the analysis columns = total of cash and bank credit columns
less the amounts of contra entries
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pages 105-157
J Kilbride
CASH BOOK
15/3/03
Year 6 Cash Bank Year 6 Cash Bank Wages Stationery Cleaning Postage Travelling Ledger
£ £ £ £ £ £ £ £ £ £
1 Mar Balance b/f 65 2,030 3 Mar Cash C 130
11:16 am
3 Mar Bank C 130 5 Mar Stationery 43 43

8 Mar L Dunster 250 9 Mar Travelling expenses 67 67
11 Mar Bank C 350 11 Mar Cash C 350
14 Mar Sales 440 12 Mar Wages 230 230
Page 150
15 Mar Cash C 300 15 Mar Bank C 300

28 Mar Sales 216 16 Mar Cleaning 95 95
17 Mar Postage 27 27
18 Mar T Smart 315 315
21 Mar Travelling expenses 52 52
23 Mar Wages 195 195
25 Mar Stationery 17 17
27 Mar Postage 31 31
30 Mar Machinery repairs 230 230
31 Mar Wages 180 180
947 1,315 605 60 95 58 119 545
31 Mar Balance c/d 254 1,265
1,201 2,580 1,201 2,580
1 Apr Balance b/d 254 1,265

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Lesson 19: Capital and revenue expenditure
Topic summary
● The nature of capital expenditure and revenue expenditure
● Classifying examples of expenditure as capital expenditure or revenue expenditure
● The significance of classifying capital and revenue expenditure for net profit and the
balance sheet
● The basic accounting significance of the distinction between the two types of
expenditure

12.1 The distinctive nature of capital expenditure and revenue expenditure
12.2 The definition, in brief, of capital expenditure and revenue expenditure
12.3 Classifying a list of items into capital expenditure and revenue expenditure
respectively
12.4 The different ways in which capital expenditure and revenue expenditure items
are dealt with in the accounts
12.5 The effect on final accounts of the incorrect treatment of capital expenditure
and/or revenue expenditure
Examination answers from some LCCIEB Centres strongly suggest that the topic of capital
and revenue expenditure has been given little attention or has been overlooked. Often,
candidates are able to select between examples presented to them, either capital or revenue.
However, they have much greater difficulty in applying their knowledge to a situation that
requires correction, for example.
Step 1
Aim: to understand the nature of both capital expenditure and revenue expenditure
1 Explain that capital expenditure is the type of expenditure that is expected to provide
benefit to the business over a period longer than the current accounting period. Capital
expenditure usually involves the purchase of fixed assets or expenditure that adds to the
value of existing fixed assets. For example, extending a factory, shop, or office premises,
or adding a fitment to a machine or adapting a machine so that its productivity improves
requires capital expenditure.
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Capital and revenue expenditure
2 Inform the students that, by contrast to capital expenditure, the benefit provided by
revenue expenditure is expected to be obtained within the accounting year. This type
of expenditure may include:
● buying goods to sell;
● buying raw materials and/or parts to use in the course of manufacturing;
● running the business, the selling and distributing of goods;
● maintaining fixed assets, eg repairing or servicing machines, which does not add to the
original value of the fixed assets.
3 Show that capital expenditure is sometimes treated as revenue expenditure.This treatment

might occur when expenditure on developing new products might take several years to
result in increased sales.This capital expenditure is charged against profits in the year in
which it is spent as though it were revenue expenditure.1
Step 2
Aim: to be able to classify examples of expenditure as capital expenditure or revenue

expenditure
1 Tell the students that treating an item of expenditure as capital expenditure, ie ‘capitalizing’
it, means that the outlay is not included in the year’s Profit & Loss Account but is carried
forward as an asset in the balance sheet. Of course, if a provision for depreciation were
created on a newly purchased fixed asset, then there would be some charge for the year
in the Profit & Loss Account.
Expense items such as rent, insurance, and salaries are likely to be reviewed at the end
of each financial year. Thus at the end of Year 1, if prepayments are identified, the
prepayments will not be charged against the income of Year 1 but will be carried
forward as a current asset into Year 2. Effectively, the prepayment is ‘capitalized’ at the
end of Year 1.
2 Illustrate the classification of expenditure by showing the example opposite on the

overhead projector.
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Example
Capital Revenue
expenditure expenditure
£ £
(1)Purchase of office equipment £27,000 27,000
(2)Repairs to existing office equipment £760 760
(3)Salaries and wages £28,400 28,400
(4)Construction of new warehouse £45,000 45,000
(5)Cleaning of offices £1,520 1,520
(6)Painting of office premises £3,200 3,200
(7)Purchase of goods for resale £980 980
(8)Painting of newly constructed warehouse £1,750 1,750
(9)Wages and salaries £63,800, of which £8,000
was paid to employees engaged on building an
addition on to the office premises 8,000 55,800
(10) Purchase of land for building new premises £30,000 30,000
(11) Payment of fee for legal services in connection with
purchase of the land mentioned in (10) £2,500 2,500
3 Advise the students that, regarding item (6) in the example, it might be argued that if
the paintwork is expected to last 4 years for example, then the cost of painting the
warehouse should be capitalized and spread over the next 4 years.This, however, would
be incorrect. If repairs, renovation, painting, etc merely restore an asset to its original
condition, the outlay is regarded as revenue expenditure and should be fully charged in
the year that the cost was incurred. Item (8) contrasts with item (6).The initial painting
of the warehouse helps to complete the construction (item (4)) and is therefore treated
as capital expenditure. The cost of painting the warehouse at a later time would then,
of course, be treated as revenue expenditure.
4 Point out that in item (9) the expenditure is partly capital and partly revenue.The cost
has been ‘apportioned’ between the two categories of expenditure. Note also that item
(11) is capitalized; the legal services are necessary to make the purchase of land possible.
5 Copy and hand out or show the following exercise on the overhead projector or board.
Ask the students to work through the exercise.
Exercise
In the columns beside the items listed below, enter the amount of capital expenditure
or revenue expenditure for each item.
Capital Revenue
£ £
(1) Paid heating and lighting bill £68
(2) Purchased stationery £1,760
(3) Fitting of new refrigerator in delivery vehicle £2,100
(4) Repairs to motor vehicle £215
(5) Paid insurance £470
(6) Fitting of new tyres to motor vehicle £190
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Solution
Capital Revenue
£ £
(1) 68
(2) 1,760
(3) 2,100
(4) 215
(5) 470
(6) 190
Note
Item (2) – is treated as a consumable purchase.
Item (3) – improves the usefulness of the vehicle and might well increase the vehicle’s
resale value.
Item (6) – fitting new tyres merely helps to ‘make good’ the wear on the vehicle and
does not increase the value of the vehicle beyond the original value.Although the tyres
may have a useful life of more than one accounting year, such a purchase would generally
be treated as revenue expenditure.
Candidates should be ready to apply their knowledge by suggesting examples of capital
and revenue expenditure for different types of business activity.
7 Copy and hand out or show on the overhead projector or board the exercise below.
Ask the students to work through the exercise.
Exercise
Give one example of (a) capital expenditure, and (b) revenue expenditure for each of
the following business organizations:
(i) a manufacturer of washing machines
(ii) a motor-vehicle distributor
(iii) a retailer of books, newspapers, and magazines.
Solution
(a) Capital expenditure (b) Revenue expenditure
(i) Purchase of machinery for production Wages, advertising, etc
(ii) Purchase and improvement of Salespersons’ salaries and commission
showrooms
(iii) Purchase of retail shop premises Purchase of newspapers, books, etc
Note
These answers are only examples from a range of possible answers.The answers should
be related to the type of business organization.
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Step 3
Aim: to appreciate the significance of classifying capital and revenue expenditure for net
profit and the balance sheet
1 Make it clear to the students that capital expenditure relates to assets and revenue
expenditure to running expenses. Capital expenditure is treated as affecting the balance
sheet, and payment is expected to be used up over more than one financial period.
Revenue expenditure, however, is treated as a profit & loss expense that is used up
within a financial period. Therefore, incorrect classification of capital and revenue
expenditure will have consequences for both net profit and the balance sheet.
2 Illustrate the consequences of incorrect classification by displaying the following table

on the overhead projector or board.
Incorrect Effect on Effect on net Effect on balance

classification accounts profit sheet
Purchase of fixed Expense overstated Understated Capital understated

asset treated as
revenue expenditure Fixed asset account Fixed asset
understated understated
Revenue expense Expenses understated Overstated Capital overstated

treated as capital
item Fixed asset account Fixed asset
overstated overstated
3 Explain that incorrect classification can also distort the gross profit, an effect that is
shown in the next 2 exercises.
4 Copy and hand out or show exercise T/19.5* and T/19.6* in the Appendix
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Step 4
Aim: to develop an understanding of the basic accounting significance of the distinction

between the two types of expenditure
1 Tell the students that they should be able to apply their knowledge of expenditure
classification to different situations. Exercises T/19.7* and T/19.8* in the Appendix
(pages 277 and 279), taken from LCCIEB First Level Book-keeping past examination
papers, will give them some practice at applying what they have learnt.
2 Copy and hand out or show exercises T/19.7* and T/19.8* on the overhead projector.
Ask the students to work through the exercises and to explain the comments given.
3 The explanation of the comments in T/19.7* should be as follows:
Item (1) – these are all items of capital expenditure and should be deducted from
the figure for purchases.
Item (2) – £1,600 should be deducted from the figure for sales. A common mistake
made by candidates is to deduct the book value of the old delivery van, ie £3,400.That
figure is completely internal to the business and would not enter into the transaction of
selling the delivery van.
Item (3) – the figures for closing stock should be reduced by £300.
Item (4) – the £2,100 is capital expenditure and should be deducted from the wages
figure.
4 The explanation of the comments in T/19.8* should be as follows:
(a) John Bradford failed to make the distinction between capital and revenue.
(b) ● Item (1) – the total of recorded sales is the total value of sales transactions in the
period, not the amount received in cash.Therefore, the amount of £1,082 should
be added to the existing figure to give a ‘true’ sales figure of £23,746.
● Item (2) – the accrual of £286 increases the item ‘Wages’ to £2,926.
● Item (3) – £1,730 becomes the figure for closing stock.
● Item (4) – the purchase price of the motor vehicle less expected trade in value of
£700 = £1,500 cost to be carried over 3 years. £1,500 ÷ 3 = £500 depreciation

per annum. The item, ‘Cash taken for own use’ in the profit statement really
means ‘drawings’.This item is not an expense of the business and therefore should
not be included in the Profit & Loss Account. It would, of course, appear in a
balance sheet as a deduction from capital.
5 Common errors made by candidates in dealing with capital and revenue

expenditure
Draw the students’ attention to these comments.
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(a) Overlooking the significance of information in the question that explains the
purpose of certain expenditure. The information provides the clue about whether
the expenditure is to be classed as capital or revenue expenditure.
(b) In considering the effect on net profit of certain capital expenditure, students
sometimes disregard the effect of any provision for depreciation. For example, the
purchase of a motor vehicle, as a capital item, has no direct effect on net profit;
however, the need to provide for depreciation over the life of the motor vehicle
would result in reduced net profit.
(c) Students may provide an unnecessary explanation of the chosen classification when
all that is required is a one-word answer.
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Lesson 20: The journal
Topic summary
● The role and main uses of the journal and the advantages of having a journal
● The preparation of journal entries with the correct layout
● Making journal entries for certain transactions or purposes
● Making journal entries for non-regular transactions or adjustments
● The role and uses of the journal

4.1 The function of the ledger
16.1 The main uses of the (General) Journal
16.2 The advantages of having a journal, as a support to the double-entry system
16.3 Journal entries, in standard format, covering:
16.3.1 the purchase and sale on credit of fixed assets
16.3.2 the correction of errors
16.3.3 opening entries
16.3.4 other non-regular transactions or adjustments
16.4 The books of original entry; their function
Questions requiring journal entries are quite common in the LCCIEB First Level
Book-keeping examination and yet the answers are often disappointing.The quality of the
answers indicates that not enough attention is given to this topic.
The questions may test the use of the journal in its own right, eg as a record of the purchase
or sale on credit of fixed assets. Alternatively, journal entries may be used as a convenient
and direct way of testing the students’ understanding of a number of features of double-
entry book-keeping that would otherwise require the use of too much examination time.
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The journal
Step 1
Aim: to be aware of the role and main uses of the journal and the advantages of having
a journal
1 Explain the origin of the journal and its present-day function. The day books exist to
assist the ledger. Detail is recorded in the day books and more summarized postings are
made to the ledger. Originally, the day books were part of the journal and the journal
was like a notebook for recording the detail of transactions. In the course of time,
specialized day books (eg the Purchases Day Book) or journals came into use and the
journal was used to record less common transactions or adjustments. Today, the journal
is sometimes termed the Main Journal, Journal Proper, or General Journal.
2 Point out that the Cash Book serves as both a book of prime entry – effectively a day
book – and as part of the ledger.The ledger and the various day books cover the great
majority of transactions.A general rule is that any transaction not included in any of the
day books should be noted in the General Journal.
3 Tell the students that the main uses of the General Journal are to make notes on:
● the purchase and sale on credit of fixed assets;

● opening entries, ie the opening of a new set of accounts;
● the correction of errors;
● other transfers.
4 Draw the students’ attention to the advantages of having and using a journal, that:
● it is an easily accessible record of the purchase and sale of fixed assets;

● it helps to explain entries, eg various adjustments or the correction of errors;
● there is less chance of omitting a transaction altogether, or of making an entry on one
side only of the accounts.
Regarding the first point above, some firms include the purchase and sale of fixed assets
for cash or bank, even though these are recorded anyway in the Cash Book – a book
of prime entry. More details of the assets, authority to purchase, etc can be shown
there than is possible in the Cash Book.1
5 Emphasize the role of the journal, that it is to support the ledger. The journal itself is
not part of the double-entry system.
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The journal
Step 2
Aim: to be able to prepare journal entries with the correct layout
1 Demonstrate the standard layout for a journal on the board or overhead projector using
the example below.
Example
T Morley
JOURNAL
Dr Cr
£ £
Date Name of account to be debited X
Name of account to be credited X
Narrative
2 Highlight the following points:
● a date should always, if possible, be entered for each journal entry;

● the account to be debited should always appear first; followed by the account to be
credited;
● a narrative is an explanation of the journal entry; narratives, if required, should be
relevant, meaningful, and to the point.
Concerning the second point above, some candidates show the credit entries first or, even
worse, mix the entries – sometimes debit entries first, sometimes credit entries first. The
students should avoid both these errors, which are confusing for the Examiner and which
may lose them marks.
Step 3
Aim: to be able to make journal entries for certain transactions or purposes
1 Introduce the students to some uses of the journal with the aid of the examples given
below.
(a) The purchase and sale on credit of fixed assets
Example
(i) On 9 June Year 3, a computer is bought on credit from Datarite Limited for £23,600.
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The journal
Dr Cr
Year 3 £ £
9 Jun Computer equipment 23,600
Datarite Ltd 23,600
Purchase, on credit from

Datarite Ltd, computer . . . .
(ii) On 21 June Year 3, a motor vehicle, used for delivery purposes within the firm, was
sold on credit to Smithson Garages for £2,300. No provision for depreciation had
been made.
Dr Cr
Year 3 £ £
21 Jun Smithson Garages 2,300
Motor-vehicle disposal 2,300
Sale on credit of motor

vehicle no . . . .
In practice, more detail concerning the fixed assets is likely to be included, but this is
not required for examination purposes.
(b) The correction of errors

See Lessons 21 and 22 (pages 168–77).
(c) Opening entries

Opening entries are to be used when a business is started or for opening a new set of
accounts for an already established business.
Example
N Maxwell has been in business for some years. He now decides to set up and maintain
a proper set of double-entry accounts. On 1 March Year 8, his assets and liabilities were as
follows:
Assets Premises £42,000 Fixtures and fittings £5,200 Office equipment £4,800
Motor vehicle £7,500
Stock £4,360 Debtors £1,840 (C Brandon £720;
R Sims £440; L Upton £680) Cash £130 Bank £1,100
Liabilities Creditors £1,370 (M Denby £580; A Trott £790)
Solution
The total of the assets £66,930 less liabilities £1,370 = £65,560 capital
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The journal
The opening journal entries appear as follows:
JOURNAL
Dr Cr
Year 8 £ £
1 Mar Premises 42,000
Fixtures and fittings 5,200
Office equipment 4,800
Motor vehicle 7,500
Stock 4,360
£
Debtors: C Brandon 720
R Sims 440
L Upton 680 1,840
Cash 130
Bank 1,100
£
Creditors: M Denby 580
A Trott 790 1,370
Capital 65,560
66,930 66,930
The journal is the basis for opening the set of accounts as follows:
GENERAL LEDGER
Premises
Year 8 £
1 Mar Balance 42,000
Fixtures and fittings

Year 8 £
1 Mar Balance 5,200
Office equipment
Year 8 £
1 Mar Balance 4,800
Motor vehicle
Year 8 £
1 Mar Balance 7,500
Stock
Year 8 £
1 Mar Balance 4,360
Capital*
Year 8 £
1 Mar Balance 65,560
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The journal
SALES LEDGER
C Brandon
Year 8 £
1 Mar Balance 720
R Sims
Year 8 £
1 Mar Balance 440
L Upton
Year 8 £
1 Mar Balance 680
PURCHASES LEDGER
M Denby
Year 8 £
1 Mar Balance 580
A Trott
Year 8 £
1 Mar Balance 790
CASH BOOK
Cash Bank
Year 8 £ £
1 Mar Balance 130 1,100
* The Capital Account could, alternatively, be kept in a Private Ledger
2 Ask the students whether journal opening entries are prepared each year. The correct
answer is that they are not. The opening entries are prepared only as required, eg as a
new set of accounts is opened, which, in practice, is rare.
Step 4
Aim: to be able to make journal entries for non-regular transactions or adjustments
1 Explain that non-regular transactions or adjustments that are not otherwise recorded in
a book of prime entry, include:
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The journal
● special transactions or adjustments arising during the course of the year;

● year-end adjustments.
Possible adjustments include:
● transfers to the Trading and Profit & Loss Account;

● accruals and prepayments;
● provision for depreciation;
● writing off a fixed asset, ie transferring the remaining balance on the asset account to
the Profit & Loss Account;
● writing off bad debts;
● creating or adjusting a provision for doubtful debts;
● adjusting for owner’s drawings.
2 Illustrate journal entries for non-regular transactions or adjustments by showing the

examples below on the board or overhead projector.
Example (a)
At 31 December Year 5, the balance on the Advertising Account is £4,850 (Dr). Of this,
£4,100 relates to Year 5, while £750 is a prepayment for Year 6.
Dr Cr
Year 5 £ £
31 Dec Profit & loss 4,100
Advertising 4,100
Transfer of expenditure for

advertising for the year ended
31 Dec Yr 5
Example (b)
At 31 December Year 5, the balance on the Rent Receivable Account is £3,350. All of
this relates to Year 5. In addition, £450 is accrued for Year 5.
Dr Cr
Year 5 £ £
31 Dec Rent receivable 3,800
Profit & loss 3,800
Transfer of the amount of rent

receivable for the year ended
31 Dec Year 5
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The journal
Example (c)
At 31 December Year 5, bad debts written off for the year amount to £715.
Dr Cr
Year 5 £ £
Bad debts 715
Total of bad debts written off

for the year ended 31 Dec Year 5
Example (d)
At 31 December Year 5, the existing provision for doubtful debts is to be increased by
£370.
Dr Cr
Year 5 £ £
Increase in provision for

doubtful debts
Step 5
Aim: to develop and reinforce learning on the role and uses of the journal
1 Review the relationship between the various books of account. Figure 20.1 (overleaf )
structurally illustrates the various books of account. Note that the books of prime entry
are not part of the double-entry system.The Cash Book and Petty Cash Book are both
books of prime entry and part of the ledger in the wider sense. Also note that, apart
from contra entries in the Cash Book, it is still necessary to post from these two books
into the ledger itself to complete the double entry.
2 Remind the students that the Trading and Profit & Loss Account is part of the double-entry
system but that the balance sheet is not. The General Journal, in its function as a diary,
holds information on transactions that are not entered into any other book of prime
entry. It should also contain adjustments – changes made without a transaction arising.
In addition, transactions of a special nature may be recorded there even though they are
entered in another book of prime entry, eg the purchase or sale of fixed assets for cash
or bank payment.
3 Advise the students to practise answering questions requiring journal entries as much
as possible.These questions can be a compact way of testing the students’ knowledge of
the rules of double entry; the importance of this topic cannot be overstated.
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The journal
Discount columns
BOOKS Returns Returns
Purchases Sales
OF Outwards Inwards General
Day Day
PRIME Day Day Journal
Book
Petty Cash Book

ENTRY Book
Book Book
Cash
Book
Ledger
General (Nominal) Ledger
Purchases Ledger
Sales Ledger
DOUBLE- (Private Ledger)
ENTRY
SYSTEM
Balance
sheet
Figure 20.1 The account system
4 Copy and hand out or show exercises T/20.2*, T/20.3, T/20.4*, and T/20.5* in the
Appendix (pages 281, 283–4, and 286). It is important that the students work
through these exercises and that you review the answers with them. Overall they show
the range of topics that can be covered in journal entries.
5 When the students work through T/20.4*, emphasize that they must provide sufficient
information in journal entries that relate to year-end adjustments on expense or income
accounts. ‘Common errors’ below deals further with this feature.
6 Common errors made by candidates regarding journal entries

Candidates sometimes:
● provide ledger accounts instead of journal entries;

● provide insufficient information for year-end adjustments on expense/income
accounts, eg:
£ £
Date Insurance 90
Insurance 90
Narration . . . .
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The journal
The correct entries appear as follows:
£ £
Date Insurance (year to 30 Jun Yr 9) 90
Insurance (year to 30 Jun Yr 8) 90
Narration . . . .
ie, the financial years must be stated for the entry to be valid.
● lay out journal entries poorly; eg, the entries might be cramped together – sometimes
it is not clear which is debit and which is credit
● provide description and explanation instead of an account name
● either state no date (where it can or should be provided) or show an incorrect date;
the date given should be the one on which (in the firm concerned) the journal entry
is made.
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Lesson 21: Errors in the accounts 1
Topic summary
● The basic classification of errors and errors that have no effect on agreement of the
trial balance
● Errors that might affect agreement of the trial balance and how the trial balance
might be affected

11.3 Errors in the accounts and their effect on the trial balance
11.4 The revising of an incorrectly drafted trial balance
11.5 The limitations of the trial balance as a means of check
17.1 The difference between errors which affect agreement of the trial balance and
those errors which do not affect such agreement
17.2 Those errors which do not affect agreement of the trial balance; types of such
error
17.3 From data provided, the selection of the relevant type of error
17.4 The drafting of appropriate adjusting journal entries
Students often experience difficulty with this topic, and the terms used should be explained
with care.
Step 1
Aim: to be aware of the basic classification of errors and, in particular, of the errors that
have no effect on agreement of the trial balance
1 Explain that errors in accounts may be classified as:
● those that have no effect on agreement of the trial balance;

● those that usually affect the trial balance.
2 Review the range of errors (below) that do not affect agreement of the trial balance.
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Errors in the accounts 1
(a) Errors of omission

This type of error occurs when a transaction is completely omitted from the books.
Use the example that follows to illustrate errors of omission.
Example
Credit note number 387 for £73 is issued to a customer. A Doyle, on the return of
goods, has not been entered in the accounts.
An adjusting journal entry should be made, as follows, before making the necessary
correcting entries in the two ledger accounts concerned.
JOURNAL
Dr Cr
£ £
Returns inwards 73
A Doyle 73
Correction of omission of entry
of credit note no 387
(b) Errors of commission

These errors occur when a transaction is entered in a wrong account of the same class
as the one in which it should have been recorded. Often, this error means that a
transaction is entered in the wrong person’s account (either debtor or creditor). Use
the example below to illustrate this type of error of commission.
Example
Invoice number S/598 for goods bought on credit for £345 from Eastern Supplies had
been entered in the account of Eastern Sundries.
The adjusting entry would appear as:
JOURNAL
Dr Cr
£ £
Eastern Sundries 345
Eastern Supplies 345
Purchase invoice no S/598 entered in

wrong supplier account, now corrected
In the Purchases Ledger, the 2 accounts would appear as:
Eastern Supplies
£
Purchases (entered wrongly
in Eastern Sundries Account) 345
(continued)
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Eastern Sundries
£ £
Eastern Supplies Purchases 345
(posting error corrected) 345
The correction of an error involving impersonal accounts is as follows:
JOURNAL
Dr Cr
£ £
Postage 19
Telephone 19
Payment in cash for postage

was wrongly posted to Telephone
Account, now corrected
Stress that both accounts are in the same class, ie they are both nominal accounts.
A further example for impersonal accounts is as follows:
JOURNAL
Dr Cr
£ £
Office furniture 463
Purchase by cheque of office furniture,

wrongly posted to Fixtures and Fittings
Account, now corrected
In this case, both accounts are real accounts.
(c) Reversal of entries

Debit and credit entries for the correct amount have been made, but on the wrong side
of the 2 accounts. Use the example that follows to illustrate the reversal of entries.
Example
The sale of goods for £420 cash has been entered as a debit to the Sales Account and
a credit to the Cash Account.
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The correct entries should be:
Sales
£
Cash 420
Cash
£
Sales 420
If the correct entries are adjusted by crediting the Sales Account and debiting the Cash
Account with £420, it merely cancels the errors.To adjust fully, and to achieve what was
first intended, it is necessary to double the amount.
Sales
£ £
Cash 420 Cash (correction of error) 840
Cash
£ £
Sales (correction of error) 840 Sales 420
Therefore, the journal entry would be:
JOURNAL
Dr Cr
£ £
Cash 840
Sales 840
Sales of goods for £420 cash

and wrongly reversed in the
accounts, now corrected
(d) Error of principle

When a transaction is entered in the wrong class of account, an error of principle
occurs. Use the example given below to illustrate this type of error.
Example
The purchase of office equipment for £1,264 has been wrongly debited to the
Purchases Account. This purchase is an item of capital expenditure that, wrongly, has
been treated as revenue expenditure and entered in a nominal account. As capital
expenditure, it should have been recorded in a real account. It is therefore necessary to
cancel the incorrect entry in the Purchases Account, ie using a credit entry, and to make
a debit entry in the Office Equipment Account.
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JOURNAL
Dr Cr
£ £
Purchases 1,264
Purchase of office equipment wrongly

debited in Purchases Account, now
corrected
(e) Error of original entry

When an error of original entry occurs, the correct accounts have been used and the
entries are on the correct sides, but the amount has been entered incorrectly in both
accounts. Often, although not necessarily, this error is the result of the source document
being incorrect. Use the following example to illustrate error of original entry.
Example
Sale of goods £350 on credit to T Hogan has been entered in the accounts as £380.
Both entries are £30 too much.
JOURNAL
Dr Cr
£ £
Sales 30
T Hogan 30
Sales overstated by £30,

now corrected
(f) Compensating error

A compensating error occurs when errors cancel each other out. Use the example that
follows to illustrate this type of error.
Example
Purchases account (debit) is understated by £10 and rent receivable (credit) also is
understated by £10. The trial balance is still in balance, provided there are no other
errors in the accounts.
JOURNAL
Dr Cr
£ £
Purchases 10
Rent receivable 10
Purchases Account and Rent

Receivable Account each undercast
by £10, now corrected
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(g) Error of duplication

In this instance, a transaction is entered correctly in the accounts and then, in error, is
entered again.This error is not revealed by the trial balance.
Step 2
Aim: to be aware of errors that might affect agreement of the trial balance and of how
the trial balance might be affected
1 Outline the errors that would usually affect the trial balance, including:
● an incorrect posting on one side of the transaction;

● an error in addition, eg of entries within an account;
● a balance wrongly brought forward to the trial balance;
● a balance omitted from the trial balance.
These errors affect agreement within the trial balance only if they do not compensate
one another.
2 Ask the students when the errors are likely to become known.The answer is that some
will become known during the course of the year, partly through checks in the system.
They will then be corrected. Others will become known at the end of the year when
the trial balance is prepared. Either way, the adjustments necessary to correct the errors
should be ‘journalized’.
3 Discuss with the students how the various errors will affect the trial balance.
4 Explain that agreement between the 2 sides of a trial balance does not prove that all
entries have been made correctly in the accounts.The trial balance is limited as a means
of checking entries.
The 2 sides of the trial balance could be in agreement even though any of the errors
outlined in Step 1 could have been made, eg the complete omission of a transaction, a
compensating error, or an error of commission.
5 Fully discuss the limitations of the trial balance with the students.
6 Copy and hand out or show exercises T/21.4 and T/21.5 in the Appendix (pages 290–1)
on the overhead projector. Ask the students to work through them.
7 Review and discuss the answers to the questions.
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Lesson 22: Errors in the accounts 2
Topic summary
● Adjustments for errors through journal entries or in accounts
● The effect of errors or of correcting errors on gross and net profits, as well as upon
the balance sheet

17.4 The drafting of appropriate adjusting journal entries
17.5 The effect of errors and/or the effect of the correction of errors both in principle
as well as by calculation on:
17.5.1 the trial balance
17.5.2 gross profit
17.5.3 net profit
17.5.4 the balance sheet
A topic that frequently occurs in LCCIEB First Level Book-keeping examinations is

correcting errors by means of journal entries or by entries in accounts. Answers to
questions requiring the correction of journal entries strongly indicate that insufficient
attention is paid to this topic.
It is also evident that candidates experience some difficulty in answering questions on the
effect of errors on profit and the balance sheet.The guidance in Step 2 and the supporting
exercises should help to overcome this problem.
Step 1
Aim: to understand the effect of errors or of correcting errors on gross and net profits, as
well as on the balance sheet
1 The problem for candidates in answering this type of question is often one of method.
In preparing for the examination as well as in the examination itself, attention should
be paid to the points listed below.
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(a) Have the students fully grasped the question? Often marks are lost because parts of
the question have been misunderstood. Lack of understanding might be the result
of unfamiliarity with the topic or with the particular form of question.
(b) In preparing an answer requiring journal entries, candidates may find it helpful to
draft T-type accounts. This exercise might help them to visualize debit and credit
entries.The T-type accounts should not be in detail – just miniature ‘accounts’ are
enough. If necessary, the account can be written in the answer book and then boldly
crossed through. It is, of course, wrong to show accounts as part of an answer when
only journal entries are required.
(c) Does the question require narrations? Or does it state that narrations are not
required?
(d) Journal entries should always be in the correct format with the debit entry first and
the credit entry following it.When an answer requires a multiple of account entries,
eg in recording the sale of a depreciated fixed asset, there may be various ways of
setting out the answer, but the same rule applies: debit comes before credit.
3 Explain that, sometimes, an item in a question may require a one-sided journal entry
only. For example, an error could be the result of a posting failure. Illustrate this point
with the example below.
Example
Stationery purchased on 12 March Year 3 for £37 in cash is correctly entered in the
Cash Book but is not posted to the Stationery Account in the General Ledger.The trial
balance would therefore be short on the debit side by £37.The correcting journal entry
made on 31 March Year 3 would be:
JOURNAL
Dr Cr
Year 3 £ £
31 Mar Stationery 37
–
Stationery purchased on 12 March

Year 3: entered in cash book but not
posted, now corrected.
Note
The dash (–) in the credit column gives a positive indication to the Examiner that that
candidate recognizes that no credit entry is required.
Note that this question requires some one-sided journal entries.
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Step 2
Aim: to understand the effect of errors or of correcting errors on gross and net profits,
as well as on the balance sheet
1 Explain that the effect of errors in terms of reported profits and a prepared balance sheet
is being discussed.
2 Stress the need to distinguish between the effect of the error itself and the effect of
correcting the error.Thus, if purchases were undercast:
the effect the effect of

of the error correcting the error
gross profit overstated gross profit reduced
The amount is the same for both effects.The distinction is of fundamental importance:
often questions relating to errors are answered from the wrong angle.When errors are
made, there is a sequence of consequences. It will help the students considerably if they
become used to working through the likely consequences of various types of error. For
example, the understatement of purchases mentioned above will, by itself, lead to:
● understatement of cost of goods sold which results in
● overstatement of gross profit which results in
● overstatement of net profit which results in
● overstatement of the addition

to capital on the balance sheet
3 Copy and hand out or show the following exercise on the overhead projector. The
errors should be put to students one-by-one. Review the consequences of each one
before moving on to the next.
Exercise
Trace the sequence of consequences of the following errors through to the balance sheet:
(1) overstatement of sales

(2) overstatement of returns outwards
(3) understatement of carriage outwards
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(4) overstatement of closing stock

(5) overstatement of carriage inwards
(6) understatement of returns inwards.
4 Use Table 22.1 to illustrate the differences between the effects of errors on reported
profits, etc, before making any correction, and the effects resulting from correction.This
table also appears on page 217 of the student’s book, How to Pass Book-keeping, First
Level.
Table 22.1 Effects of the error and effects of correcting the error
Effects of the error, Effects (upon already reported

ie before correction profits) of correcting the error
Gross Net Balance Gross Net Balance

profit profit sheet profit profit sheet
Purchases Over- Over- Capital Reduced Reduced Capital

undercast stated stated over- reduced
stated
Closing Over- Over- Capital Reduced Reduced Capital

stock stated stated over- reduced
overstated Stock
valued Stock reduced
over-
stated
Expense No Under- Capital No Increased Capital

item, effect stated under- effect increased
eg rent stated
overstated
Income No Over- Capital No Reduced Capital

item, eg effect stated over- effect reduced
commission stated
overstated
Note
Any overstatement or understatement of either an asset or a liability affects only the
balance sheet.
5 Exercise T/22.4* in the Appendix (page 294) shows the effects of errors and of their
correction. Copy and hand out, or show the exercise on the overhead projector, and
work through it with the students. Pay special attention to the note at the end of
T/22.4A.
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Lesson 23: Final accounts and adjustments

further considered
Stock valuation
Topic summary
● Adjustments for drawings other than cash drawings
● End-of-period adjustments for outstanding purchase invoices
● Year-end adjustments in the preparation of final accounts
● Trading and Profit & Loss Accounts in a vertical format
● The basic rule for stock valuation

13.6 Adjustments in the Trading Account and balance sheet for end-of-period
‘outstanding’ purchases, ie goods received but invoices still awaited
13.11 Adjustments for end-of-period income accrual and income prepayment in the
18.2 The meaning of the term drawings; the various forms of drawings
18.3 The book-keeping entries for drawings
18.4 The possible effect of drawings upon the amount of capital
18.5 How drawings are stated in the balance sheet and, where necessary, in the
Trading Account (where goods are withdrawn for private benefit)
19.4 The valuation of closing stock: the lower of cost or net realizable value
19.13 Showing income and expenses within the final accounts, with related items
being suitably brought together
This lesson considers the further adjustments that might have to be made to the final
accounts. The adjustments include different forms of drawings and the valuation of stock.
Stock valuation could also be the main subject of a question or a part of a question. The
vertical layout of the Trading and Profit & Loss Account is also discussed.
By this stage of their studies, the students should have gained a fair knowledge of the
various topics that have been discussed. Final accounts brings together many facets of
book-keeping.The working and review of final accounts affords an opportunity to clarify
points, sort out difficulties, and if necessary to reinforce key study points.
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Final accounts and adjustments further considered
Stress that the overriding aim of the final accounts is to present a true picture of a business
by showing that:
● the net profit is a true result after taking into account all relevant costs and income
for the given period
● the balance sheet is a true statement of assets and liabilities at the balance sheet date
Correctly classifying expenditure between capital and revenue, and making period-end
adjustments for accruals and prepayments, all contribute towards presenting a true picture
of a business.
Step 1
Aim: to be able to make adjustments for drawings other than cash drawings
1 Remind the students of the entries for drawings by the proprietor (ie owner of the
business), that they are:
Dr Drawings Account
Cr Cash/bank account
In the balance sheet, the total of the drawings for the year is deducted from the owner’s
capital balance at the start of the year.
If the drawings take the form of goods being withdrawn from the business for private
use, the necessary adjustment would be:
Dr Drawings Account
Cr Purchases Account
2 Point out that if the adjustment for drawings is made before the preparation of the trial
balance, then the purchases balance will already be reduced by the amount of the
drawings, while the Drawings Account will show both cash and goods drawings.
However, the candidates may be required to prepare final accounts that incorporate an
adjustment for goods withdrawn by the proprietor, using an already prepared trial balance
that is not adjusted for the withdrawal. It will then be necessary to:
● show a deduction from purchases in the Trading Account;

● increase the amount deducted as drawings in the balance sheet.
Sometimes, examination candidates merge these figures, eg drawings of cash and drawings
of goods are added together and entered as one figure.Advise the students to show each
adjustment to make sure they obtain the mark(s).
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3 Explain that there are other alternative forms of drawings (ie besides cash) that usually
involve the private use of business facilities. For example, the owner may use a motor
vehicle or the business telephone, or live in part of the business premises for which
rent would otherwise be payable to the business. Use of these facilities may mean
that the cost of a facility is shared (or ‘apportioned’) between the business and the
owner personally.
4 Illustrate how to show shared cost by displaying the following example on the overhead
projector or board.
Example
The business telephone is also used by the owner for private purposes.The yearly cost
of the telephone is apportioned as follows:
4
business /5
1
owner’s private use /5
At the year end, an adjustment would be made to allow for the owner’s private use.The
amount paid from the business bank account for the telephone during the year ended
30 June Year 7 was £380, of which £30 was prepaid at the year end.
Solution
£
Amount paid during year ended 30 Jun Yr 7 380
less Prepayment at 30 Jun Yr 7 30
Annual charge 350
To be apportioned:
£
4
business use /5 280
1
private use /5 70
350
The period-end adjustments in the ledger would be:
Dr Drawings £70
Cr Telephone £70
In the final accounts:

● the figure for the telephone in the Profit & Loss Account would be shown as £280;
● drawings in the balance sheet should be increased by £70.
The increased figure for

drawings is offset by (= capital reduced)
the increased figure of net profit (= capital increased)
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Step 2
Aim: to be able to make end-of-period adjustments for outstanding purchase invoices
Explain that, at the end of a financial period, purchased goods might already have been
received but the invoice may still have to come from the seller.The Purchases Account will
therefore be understated, while the period-end stock check will include the goods in the
value of the closing stock. In addition, creditors will be understated in the Purchases Ledger.
The effects will be that:
● the cost of goods sold will be understated, resulting in an overstated gross profit
and overstated net profit;
● in the balance sheet, creditors will be understated, while capital (through the addition
of net profit) will be overstated.
The adjustment for this at the period-end would therefore be to debit the Purchases
Account and credit the creditor’s account with the amount of the anticipated invoice.The
account entries should be supported by a journal entry. If, for some reason the amount in
the invoice (when it is received) is different from the amount shown in the adjustment, then
a further adjustment for the difference in amount has to be made. For examination purposes,
if Trading Account and balance sheet adjustments are required, the candidates should make
it clear that they are including the amount in their figures, ie it should not be lost in the
total figure.
Step 3
Aim: to reinforce understanding and practice in making year-end adjustments in the

preparation of final accounts
1 Explain that, at the stage of preparing final accounts from a trial balance, the students
should keep in mind that, with the trial balance in agreement, a position of balance
exists at the start of drafting the final accounts. Therefore, if any adjustment has to be
made, the student should always look for 2 effects: a debit adjustment and a credit
adjustment. An adjustment for an expense prepayment of £100 will reduce total
expenditure in the Profit & Loss Account and will also create an asset balance for the
expense prepaid (debit effect). The matching effect will be an increase of £100 in net
profit and consequently in the amount of capital (credit effect).
overhead projector. Ask the students to work through the exercise and give them
guidance on method and the particular items.
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Remind the students that the techniques recommended in Lesson 7 for marking each
item with its position in the final accounts should be followed here.
After the students have had time to scan the question, review the adjustments one by
one, pointing out the two-fold aspect of each adjustment:
(1)(a) The increase in each depreciation provision is charged to the Profit & Loss
Account, which reduces the net profit;
(b) this decrease is matched by a reduction in the figure for fixed assets.
(2)(a) Closing stock, as a deduction, reduces the cost of goods sold;

(b) therefore the gross profit is increased and, as a result, net profit is increased.
(3)(a) The revised provision for doubtful debts at 2% of debtors, ie 2% of

£35,000 = £700 less the existing provision of £600 = an increase of £100
which is charged to the Profit & Loss Account which reduces net profit by £100;
(b) in the balance sheet, the smaller net assets figure (ie from a reduced figure for net
debtors) is matched by a reduced addition of net profit to capital.
(4)(a) £520 is added to motor-vehicle running expenses and £420 is added to heating
and lighting in the Profit & Loss Account, so reducing the net profit;
(b) this reduction is matched in the balance sheet by 2 accrual items included under
liabilities.
(5)(a) Rates and insurances in the Profit & Loss Account is reduced by £120, making
the net profit £120 more;
(b) in the balance sheet, the increased net profit addition to capital is matched by an
item, ‘rates and insurances prepaid’, among the current assets.
Note
The adjusted entries are highlighted in the solution given in T/23.1A.
on the overhead projector.Ask the students to work through them. Note that in T/23.3,
item (6), the Sales Ledger figure of £370 is set off against the Purchases Ledger figure
of £4,096, resulting in a net figure of £3,726.
Step 4
Aim: to be able to prepare Trading and Profit & Loss Accounts in vertical format
1 Explain that the practice is now well established of preparing Trading and Profit & Loss
Accounts in vertical format. Stress that the double entry is maintained; only the
presentation is different.
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2 Illustrate vertical format on the board or overhead projector with the Trading and Profit
& Loss Account for J Salmon for the year ended 30 June Year 6 (see exercise T/23.1*,
page 299), shown below.
J Salmon
for the year ended 30 June Year 6
£ £ £
Sales 370,000
less Sales returns 3,400 366,600
less Cost of goods sold:
Stock, 1 Jul Yr 5 15,700
Purchases 263,500
less Purchases returns 7,300 256,200
271,900
less Stock, 30 Jun Yr 6 17,400 254,500
Gross profit 112,100
add Discount received 1,600
113,700
Depreciation: Motor vehicles 20,000
Fixtures and fittings 8,200 28,200
Discount allowed 2,300
Bad debts 650
Rent 12,000
Motor-vehicle running expenses 3,870
Rates and insurances 3,300
Salaries 12,300
Lighting and heating 4,350 67,070
Net profit 46,630
3 Ask the students to rewrite the Trading and Profit & Loss Account for exercise T/23.3
in vertical format.
Step 5
Aim: to appreciate and be able to apply the basic rule for stock valuation
1 Remind students of the significance of the value placed on closing stock. Show that:
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the value of closing stock affects cost of goods sold
which in turn affects gross profit
which then affects net profit
with balance sheet asset value and

consequences amount of capital
2 Point out that (closing) stock is usually valued at the end of a trading period (generally
a year). Valuation involves:
(a) a check on and count of the items in stock, to allow for items lost, stolen, that have
physically deteriorated, or that are otherwise unsaleable;
(b) placing a value per item on the stock.
Then
total stock value = number of items held × stock value per item
Each item of stock is valued according to the rule of valuing at the lower of:
● cost price
or
● net realizable value.
3 Tell the students that profit should not be anticipated, ie it should not be included in
the accounts until the goods concerned have actually been sold. Net realizable value is
defined as the selling price less the costs of getting the goods into a saleable condition.
This means, for example, that costs incurred for repairing damaged goods before they
can be sold must first be deducted.
4 Emphasize that the result of applying the rule of valuing at the lower cost price or net
realizable value is that stock is cautiously valued. A lower figure for closing stock means
a higher ‘cost of goods sold’ and therefore a lower gross profit. This is known as being
‘prudent’.
5 Illustrate how to apply the basic rule of stock valuation by showing the example opposite
on the board or overhead projector.
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Example
Andy Struddles has valued his stock at 31 December Year 3 at cost £6,340. Included in
this figure are items for which the stock value is under review.
● Item 1 cost £410.The likely selling price has fallen from £590 to £530.
● Item 2 cost £290. Its normal selling price is £350 but it is now expected to sell for
only £270.
● Item 3 cost £330.The item now has no sale or scrap value.The normal selling price
is £450.
● Item 4, which cost £215, has been damaged and cannot be repaired. Its normal selling
price is £280 but it is now expected to sell for only £220.
● Item 5 cost £170. Its normal selling price was £250 but this had been reduced in
November Year 3 to £190.
● Item 6, which cost £520, has been damaged and is to be repaired at a cost of £110.
Once repaired it is expected to sell for £570.
Andy Struddles
Revised stock valuation
at 31 December Year 3
£
Pre-revised stock valuation 6,340
Item 1 Valued at cost. The stock value is unchanged. The likely selling price
is well above this figure.
Item 2 Valued at net realizable value. The expected selling price has fallen
below the cost price, so that £270 becomes the stock valuation figure. (20)
Item 3 Valued at net realizable value. The stock value has fallen to zero.
This will be written off. (330)
Item 4 Valued at cost. Although the selling price has fallen it is still above
cost. The stock value is unchanged.
Item 5 Valued at cost. The stock value is unchanged. The reduced selling
price remains above cost.
Item 6 Valued at net realizable value. The expected selling price has fallen
below the cost price, so that £460 (ie £570 - £110) becomes the
stock valuation figure. (60)
Revised stock valuation 5,930
Note
A detailed explanation is given here for each item. Usually a question would not require
such detail to be provided.
6 Explain that the type of question similar to the example above requires adjustment for
the difference in valuation. In examination answers, some candidates add the total net
realizable value to the existing stock figure, which results in a much higher figure than
they started with.
7 Show the significance of the stock valuation rule by displaying the example overleaf on
the board or overhead projector.
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Example
In Year 1 a trader purchases 8 machines at a cost of £1,000 each. During the course of
the year, 6 machines are sold at £1,500 each. The remaining 2 machines are valued at
the year end at cost price, ie at £1,000 each.The profit is calculated as follows:
£ £
Sales (6 × £1,500) 9,000
Purchases (8 × £1,000) 8,000
less Stock (2 × £1,000) 2,000 6,000
Profit 3,000
The profit in Year 1 consists of £500 on each of the 6 machines sold. If the unsold
machines had been valued at the selling price, ie at £1,500, the profit for Year 1 would
have been calculated as follows:
£ £
Sales (6 × £1,500) 9,000
less Purchases (8 × £1,000) 8,000
less Stock (2 × £1,500) 3,000 5,000
Profit 4,000
The profit is therefore equal to £500 on each of the 8 machines when, in fact, only 6
have been sold. The profit on the 2 unsold machines has been ‘anticipated’. If the
machines are sold in Year 2 then no profit on their sale is recorded for that year even
though plenty of effort, time, and expense might have gone into selling them in that year.
The stock at the end of Year 1 becomes the opening stock for Year 2. By valuing
the stock in Year 1 at selling price (ie the higher figure), the opening stock for Year 2 is
increased. The cost of goods sold is also increased and gross profit is reduced. The
recorded position between the 2 years is incorrect and misleading.
on the overhead projector. Ask the students to work through them.
9 Explain the term ‘mark-up’. It is a term used in questions relating to stock valuation,
and it often causes students problems in the examination. ‘Mark-up’ can be defined as:
cost of goods sold

+ some running cost = mark-up = selling price
+ profit
10 Display Figure 23.1 (opposite) on the board or overhead projector to illustrate how
mark-up is obtained.
11 With reference to Figure 23.1, explain that goods may be ‘marked up’ from the cost
price to ensure that an amount is received towards running costs and, if possible, to make
some net profit. For example, if the cost price of a product is £300 and the mark-up to
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selling price is 331/3 %, the selling price will be £400.The original cost portion can be
viewed as thirds.The extra 1/3 at the end means that there are now 4 thirds (4/3 ) instead
of 3 thirds ( 3/3 ).The mark-up or 1/3 on the cost price = 1/4 (25%) of the selling price.
Selling Price
Running cost
Cost of goods sold + profit
1 2 3 4
Mark-up 331/3 % = 1/3

Figure 23.1 Mark-up
12 Point out that the cost portion may also be viewed as quarters, fifths, and so on.
By adding the numerator to the denominator in the fraction of the cost price, the
denominator of the fraction in the selling price (the mark-up) can be obtained.Thus:
1
/3 on cost price = 1 + 3 = 1/4 of selling price
or
1
or
1
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Lesson 24: Club and society accounts
Topic summary
● The deficiencies of a Receipts & Payments Account
● The presentation of an Income & Expenditure Account with regard to the distinctive
features of club or society accounts
● The suitable and effective presentation of subsidiary income and expense information
● The calculation of the accumulated fund of a club or society
● The presentation of a balance sheet of a club or society
● The correct recording of amounts received through donations

21.1 The differences between a Receipts & Payments Account and an Income &
Expenditure Account
21.2 The preparation of an Income & Expenditure Account from a list of balances or
from a Receipts & Payments Account (both with supporting data)
21.3 The suitable grouping of associated items of income and expenditure within an
Income & Expenditure Account
21.4 The preparation, if required, of an ancillary account for trading activities, eg
Refreshments Account, and the carrying of the surplus/deficit into the Income
& Expenditure Account
21.5 The preparation of the balance sheet of a club or society
21.6 The calculation, if necessary, of the amount of the Accumulated Fund
Many candidates will have personal experience of club or society accounts, whether as club
member recipients of the accounts or whether in helping to prepare the accounts. This
experience can be drawn upon when teaching this topic. Unfortunately, though, club
accounts are often not prepared according to good accounting principles.
Questions on this topic can be set with various kinds of starting information.The questions
usually start from either a trial balance or a Receipts & Payments Account. Plenty of care
is needed to answer the questions and some distinctive terms should be learned. Club
accounts, nevertheless, are based on the same accounting principles as those for a business.
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Club and society accounts
Step 1
Aim: to recognize the deficiencies of a Receipts & Payments Account
1 Explain the nature of a Receipts & Payments Account, ie that it represents a summary
(in debit and credit form) of cash/bank transactions for a given period.
2 Display the example of a Receipts & Payments Account that follows on the board or
overhead projector.
Example
Linkwell Social Club
Receipts & Payments Account
Receipts £ £ Payments £
Balance at bank, 1 Jan Yr 9 870 Hire of rooms 1,860
Subscriptions Printing and stationery 570
received: Purchase of video equipment 1,160
Year ended 31 Dec Yr 8 420 Hire of films 320
31 Dec Yr 9 4,100 Annual social 490
31 Dec Yr 10 240 Visit to Bruges 380
4,760 Balance at bank, 31 Dec Yr 9 850
5,630 5,630
3 Point out that the 2 sides of the account relate to the debit and credit of a cash or bank
account.The amounts, however, are item totals for the year and not individual transaction
entries.
Ask the students to identify the weaknesses of a Receipts & Payments Account.
The weaknesses are that:
● there is no allowance for accruals and/or prepayments, eg subscriptions are included
for Years 8 and 10;
● no account is taken of capital expenditure as distinct from revenue expenditure, eg the
video equipment is fully charged to Year 9 even though it may well be in use for
several years;
● by itself the Receipts & Payments Account is incomplete: there is no mention of
assets owned other than those mentioned in the account;
● there is no mention of liabilities and, unfortunately, the Receipts & Payments Account
is sometimes the only account statement issued to members.
Regarding the third and fourth points, assets and liabilities should be dealt with separately,
ie in a balance sheet. The club or society members also need to know by means of
the balance sheet whether the capital has increased or decreased over the period and
why this is so.
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Step 2
Aim: to be able to present an Income & Expenditure Account with regard to the
distinctive features of club or society accounts
1 Explain that the Income & Expenditure Account is used by clubs and societies, ie
non-profit-making organizations, as a replacement for the Profit & Loss Account. The
account has certain distinctive features, but it is constructed on similar principles to the
Profit & Loss Account. It incorporates adjustments for:
● accruals
● prepayments
● provision for depreciation of fixed assets.
Thus, the reason for using an Income & Expenditure Account is to include only ‘true’
income & expenditure for a period, in order to obtain a result that correctly reflects the
activities of the club or society for the period.
2 Tell the students that, like the Profit & Loss Account, the Income & Expenditure
Account is part of the double-entry system: the period totals for income and the various
expenses are transferred to it from the General Ledger.
3 Emphasize that the final accounts issued to members of clubs or societies should be:
● meaningful
● relevant
● easily understood.
Many club members may have little if any knowledge of accounting. They should be
supplied with statements that are informative and yet easily read.The members should
not have to search for separate pieces of information and then have to put them
together to form a complete financial picture.Therefore, matters relating to a particular
topic should be brought together, ie items should be appropriately ‘grouped’.
4 Illustrate how to present an Income & Expenditure Account by showing the example
opposite on the board or overhead projector.
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Example
Tattenham Sports Club

Dr Cr
£ £
Sports equipment at cost 6,300
Video equipment at cost 2,200
Provision for depreciation:
Sports equipment 2,400
Video equipment 800
Balance at bank 1,860
Subscriptions received 7,150
Rent payable 3,400
Insurance 530
Telephone and postage 410
General expenses 260
Surplus on annual dance 180
Accumulated fund 4,430
14,960 14,960
Additional information that applies at 31 December Year 4:
(1) subscriptions: £280 has been received in advance of Year 5; £360 is accrued due for
Year 4;
(2) rent payable accrued due amounted to £400;
(3) prepaid insurance £80;
(4) depreciation to be provided:
sports equipment – 20% on cost
video equipment – 121/2% on cost.
Required
An Income & Expenditure Account for Tattenham Sports Club for the year ended
31 December Year 4.
Note
Remind the students that capital expenditure items and liabilities are not included in this
account.They are shown in the balance sheet, which is dealt with on page 196.
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Solution

Expenditure £ £ Income £
Rent payable (+400) 3,800 Subscriptions 7,150
Insurance (-80) 450 less received in advance 280
Telephone and postage 410 6,870
General expenses 260 add accrued due for Year 4 360
7,230
Depreciation:
Sports equipment 1,260 Annual dance – surplus 180
Video equipment 275 1,535
Surplus of income
over expenditure 955
7,410 7,410
5 Point out that a common mistake made by candidates is that they confuse this account
with the Receipts & Payments Account. Stress that income is entered on the credit side
of Income & Expenditure Account and expenditure on the debit side, as they are in the
Profit & Loss Account.
6 Subscriptions
Highlight the fact that in the above account, it is acceptable merely to state ‘7,230’
against subscriptions without any detail of adjustments. However, the students should be
warned that this method is unwise. Examiners like to award marks for correct workings,
if possible. If only the adjusted figure is given with no indication of the adjustments
made and that figure is incorrect, then no marks for workings can be awarded.
An alternative to showing adjustments within the Income & Expenditure Account is to

key the adjusted figures to workings shown clearly after the account.This practice can,
of course, be applied to other workings and is discussed further in Lesson 25.
7 Events
Clubs or societies may hold events or have special occasions, eg a dance, a social, a day
out, or a trip abroad.These events may be aimed at raising funds.The outcome may be
a surplus, which can boost club funds, or it may be a deficit where expenditure exceeds
income.These events might involve 2 or even 3 items that are classified as partly income
and partly expenditure.
The members would be interested in the result of any particular event, ie whether a
surplus or a deficit. It is therefore essential that these items are brought together, ie
‘grouped’. If the outcome is a deficit, the group should be positioned on the debit side;
if a surplus, the group should be on the credit side. Candidates often fail to position
groups correctly and consequently lose marks.
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In the example on page 192, surplus on the annual dance is recorded as one entry only
in the trial balance, ie it is shown as the outcome.This entry could have been shown as
2 or more items. The best practice is for the students to develop the habit of looking
for appropriate groupings when presented with a question concerning Income &
Expenditure Accounts.The exercises in this lesson provide the opportunity for practice.
8 With reference to the Income & Expenditure Account above, draw attention to use of
the phrase ‘surplus of income over expenditure’. For Income & Expenditure Accounts,
this phrase replaces the term ‘net profit’ found in Profit & Loss Accounts. If expenditure
exceeds income, the phrase to use is ‘deficit, excess of expenditure over income’, not
‘net loss’.
Step 3
Aim: to be able to present subsidiary income and expense information suitably and
effectively
1 The presentation of subsidiary income and expense information has been referred to in
Step 2. Explain that this can be taken a stage further by using a separate account to deal
specifically with a club or society’s trading activities. The examination might require a
separate Trading Account to carry the trading activities. The Trading Account should
reach a profit or loss on trading which is then transferred to the Income & Expenditure
Account.A common and major mistake made by candidates is to fail to carry the trading
profit or loss into the Income & Expenditure Account or else to repeat the items already
included in the Trading Account in the Income & Expenditure Account.
Set out the correct sequence of the effect of trading and other activities:
Trading Account
£ £
Trading expenditure Trading income
Profit on trading c/d X1

£ £
Various expenditure items Profit on trading b/d X2
Surplus of income
over expenditure X3
overhead projector.Work through the exercise with the students. Stress that with T/24.2
capital expenditure items are not included in the account.
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The item ‘subscriptions’ might involve making a number of adjustments.This situation

occurs in exercise T/24.3* in the Appendix (page 310), which also involves the
preparation of a separate Trading Account.Ask the students to work through the exercise.
Note
Advise the students to follow the requirements of the question closely. A separate
Trading Account should be provided in an examination answer only if it is specifically
required. Some candidates prepare one when it is not required – and forfeit marks by
preparing it incorrectly.
Step 4
Aim: to be able to calculate the accumulated fund of a club or society
1 Explain that instead of a Capital Account, a non-profit-making organization has an

‘accumulated fund’. Like a Capital Account, the fund represents the difference between
assets and liabilities.Therefore,
assets = capital + liabilities
is replaced by
assets = accumulated fund + liabilities
2 Illustrate how to calculate an accumulated fund by showing the following example on

the board or overhead projector.
Example
The following receipts and payments account has been prepared for the Bloxmore
Travel Group for the year ended 31 December Year 5:
Receipts £ Payments £
Balance at bank 1,020 Refreshments 182
Cash in hand 48 Rent of room 1,680
Subscriptions for Year 5 2,760 Travelling expenses 64
Interest on bank account 32 Postage, printing and stationery 53
Subscriptions for Year 6 75 Expenses for guest speakers 810
Hire of films 78
Cash in hand 82
Balance at bank 986
3,935 3,935
Additional information:
31 December 31 December
Year 4 Year 5
£ £
Subscriptions in arrears – 60
Rent accrued due 40 50
Stock of stationery 18 15
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The calculation of the accumulated fund at 1 January Year 5 is as follows:
£ £
Cash in hand 48
Stock of stationery 18
1,086
less Rent accrued 40
1,046
3 Ask the students to prepare the Income & Expenditure Account for Bloxmore Travel
Group in vertical format for the year ended 31 December Year 5. This Income &
Expenditure Account is shown below.
Bloxmore Travel Group

Income
£ £
Subscriptions 2,760
add accrued due Year 5 60 2,820
Interest on bank account 32
2,852
less Expenditure
Refreshments 182
Rent of room (1,680 - 40 + 50) 1,690
Travelling expenses 64
Postage, printing and stationery
(53 + 18 - 15) 56
Expenses for guest speakers 810
Hire of films 78 2,880
Excess of expenditure over income (deficit) (28)
Step 5
Aim: to be able to present a balance sheet of a club or society
1 As a straightforward example, work through the balance sheet for Bloxmore Travel
Group (overleaf) with the students. Carefully explain each item.
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Bloxmore Travel Group

Current assets £ £
Stock of stationery 15
Subscriptions accrued due 60
Bank balance 986
Cash in hand 82 1,143

Rent accrued due 50
Subscriptions received for Year 6 75 125
1,018
Accumulated fund
Balance at 1 Jan Yr 5 1,046
less Deficit for Yr 5 28
1,018
2 Refer the students to the example in Step 2 (pages 191–2). The items not yet marked
off should be brought into the balance sheet for Tattenham Sports Club at 31 December
Year 4.The balance sheet is presented below in vertical format.

Cost depreciation value
Sports equipment 6,300 3,660 2,640
Video equipment 2,200 1,075 1,125
8,500 4,735 3,765
Current Assets
Subscriptions accrued due 360
Prepaid insurance 80
Bank 1,860
2,300
Rent 400
Subscriptions in advance 280 680
1,620
5,385
Financed by:
Accumulated fund 4,430
add Surplus of income over expenditure 955
5,385
3 Refer the students back to exercise T/24.1 and ask them to prepare the balance sheet
of the Southern Jazz Club.
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Step 6
Aim: to be able to record correctly amounts received by a club or society through

donations
Explain that a donation is a gift of money to an organization.There are two ways in which
a donation can be recorded in the books of account:
(a) as income in the Income & Expenditure Account;

(b) by adding the amount to the accumulated fund in the balance sheet, ie ‘capitalizing’ it.
If the amount is small it is more likely, that method (a) will be used.
Note
In any examination question involving a donation, the candidates will be told if it is to be
capitalized. If there is no specific instruction, the amount should be placed to the credit of
Income & Expenditure Account.
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Lesson 25: The presentation of answers

This lesson is devoted to bringing together points regarding the layout and presentation of
examination answers. It is often evident that candidates understand the subject matter of a
question but throw away vital marks by overlooking or disregarding key points of presentation.
Attention to the appearance of the answers could well make all the difference between an
overall fail or pass.
A number of matters are highlighted, regarding presentation, that could be introduced into
the course at appropriate stages.These points can be particularly related to the requirements
of worked questions. However, it is advisable to reinforce them for the concluding stages
of the course and when finally helping the students to prepare for the examination itself.
1 Ledger accounts
The correct description must be shown for each debit and credit entry.The rule is that
this should be the name of the related account, ie where the double entry is completed.
Whenever possible, the date should be included as part of an entry.When balancing an

account, the double entry should be completed by bringing down the balance.The date
shown should be the first day of the next accounting period.
2 Layout of final accounts

For the Trading and Profit & Loss Account and balance sheet, vertical presentation is
purely optional and the students will not lose marks by using horizontal layout.
However, the balance sheet, in particular, can often be presented more effectively in
vertical format.
3 The difference between an account and a statement

This difference needs to be fully stressed. If a statement is required, it must not be
presented in account form. For an example of a statement, see ‘Andy Struddles: revised
stock valuation at 31 December Year 3’ in Lesson 23, page 185.
A suitable heading should always be provided for a statement. Where an account is

specified as being required, it must be in proper account format with debit and credit.
Running balance format is usually acceptable, as long as the debit and credit columns
are clearly marked with Dr and Cr respectively, and the cumulative (updated) balance is
clearly shown as well (either Dr or Cr).
Vertical presentation of a Trading and Profit & Loss Account effectively becomes a
statement, but that is acceptable.The balance sheet is a statement anyway.
4 Presentation in columns (‘columnar presentation’)

The 3-column Cash Book is probably the most familiar example.This should be shown
in the recognized sequence as follows:
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The presentation of answers
Dr Cr
Discount Discount
allowed Cash Bank received Cash Bank
£ £ £ £ £ £
Another example could be as follows:
Year 1 Year 2 Year 3

A
B
C
A question might specify this layout. If so, an answer should keep to the instructions and
not show something totally different, as may sometimes be the case.
5 Workings
Workings should be clearly shown. They should not be unnecessarily complicated.
Thus, if an adjustment is made to the figure of ‘rent payable’ in the Profit & Loss
Account, it is sufficient to show the adjustment as follows:
£
Rent payable (16,000 - 2,400) 13,600
The examiner can spot the working straightaway instead of having to search it out at a
more distant point.
If, however, the adjustment of an item has to be more complicated, workings (W1 W2
and so on) should be shown underneath the main account but ‘keyed’ to it, eg:

£ £
W1
Rent & rates 12,130 Gross profit b/d X
Various other entries X
X
X
X
Net profit X
X X
W1 X
X
X
X
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The presentation of answers
6 Spacing
The spacing of examination answers often leaves much to be desired. Sometimes work
is crammed together within the first 3 or so pages of the answer book and becomes
difficult to read. Sensible spacing comes with practice and some guidance.
Where work is cancelled, it should be struck through with a bold diagonal line. If part
of the answer is shown later on in the answer book, the earlier stage of the answer
should clearly signal the fact.
Work often lacks legibility because candidates use too light a shade of ink. Dark blue or
black inks are strongly recommended. Pencil should never be used to write answers to
questions in this examination.
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Appendix 1: Exercises, some worked solutions,

and support material
T/1.1
State the effect on a balance sheet of each of the following transactions, in each case stating
which assets and/or liabilities are affected.
(1) Purchase of goods by cheque £350.

(2) Sale of goods for cash £290.
(3) Purchase of office furniture from D Jackson on credit £318.
(4) Repayment by cheque of £1,500, previously borrowed from T Walls.
(5) The receipt of a cheque for £965 from a debtor, F Wiles.
(6) Purchase of postage stamps for £11 in cash.
(7) Payment by cheque of £617, due to T Gates, creditor.
T/1.2
State the effect on a balance sheet of selling a computer for £3,600:
(i) if the purchaser paid by cheque;

(ii) if it were sold on credit;
(iii) if £2,000 were paid by cheque on account and if the remainder were on credit.
T/1.3
Draw up A Grant’s complete balance sheet from the following incomplete data at 31 March
Year 4, including any missing items:
£
Creditors 3,970
Goods 5,160
Debtors 4,250
Cash at bank 2,380
Loan from J Tesco 3,500
Motor vehicle 5,600
201
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Appendix 1: Exercises
T/1.4
Enter the following transactions into the accounts of K Morgan:
Year 8
1 Aug Started business with £15,000 in cash
3 Aug Transferred £14,200 of the cash into a newly opened business bank account
7 Aug Bought goods on credit from B Fury for £760
12 Aug Bought office furniture, for £390, paid by cheque
16 Aug Sold for cash £125-worth of goods that had cost the same amount
19 Aug Purchased a lease on premises, for £8,200 paid by cheque
25 Aug Bought stationery for £27 in cash
28 Aug Paid B Fury the amount owing
30 Aug Received from N Lawson a cheque for £2,000, as a loan to the business
T/1.5
R Lines has the following items in his balance sheet on 31 October Year 3:
£
Cash at bank 1,615
Debtors 3,740
Goods 4,850
Creditors 2,860
Motor vehicle 6,400
Loan from T Clasp 4,000
During November Year 3, R Lines:
● banked cheques received from debtors, amounting to £2,900;

● paid creditors £2,060 by cheque;
● bought goods on credit for £1,300;
● sold on credit goods that had cost £1,450 for the same amount.
Required
Prepare the balance sheet of R Lines at:
(i) 31 October Year 3

(ii) 30 November Year 3.
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T/2.1
Beside each of the details in the table, state:
(i) the name of the account to be debited;

(ii) the name of the account to be credited.
Account Account
debited credited
(1) Bought goods on credit from T Ball
(2) Sold goods for cash
(3) Weighing equipment for use in the business
bought by cheque
(4) Returned some of the goods previously bought from T Ball
(5) Sold goods on credit to D Trill
(6) Some furniture for use in the business bought on credit
from T Doyle
T/2.2
Beside each of the details in the table, state:
(i) the name of the account to be debited;

(ii) the name of the account to be credited.
Account Account
debited credited
(1) Sold goods on credit to A Darby
(2) A Brittle, debtor, returns goods
(3) A Darby pays his account by cheque
(4) Goods are returned to T Zuck, creditor
(5) The account of F Lane, a creditor, is paid by cheque
(6) A Darby returns some of the goods previously sold to him
T/2.3
You are required to enter the transactions of B Lancaster in the appropriate accounts.
Year 9
2 Jan Commenced business with £15,000 in the bank
5 Jan Bought goods from T Minott on credit for £620
9 Jan Bought office equipment by cheque for £940
13 Jan Sold goods to R Lake on credit for £370
16 Jan R Lake returned goods worth £80
22 Jan Sent cheque for £350 to T Minott on account
25 Jan Returned goods worth £120, to T Minott
27 Jan Sold goods for £90 in cash
30 Jan Purchased goods from T Marner on credit for £430
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T/2.4
You are required to enter the transactions of R Quarnby in the appropriate accounts.
Year 5
3 Sep Bought goods from A Little on credit for £846
6 Sep Sold goods for £73 in cash
8 Sep Bought motor vehicle by cheque for £4,300
11 Sep Sold goods to H Keen on credit for £380
13 Sep H Keen returned goods worth £83
17 Sep Returned goods to A Little worth £143
20 Sep Received cheque for £60 from H Keen on account
24 Sep Bought office furniture by cheque for £365
27 Sep Sent cheque to A Little in settlement of account
29 Sep Sold goods to J Strong on credit for £412
T/3.1
In the column beside each of the details in the table, state which account is to be debited
and which account is to be credited.
Account Account
debited credited
(1) Bought goods for cash
(2) Paid creditor the amount owing by cheque
(3) Bought office equipment on credit from Office Services Ltd
(4) Paid rent in cash
(5) Sold goods for cash
(6) F Tracey, debtor, paid her account by cheque
T/3.2
In the column beside each of the details in the table, state which account is to be debited
and which account is to be credited.
Account Account
debited credited
(1) Received cheque from T Ward as a loan
(2) Sold goods on credit to J King
(3) Paid telephone account by cheque
(4) Sold office furniture for cash
(5) Paid insurance by cheque
(6) Bought goods on credit from R Veal
(7) A customer, B Trent, returned goods
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T/3.3
Record the following in accounts:
Year 5
1 Jul Jen Ling started in business with £17,000 in a new bank account
3 Jul Purchased goods from K Merrit on credit for £620
7 Jul Returned goods to K Merrit worth £45
9 Jul Paid rent by cheque for £310
11 Jul Drew £130 from bank for office cash
12 Jul Bought office furniture by cheque for £420
14 Jul Sold goods to T Larkspur on credit for £560
16 Jul T Larkspur returned goods worth £65
19 Jul Purchased stationery for £34 in cash
20 Jul Sold goods for £370, paid by cheque
22 Jul Bought a computer for use in the business for £3,500 from Comtec Ltd,
£1,000 of which was paid by cheque, with the remainder on credit.
25 Jul Drew from bank £360 in cash for office
26 Jul Paid wages in cash, £330
28 Jul Sold goods to T Larkspur for £850 on credit
30 Jul Received cheque from T Larkspur for the amount owing on 17 July Year 5
31 Jul Paid insurance by cheque for £270
T/3.4
Record the following in accounts:
Year 3
1 Oct Choi Wing started in business with £21,000 in cash
2 Oct Paid £19,000 cash into a newly opened business bank account
4 Oct Purchased goods from N Tucker on credit for £850
7 Oct Bought office furniture by cheque for £930
9 Oct Bought a fax machine for use in the business for £2,500 from Oftech Ltd,
£1,000 of which was paid by cheque with the remainder of the account on
credit
10 Oct Returned goods worth £70 to N Tucker
12 Oct Paid wages in cash, £150
13 Oct Sold goods to K Francis on credit for £590
14 Oct Paid insurance by cheque for £280
16 Oct Choi Wing drew £350 from bank for private use
18 Oct Purchased stationery for £210 in cash
20 Oct K Francis returned goods worth £80
21 Oct Bought goods from B Minott on credit for £380
22 Oct Sold to A Jenkins some office furniture bought for £200 on 7 October:
received a cheque for £30, with the balance of £170 on credit
24 Oct Sent cheque to N Tucker to settle the account
28 Oct Received cheque from K Francis in settlement of the amount owing
30 Oct Choi Wing drew £430 from bank for private use
31 Oct Sold goods on credit to R Flinn for £360
205
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T/4.1
(a) Balance the following account:
Ching Wong
Year 4 £ Year 4 £
6 May Returns outwards 80 2 May Purchases 730
9 May Purchases 315
17 May Purchases 250
(b) How would you describe the balance you have just entered?
T/4.2
Enter the following into debtor and creditor accounts only. Balance each account at 31 October
Year 3 and bring down the balances.
Year 3
2 Oct Bought goods from F Swain on credit for £480
6 Oct Sold goods to N Knight on credit for £215
9 Oct Returned goods to F Swain that had cost £62
12 Oct Bought goods from A Hinter on credit for £390
15 Oct N Knight returned goods which she had bought on 6 October for £45
18 Oct Returned goods to A Minter that had cost £65
20 Oct Received cheque for £80 from N Knight in part payment
21 Oct Sold goods to W Mull on credit for £535
23 Oct Sent cheque for £418 to F Swain
26 Oct W Mull returned goods that he had bought on 21 October for £90
27 Oct Sold goods to N Knight on credit for £383
29 Oct Received cheque for £70 on account from W Mull
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T/4.3
This bank account is an example of running balance format.
Bank account
Debit Credit Balance
Year 7 £ £ £
1 Mar Balance 1,316 Dr
4 Mar Insurance 300 1,016 Dr
7 Mar Sales 740 1,756 Dr
11 Mar Drawings 200 1,556 Dr
14 Mar Purchases 450 1,106 Dr
18 Mar Wages 300 806 Dr
23 Mar Machine repairs 700 966 Dr
25 Mar L Logan 570 1,536 Dr
26 Mar Wages 380 1,156 Dr
30 Mar Rent 450 1,626 Dr
31 Mar Balance 1,626 Dr
Note
The above is not a representation of statements issued by banks to their customers. It is of
an account drawn up and maintained by the customer.
T/4.4
The following transactions are to be entered in (two-sided) accounts:
Year 5
1 Apr Chan Lee commenced business with £12,000 in cash
2 Apr Transferred £11,000 in cash into a bank account
5 Apr Purchased goods from D Styles on credit for £830
9 Apr Bought office furniture for £250 in cash
12 Apr Sold goods to S Wick on credit for £570
14 Apr Returned goods worth £75 to D Styles
16 Apr Paid rent by cheque for £350
18 Apr Purchased office stationery for £30 in cash
21 Apr Chan Lee made drawings in cash for £140
24 Apr Paid insurance by cheque for £170
25 Apr Sold goods to S Wick on credit for £490
28 Apr Purchased goods from D Styles on credit for £560
30 Apr Sent cheque to D Styles for £755
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T/4.5
Against each of the listed items, tick () either the debit column or the credit column
according to which side of the trial balance you would expect the item to appear.
Debit Credit
Office equipment
Creditors
Insurance
Cash
Rent payable
Debtors
Sales
Rent receivable
Drawings
Motor vehicle
Loan from F Lang
Capital
Wages
Premises
T/4.6
On 30 June Year 4, D Lamb had the following account balances:
£
Debtors 2,530
Creditors 3,670
Rent 1,400
Motor vehicle 5,300
Loan from A Green 2,500
General expenses 1,040
Purchases 3,650
Sales 5,980
Cash at bank 7,900
Wages 2,740
Drawings 420
Capital 19,630
Required
Prepare the trial balance of D Lamb at 30 June Year 4.
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T/5.1*
(a) The following details relate to K Fox for the year ended 30 September Year 3:
£
Sales 15,800
Running expenses 4,300
Required
A statement relating to K Fox showing the following for the year ended 30 September
Year 3:
(i) gross profit

(ii) total net profit.
(b) The following information is available relating to R Lott in respect of the year ended
31 December Year 2:
£
Sales 26,900
Income from other than trading 1,200
Running expenses 12,400
Required
Prepare a statement relating to R Lott showing the following for the year ended
31 December Year 2:
(i) gross profit

(ii) total net profit.
T/5.1/A
(a) K Fox
Income and profit
for the year ended 30 September Year 3
£ £
Sales 15,800
less Cost of goods sold 8,500
Gross profit 7,300
less Running expenses 4,300
Net profit 3,000
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(b) R Lott
Income and profit
£ £
Sales 26,900
less Cost of goods sold 9,300
Gross profit 17,600
add Non-trading income 1,200
18,800
less Running expenses 12,400
(Total) Net profit 6,400
Note
The above are statements – not accounts.
T/5.2
T Avis
Dr Cr
£ £
Purchases 5,160
Sales 6,320
Debtors 750
Creditors 910
Rent payable 700
Office expenses 360
Rent receivable 450
Motor vehicle 1,600
Cash at bank 1,040
Cash in office 50
Drawings 800
Capital 4,000
11,680 11,680
Note
It is assumed that T Avis started in business on 1 January Year 5 by placing £4,000 in a
business bank account.Therefore, there is no opening stock. Stock at 31 December Year 5
was valued at cost at £2,100.This figure is due to be brought into the accounts of TAvis
after the agreement of the trial balance.
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T/5.3
At the end of her first year’s trading, Shui Ling drafted the following trial balance.You are
required to draw up a Trading and Profit & Loss Account for the year ended 31 December
Year 4.
Shui Ling
Dr Cr
£ £
Purchases 19,800
Sales 32,360
Cash at bank 3,960
Wages 7,510
Debtors 3,680
Creditors 2,100
Rent 3,700
Motor vehicles 12,400
Insurance 390
Drawings 4,300
Capital 31,000
65,460 65,460
Shui Ling valued her stock at 31 December Year 4 at cost at £4,650.
Note
A balance sheet is not required.
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T/5.4
The following is the trial balance of Fred Trotter after his first year’s trading. You are
required to draw up a Trading and Profit & Loss Account for the year ended 30 June Year 8.
Fred Trotter
Trial balance at 30 June Year 8
Dr Cr
£ £
Cash at bank and in office 2,080
Rent 2,600
Debtors 3,100
Creditors 5,100
Purchases 36,440
Wages 15,100
Sales 59,400
Sundry expenses 1,620
Premises 38,500
Drawings 4,300
Insurance 390
Capital 53,000
117,500 117,500
Stock at 30 June Year 8 was valued at £4,220.
Note
T/6.1*
From the following details you are required to draw up a complete balance sheet for
Sai Yoon at 31 October Year 7, including any item that you believe to be missing.The balance
sheet should be in the correct format.
Loan from T Gaul, repayable 31 December Year 9, £4,000

Stock £3,980 Premises £42,000 Bank £3,130
Motor vehicle £7,100 Cash £110 Creditors £7,120
Debtors £7,800 Fixtures and fittings £2,750
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T/6.1/A
Sai Yoon
Balance sheet at 31 October Year 7
£ £
Fixed Assets Capital 55,750
Premises 42,000
Fixtures and fittings 2,750 Amount due in more than 1 year
Motor vehicle 7,100 Loan: T Gaul, repayable
51,850 31 Dec Yr 9 4,000
Current Assets £ Amount due within 1 year

Stock 3,980 Creditors 7,120
Debtors 7,800
Bank 3,130
Cash 110 15,020
66,870 66,870
T/6.2*
With reference to the data in T/5.3 and the answer to it, draw up a balance sheet for Shui
Ling at 31 December Year 4.
T/6.2/A
Shui Ling
£ £ £
Fixtures and fittings 3,800 Commencing balance 31,000
Office equipment 5,400 add Net profit 5,090
Motor vehicles 12,400 less Drawings 4,300 790
21,600 31,790
£
Current Assets
Amount due within
Stock 4,650 1 year
Debtors 3,680 12,290 Creditors 2,100
Bank 3,960 33,890 33,890
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T/6.3*
By reference to the data of T/5.4 and the answer to it, draw up a balance sheet for Fred
Trotter at 30 June Year 8.
T/6.3/A
Fred Trotter
Balance sheet at 30 June Year 8
£ £ £
Premises 38,500 Balance at 1 Jul Yr 7 53,000
Fixtures and fittings 3,600 add Net profit 6,900
Motor vehicles 9,200 less Drawings 4,300 2,600
51,300 55,600
Current Assets £
Amount due within
Stock 4,220 1 year
Debtors 3,100 9,400 Creditors 5,100
Bank 2,080 60,700 60,700
T/6.4*
(a) The ledger of Alison Sharpe includes the following balances at 30 September Year 4:
£
Debtors 3,640
Motor vehicle 2,100
Stock 4,080
Cash at bank 1,970
Cash in office 60
Creditors 2,940
Loan from T Wylie, repayable 30 Jun Yr 7 2,000
Required
Prepare a balance sheet for Alison Sharpe at 30 September Year 4, complete with the
balance of capital, which has not been shown above.
(b) On 1 October Year 4, Alison Sharpe purchased another motor vehicle for business use
for £2,600. She paid T Rolt £400 by cheque and the remainder of the amount was
on credit.
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Required
(i) In ledger accounts, record the entries for the transaction.
(ii) State which one of the following effects this transaction will have:
(1) an increase of current assets by £2,600

(2) a decrease of current assets by £2,600
(3) a decrease of current assets by £400
(4) no effect on current assets
(5) an increase of current assets by £2,200.
T/6.4/A
(a) Alison Sharpe

Balance sheet at 30 September Year 4
£ £
Fixed Assets Capital 7,890
Motor vehicle 2,100 Amount due in more than 1 year
Loan – T Wylie
(repayable 30 Jun Yr 7) 2,000
3,080
£
Current Assets
Stock 4,080 Amount due within 1 year
Debtors 3,640 Creditors 2,940
Bank 1,970
Cash 60 9,750
12,830 12,830
(b) (i) Motor Vehicle

Year 4 £
1 Oct Balance 2,100
1 Oct Bank and T Rolt 2,600
Bank
Year 4 £ Year 4 £
1 Oct Balance 1,970 1 Oct Motor vehicle 400
T Rolt
Year 4 £
1 Oct Motor vehicle 2,200
(ii) Answer = (3) a decrease of current assets by £400
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T/7.1
Prepare a Trading and Profit & Loss Account for Lui Man for the year ended 31 December
Year 6 from the following details:
£
Purchases 15,460
Sales 31,970
Carriage inwards 860
Carriage outwards 1,030
Wages 8,460
General expenses 1,270
Stock at 31 Dec Yr 6 2,790
Note
Year 6 was Lui Man’s first year of trading.
T/7.2
T Avis
Dr Cr
£ £
Purchases 9,260
Sales 13,050
Debtors 1,170
Creditors 1,750
Rent payable 1,100
Office expenses 590
Rent receivable 450
Returns inwards 480
Motor vehicle 1,600
Cash at bank 1,230
Cash in office 70
Stock at 1 Jan Yr 6 2,100
Drawings 1,100
Capital 5,430
21,020 21,020
Stock at 31 December Year 6 was valued at £2,450.
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T/7.3
Using the following information, draw up a Trading and Profit & Loss Account for Chea
Yee for the year ended 31 May Year 4:
£
Stock at 31 May Yr 3 27,380
Purchases 143,700
Sales 231,600
Wages 53,200
Stock at 31 May Year 4 25,300
T/7.4
From the following information, draw up a Trading and Profit & Loss Account for G Crumb
for the year ended 31 October Year 7:
£
Sales 68,890
Stock at 31 Oct Yr 6 7,640
Rent payable 2,800
Purchases 49,620
Returns inwards 980
Rent receivable 1,200
Wages 8,030
Carriage inwards 1,010
Office expenses 390
217
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T/7.5: The end-of-year procedure
Purchases
Sales
Returns outwards account balances
Trading Account
Returns inwards transferred to
Opening stock
Closing stock
Gross profit to
Expense accounts
account
balances Profit & Loss Account
Other income
transferred to
accounts
Net profit to
Capital Account
Drawings Account Capital Account
Cash/bank account(s) Balanced, ie

Debtor/creditor accounts balances c/d
Asset accounts on each account
Balance sheet
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T/7.6
From the following trial balance of T Brackwell, prepare a Trading and Profit & Loss
Account for the year ended 31 July Year 8, together with a balance sheet at that date.
T Brackwell
Trial balance at 31 July Year 8
Dr Cr
£ £
Purchases 177,500
Sales 256,800
Stock at 1 Aug Yr 7 13,200
Returns outwards 5,750
Rent payable 4,500
Wages 53,650
Lighting and heating 4,300
Debtors 24,960
Equipment 29,500
Bank 1,340
Cash 194
Premises 110,000
Creditors 16,394
Loan from T Royal,
repayable 31 Jul Yr 13 26,000
Drawings 11,200
Capital 157,400
462,344 462,344
Stock at 31 July Year 8 was valued at £14,400.
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T/8.1*
Philip Wilshaw, a sole trader, uses the following accounts in his books:
Fixtures and fittings

Rent
Motor vans
Light and heat
J Symes, a creditor
Purchases
Sales
Stock
T P Stanley, a debtor
Bank
Capital
Drawings
Required
Set out the following headings:
To be found in the
Account Type of account following ledger
List under the heading ‘Account’ each of the accounts given above, fill in the column ‘Type
of account’ and, in the last column, state the ledger in which you would find the account.
T/8.1/A
To be found in the
Account Type of account following ledger
Fixtures and fittings Real General (or Nominal)

Rent Nominal General (or Nominal)
Motor vans Real General (or Nominal)
Light and heat Nominal General (or Nominal)
J Symes, a creditor Personal Purchases (or Bought)
Purchases Nominal General (or Nominal)
Sales Nominal General (or Nominal)
Stock Real General (or Nominal)
T P Stanley, a debtor Personal Sales (or Debtors)
Bank Real Cash Book
Capital Personal Private or General
Drawings Personal Private or General
220
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T/8.2*
Division of the (A) (B)
ledger Type of account Name of account
Sales Ledger
Purchases Ledger
General Ledger
Private Ledger
Required
(a) In column (A), state the type of accounts you would expect to find in each division of
the ledger.
(b) In column (B), against the General Ledger and Private Ledger, name 3 accounts
that might be included.
T/8.2/A
Division of the (A) (B)
ledger Type of account Name of account
Sales Ledger Personal/customers (or debtors)
Purchases Ledger Personal/suppliers (or creditors)
General Ledger Impersonal: nominal or real Wages, sales,
rent receivable, etc
Private Ledger Personal (private) Capital
Drawings
Trading and Profit & Loss
T/8.3*
(a) Set out the following table. In the right-hand column, enter the name of the ledger in
which each of the accounts is recorded.
Name of account Name of ledger

(1) Drawings
(2) T Lucan, creditor
(3) Trading
(4) Rent receivable
(5) Fixtures and fittings
(6) Wages
(7) Capital
(b) Suggest 3 ways in which the Sales Ledger might be subdivided.
221
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T/8.3/A
(a)
Name of account Name of ledger
(1) Drawings Private or General
(2) T Lucan, creditor Purchases (or Bought)
(3) Trading Private or General
(4) Rent receivable General (or Nominal)
(5) Fixtures and fittings General (or Nominal)
(6) Wages General (or Nominal)
(7) Capital Private or General
(b) Answers to ways of subdividing the Sales Ledger might include:
● alphabetically, eg by customer names;

● numerically, in which customers are numbered individually, then grouped;
● geographically, ie by sales areas;
● on a product basis, ie according to product categories;
● by type of customer, eg trade as opposed to private customers.
T/8.4
T Avis
£ £
Fixed Assets
Motor vehicle 1,600
2,500
Current Assets
Stock 2,450
Debtors 1,170
Bank 1,230
Cash 70
4,920
Creditors 1,750
5,670
Financed by:
5,670
222
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T/8.5*
From the following trial balance of J Penarth, prepare:
(i) a Trading and Profit & Loss Account for the year ended 30 April Year 8;
(ii) a balance sheet, in vertical format, at 30 April Year 8.
J Penarth
Trial balance at 30 April Year 8
Dr Cr
£ £
Purchases 154,300
Sales 212,600
Premises 48,000
Stock at 1 May Yr 7 39,650
Rent 7,200
Returns inwards 615
Loan from R Jenks, repayable Yr 12 20,000
Debtors 32,290
Creditors 18,160
Wages and salaries 22,400
Cash at bank 6,670
Cash in office 265
Returns outwards 1,430
Insurance 475
Drawings 16,500
Capital 87,000
339,190 339,190
Stock at 30 April Year 8 was valued at £41,080.
223
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T/8.5/A
(i) J Penarth
For the year ended 30 April Year 8
£ £ £
Stock at 1 May Yr 7 39,650 Sales 212,600
Purchases 154,300 less Returns inwards 615
add Carriage inwards 915 211,985
155,215
less Returns outwards 1,430 153,785

193,435
less Stock at 30 Apr Yr 8 41,080
211,985 211,985
Rent 7,200 Gross profit b/d 59,630

Insurance 475
Net profit 26,045
59,630 59,630
(ii) Balance sheet at 30 April Year 8

£ £
Fixed Assets
Premises 48,000
54,400
Current Assets
Stock 41,080
Debtors 32,290
Bank 6,670
Cash 265
80,305
Creditors 18,160
116,545
less Amount due in more than 1 year
Loan from R Jenks, repayable Yr 12 20,000
96,545
Financed by:
Capital – at 1 May Yr 7 87,000
less Drawings 16,500 9,545
96,545
224
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T/9.1: The journey of a ‘drawn’ cheque

Year 4 T Royle (drawer)
7 May cheque T Royle credits

sent to bank account
P Sempster (payee)
receives cheque P Sempster debits
bank account
8 May pays cheque into

account with
Derbyshire Bank
Chester branch
9 May cheque
sent to
10 May Derbyshire Bank

clearance centre
sent (with other
cheques) to
10 May Albion Bank

clearance centre
11 May Albion Bank charged against

York East branch account of T Royle
The journey of a ‘drawn’ cheque:
● the cheque is drawn by T Royle (an account holder at Albion Bank,York East branch);
● the cheque is made payable to P Sempster (an account holder at Derbyshire Bank,
Chester branch).
Note
The delay in clearance will increase if P Sempster (the payee) were to delay paying the
cheque into his account.
225
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T/9.2
Multiple choice questions
(1) Which of the following are true of bank current accounts?
(a) The account must not be overdrawn.

(b) They provide the facilities for regular banking.
(c) The transfer of funds requires the use of a cheque.
(d) It may be shown in the books of the account holder as having a credit balance.
Choose the answer from the following:

(a) and (b)
(a) and (c)
(b) and (c)
(b) and (d)
(2) Which of the following are true of the standing-order method of payment?
(a) It is suited to payment of fixed amounts.

(b) It requires the use of a cheque.
(c) It can be cancelled by the payer.
(d) It gives the payee freedom to draw upon the bank account of the debtor.

(a) and (b)
(b) and (d)
(a) and (c)
(b) and (c)
(3) Which of the following are not true of the direct-debit method of payment?
(a) It is unsuited to the payment of wages and salaries.

(b) Payments are always at pre-stated intervals.
(c) It is suited to the payment of gas bills.
(d) It is not intended for variable amounts.

(a) and (b)
(a) and (c)
(b) and (c)
(b) and (d)
226
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T/9.3*
Chandran Yin had the following balances on 1 October Year 9:
£
Cash 96
Bank 387 (Dr)
During October Year 9, she had the following transactions:
Year 9
3 Oct Purchased stationery for £27 in cash
5 Oct Received cheque from L Tarne for £312
8 Oct Paid T Womble £95 by cheque
13 Oct Sales for £117 in cash
23 Oct Carriage outwards paid in cash, £32
27 Oct Received cheque from T Lyle, £134
Required
Enter the balances and transactions in the 2-column Cash Book of Chandran Yin and
balance it at 31 October Year 9.
T/9.3/A
Chandran Yin
CASH BOOK
Cash Bank Cash Bank
Year 9 £ £ Year 9 £ £
1 Oct Balances b/d 96 387 3 Oct Stationery 27
5 Oct L Tarne 312 8 Oct T Womble 95
13 Oct Sales 117 20 Oct Wages 87
27 Oct T Lyle 134 27 Oct Carriage outwards 32
31 Oct Balances c/d 67 738
213 833 213 833
1 Nov Balances b/d 67 738
227
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T/9.4*
Record the following in the 2-column Cash Book of W Towcester and balance the
accounts at the end of the month:
Year 6 £
1 Apr Balances brought forward: Cash 162
Bank (Dr) 930
4 Apr Paid rent by cheque 240
6 Apr Cash sales 470
8 Apr Purchased stationery for cash 58
9 Apr Banked some office cash 400
13 Apr Paid wages in cash 190
16 Apr Drew from bank for office cash 80
20 Apr Received cheque from N Vine 235
23 Apr Sales for cash 360
24 Apr Banked some office cash 340
26 Apr Paid for cleaning in cash 45
28 Apr Sent cheque to B Lines 283
T/9.4/A
W Towcester
CASH BOOK
Cash Bank Cash Bank
Year 6 £ £ Year 6 £ £
1 Apr Balances b/d 162 930 4 Apr Rent 240
6 Apr Sales 470 8 Apr Stationery 58
9 Apr Cash C 400 9 Apr Bank C 400
16 Apr Bank C 80 13 Apr Wages 190
20 Apr N Vine 235 16 Apr Cash C 80
23 Apr Sales 360 24 Apr Bank C 340
24 Apr Cash C 340 26 Apr Cleaning 45
28 Apr B Lines 283
30 Apr Balances c/d 39 1,302
1,072 1,905 1,072 1,905
1 May Balances b/d 39 1,302
228
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T/9.5*
Prepare a 2-column Cash Book from the following transactions. Balance the Cash Book at
the end of the month.
Year 5
1 Nov F Swaine started in business with £12,000 in cash
2 Nov Placed £11,500 of cash in a newly opened business bank account
5 Nov Bought motor vehicle for £4,200, paid by cheque
8 Nov Sales for £860 in cash, which was banked the same day
10 Nov Paid wages in cash, £270
13 Nov Bought goods by cheque for £1,040
15 Nov Paid carriage in cash, £43
17 Nov Withdrew £130 from bank for office cash
18 Nov Paid wages in cash, £290
20 Nov Received cheque from T Dart for £315
23 Nov Sales for £910 in cash, of which £700 was banked the same day
28 Nov F Swaine withdrew £150 in cash for private use
29 Nov Paid F Glubb £460 by cheque
T/9.5/A
F Swaine
CASH BOOK
Cash Bank Cash Bank
Year 5 £ £ Year 5 £ £
1 Nov Capital 12,000 3 Nov Bank C 11,500
3 Nov Cash C 11,500 5 Nov Motor vehicle 4,200
8 Nov Sales 860 10 Nov Wages 270
17 Nov Bank C 130 13 Nov Purchases 1,040
20 Nov T Dart 315 15 Nov Carriage 43
23 Nov Sales 210 700 17 Nov Cash C 130
18 Nov Wages 290
28 Nov Drawings 150
29 Nov F Glubb 460
30 Nov Balances c/d 87 7,545
12,340 13,375 12,340 13,375
1 Dec Balances b/d 87 7,545
229
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T/10.1
The following information relates to the business of J Mander:
Year 5 £
1 May Balances brought forward:
Cash 93
Bank (Dr) 1,040
Debtors – A Croft 440
– R Vine 350
Creditors – T Dole 280
– W Kone 300
11 May R Vine settled his account by cheque after deducting a 2% cash discount
13 May Purchased stationery for £56 in cash
18 May Settled the account of T Dole by cheque number 136214, after deducting a
21/2% cash discount
21 May Paid insurance by cheque number 136215 for £190
24 May A Croft settled his account by cheque, after deducting a 21/2% cash discount
28 May Withdrew £80 from bank (cheque number 136216) for office cash
30 May Settled the account of W Kone by cheque number 136217, after deducting a
3% cash discount
Required
Record these balances and transactions in the books of J Mander. Use a 3-column Cash
Book, ie which includes discount columns. Balance the Cash Book at 31 May Year 5 and
post the totals of the discount columns to the General Ledger.
230
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T/10.2
Thelma Cook keeps a 3-column Cash Book for her business. The following information
refers to the month of March Year 6:
Year 6
1 Mar Balances of cash and bank were £106 and £3,214 (Dr) respectively
2 Mar Drew cheque number 10674, for rent of £250
3 Mar Sales totalled £1,050, of which £950 was banked on the same day
5 Mar Paid cleaning expenses of £35 from cash
8 Mar Sales banked £1,680
9 Mar Drew cheque number 10675, for purchases costing £1,200
11 Mar Drew cheque number 10676 for £150, to replenish office cash
13 Mar Cash from sales totalling £1,800 was banked
16 Mar Paid postage of £50 from cash
18 Mar Drew cheque number 10677 for £168, to pay a telephone bill
20 Mar Paid £128 for stationery from cash
22 Mar Drew cheque number 10678 for £150, to replenish office cash
25 Mar Cash from sales totalling £2,108 was banked
26 Mar Paid office expenses of £70 from cash
27 Mar Drew cheque number 10679 for £2,000, to pay wages
29 Mar Income from sales totalled £2,200, of which £2,000 was banked on the same day
30 Mar Drew cheque number 10680 for £106, to pay a gas bill
31 Mar Drew cheque number 10681 for £855 payable to D Coyne, in settlement of a debt of
£900
31 Mar Drew cheque number 10682 for £494 payable to F Cox, in settlement of a debt of
£520
31 Mar Received cheque for £720 from S Britton, in settlement of an amount of £750
31 Mar Received cheque for £1,160 from D F Pratt, in settlement of an amount of £1,210
Required
Write up the 3-column Cash Book, bringing down the balances at 1 April Year 6.
231
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T/10.3
On 1 November Year 4, the Cash Book of T Jackson, a sole trader, showed a debit balance
of cash in hand of £34 and a credit balance on bank account of £287.
Jackson prepared the Cash Book by entering the cheque-book counterfoils directly from
the bank paying-in book and by entering from a record of movements of cash in the office.
For the month of November Year 4, these showed respectively:
(1) Bank paying-in book

£
7 Nov Cheque – K Lawton 153
12 Nov Cash banked 425
19 Nov Cheque – N West 373
(2) Cheque-book counterfoils

£
8 Nov B Thwaites 423
14 Nov Electricity account 46
18 Nov T Smith 327
22 Nov Telephone account 68
26 Nov C Lord 197
(3) Record of movements of cash

£
11 Nov Cash sales 460
30 Nov Taken for personal use 140
All these transactions were entered by Jackson. He then received the bank statement, which
showed the following additional items for November Year 4:
11 Nov Standing order payment: subscription to local trade association £25

15 Nov T Drummond, a debtor of Jackson, settled his account by credit transfer £236
21 Nov The account for servicing the heating system in Jackson’s office was settled by
direct debit £54
29 Nov Jackson instructed the bank to pay monthly salary direct into an employee’s bank
account £340
Required
Prepare the cash and bank columns of Jackson’s Cash Book for November Year 4, entering
the information given in (1) to (3) above and balancing the cash and bank columns.Then
record the additional items obtained from the bank statement, showing the final balance at
the end of November.
(LCCIEB)
232
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T/10.4
Ket Rampalla owns a small catering business. On 1 May Year 11, there was a credit balance
of £345 in the bank column of his Cash Book.
During May Year 11, he paid the following cheques into his bank account:
Amount of Cash discount
cheque allowed
£ £
3 May Keston Services 242 18
12 May F Savage 83 –
19 May Quantell Ltd 156 7
26 May L Wright 95 –
He also paid the following amounts from cash sales into his bank account:
£
6 May 585
13 May 614
20 May 603
27 May 526
He received the following remittances, which were paid directly into his bank account:
£
14 May From Westerns Ltd 180
22 May From Dugard & Wells 76
During the month, he drew the following cheques:

Amount of Cash discount
In favour of cheque received
£ £
5 May Malata Foods 507 25
11 May Kentish Supplies 335 –
15 May Ambrostic Dairies 261 8
21 May Kenton Electricals 68 –
28 May Malata Foods 283 14
In addition, the following took place:

£
(1) 18 May Payment by direct debit to Wombles Linen Services 63
(2) 19 May Bank charges 36
(3) 23 May Payment by standing order of annual subscription to
Caterers’ Association 40
(4) 29 May Bank interest charged 24
Required
(a) Prepare the bank and discount columns of the Cash Book of Ket Rampalla for May
Year 11, in date order, and balance the Cash Book at 31 May.
(b) Open the ledger accounts and post the totals of the discount columns of the Cash Book.
Include in your answer the name of the ledger in which the posting would be made.
233
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T/11.1
From the following details, you are to:
(a) enter the transactions in the Sales Day Book;

(b) post the items to relevant accounts in the Sales Ledger;
(c) record the transfer to the Sales Account in the General Ledger at the end of the month.
Year 6 Credit sales to Invoice no £

2 Aug F Dene 3,516 258
5 Aug T Marchant 3,517 312
12 Aug P Drummond 3,518 406
18 Aug T Marchant 3,519 194
23 Aug F Dene 3,520 425
29 Aug S Field 3,521 538
T/11.2
From the following details, you are to:
(a) enter the items in the Sales Day Book;

(b) post the items to the relevant accounts in the Sales Ledger;
(c) record the transfer to the Sales Account in the General Ledger at the end of the month.
Invoice List Trade

Year 6 Credit sales to no price discount
£ £ %
4 Sep J Burton 5,839 320 121/2
9 Sep W Thorne 5,840 460 15
15 Sep A Glenn 5,841 240 71/2
22 Sep J Burton 5,842 580 20
26 Sep W Thorne 5,843 360 121/2
234
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T/11.3
From the following details, you are required to:
(a) enter the items in the Purchases Day Book;

(b) post the items to the relevant accounts in the Purchases Ledger;
(c) record the transfer to the Purchases Account in the General Ledger at the end of the
month.
Credit purchases Invoice List Trade

Year 8 from no* price discount
£ %
3 Oct T Slocombe B361 190 10
8 Oct J Barnaby 1634 370 20
12 Oct K Linden 958 240 121/2
17 Oct R Tredgarth A179 420 20
24 Oct J Barnaby 2583 860 25
29 Oct T Slocombe B398 320 15
* The invoice numbers are those provided by each supplier.
235
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T/11.4
The Cash Book balances of Rachel McLeod at 30 June Year 2 were:
Cash £100
Bank £850 (Dr)
In July Year 2, she had the following transactions:
Date Details
Year 2
2 Jul Drew cheque number 554 for telephone expenses of £224
4 Jul Paid sundry expenses in cash, £45
6 Jul Cash sales of £750, £650 of which was paid into the bank
7 Jul Drew cheque number 555 for electricity, £145
10 Jul Drew cheque number 556 for purchases, £650
11 Jul Received cheque from J Royle for £880, in settlement of a debt of £900
13 Jul Cash sales totalled £80
15 Jul Drew cheque number 557, payable to N Henry for £480 to settle an account of £500
18 Jul Cash sales totalled £440, £400 of which was paid into the bank
20 Jul Paid travelling expenses in cash, £12
21 Jul Drew cheque number 558, payable to D Beckford for £240 to settle an account of
£250
23 Jul Drew cheque number 559 for insurance, £442
24 Jul Received and banked cheque from G Halle for £360 in settlement of a debt of £370
28 Jul Drew cheque number 560 for drawings of £400
29 Jul Received and banked cheque from R Holden for £620 in settlement of a debt of £650
30 Jul Cash sales totalling £950 were banked the same day
Required
In Rachel McLeod’s Cash Book, enter the balances at 1 July Year 2 and the transactions for
the month of July, bringing down the balances at 1 August Year 2.
(LCCIEB)
236
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T/12.1
(a) enter the transactions in:

(i) the Sales Day Book
(ii) the Returns Inwards Day Book;
(b) post to the relevant accounts in the Sales Ledger;
(c) show the transfers to the General Ledger.
Year 3
5 Dec Credit sales of £196 to S Preen
8 Dec Credit sales of £430 to M Quant
11 Dec Goods worth £38 returned by S Preen
18 Dec Credit sales of £287 to M Quant
21 Dec Goods worth £53 returned by M Quant
23 Dec Credit sales of £392 to R Robson
30 Dec Goods worth £61 returned by M Quant
T/12.2
(a) enter the transactions in:

(i) the Purchases Day Book
(ii) the Returns Outwards Day book;
(b) post to the relevant accounts in the Purchases Ledger;
(c) show the transfers to the General Ledger.
Year 6
3 May Credit purchases of £254 from L Squires
7 May Credit purchases of £385 from N Neale
12 May Goods worth £37 returned to L Squires
19 May Credit purchases of £138 from N Neale
24 May Goods worth £72 returned to N Neale
28 May Credit purchases of £364 from T Roberts
237
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T/12.3
(a) enter the transactions in the Purchases, Sales, Returns Outwards and Returns Inwards
Day Books;
(b) post the items to the personal accounts in the Purchases and Sales Ledgers; and
(c) record the transfer to appropriate accounts in the General Ledger at the end of October
Year 6.
Year 6
3 Oct Credit purchase from R Varney, at a list price of £480, subject to a trade discount
of 121/2%
5 Oct Credit sale to K Petts at a list price of £420, subject to a trade discount of 15%
8 Oct Returned goods to R Varney with a list price of £64
11 Oct Credit sale to J Beaver at a list price of £560, subject to a trade discount of 20%
15 Oct K Petts returned goods with a list price of £120
17 Oct Credit purchase of £296 from T Langton
19 Oct J Beaver returned goods with a list price of £90
21 Oct Credit sale to K Petts at a list price of £680, subject to a trade discount of 20%
24 Oct Credit purchase from R Varney at a list price of £320, subject to a trade discount
of 15%
27 Oct Returned goods worth £37 to T Langton
30 Oct Returned to R Varney, goods bought on 24 October Year 6 at a list price of £40
Note
The entry about the returns to R Varney on 8 October refers back to the purchase of
3 October, ie a discount rate of 12 1/2% must be applied to the returns. The entry
concerning returns to R Varney on 30 October is related to the purchase on 24 October;
therefore, a trade discount of 15% must be applied to the returns.
238
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T/12.4
During the month of January Year 4, Lung Kwok had the following transactions:
5 Jan Bought goods on credit from T Brown with a list price of £720, subject to a trade
discount of 25%
7 Jan Sold goods on credit to B Stevens for £340, subject to a cash discount of 5%, if
paid within 10 days
12 Jan Bought goods from F Robins with a list price of £420, subject to a trade discount
of 20% and a cash discount of 5%, if paid within 14 days
17 Jan Sold goods to J New for £580, subject to a trade discount of 25% and a cash
discount of 3%, if paid within 10 days
18 Jan Paid cheque to F Robins, in full settlement, for goods bought on 12 January
22 Jan Received cheque from J New, in full settlement, for goods sold on 17 January
22 Jan Bought goods from P Harper with a list price of £840, subject to a 331/3% trade
discount and a cash discount of 2 1/2%, if paid within 14 days
23 Jan Sold goods to K Burton for £660 less a trade discount of 15% and a cash discount
of 5%, if paid within 10 days
25 Jan Paid cheque to T Brown, in full settlement, for goods bought on 5 January
30 Jan Received cheque from B Stevens, in full settlement, for goods bought on 7 January
Required
(a) Enter the above transactions in Lung Kwok’s Purchases Day Book, Sales Day Book and
Purchases Returns Day Book and show the Cash Book entries.
(b) Why do traders allow cash discount?
239
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T/12.5
T Riggan is a sole trader and has a sports goods shop. She regularly purchases goods on
credit. Each of her suppliers grants a trade discount of 5% if the value of a transaction
exceeds £2,000.
She made the following credit purchases in May Year 8:
Gross purchases
Date Supplier value
£
8 May M Boyce 3,000
12 May B Jones 1,800
15 May C Smith 4,200
22 May S Morris 3,700
23 May M Boyce 1,800
26 May C Smith 1,200
During May, Riggan had to return some of the goods to her suppliers.The returns were as
follows:
Gross purchases
Date Supplier value
£
14 May B Jones 300
22 May S Morris 500
27 May M Boyce* 200
* relating to goods purchased on 23 May
M Boyce also offers a 2% cash discount if Riggan pays the account by the end of the month.
Riggan pays this account monthly to take advantage of the cash discount.
Required
(a) Prepare the Purchases Day Book for May.
(b) Prepare the Purchases Account and the Purchases Returns Account for May, showing
the transfer to the Trading Account.
(c) Prepare the personal account of M Boyce for the month of May. Assume that there
was a nil balance at the beginning of the month.
(LCCIEB)
240
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T/13.1*
On 1 January Year 4, the following were 3 of the account balances in E Parker’s ledger:
£
Rent 230 Dr
Insurance 65 Dr
Advertising 110 Cr
During the year ended 31 December Year 4, he paid the following amounts by cheque:
£
31 Jan Advertising 110
28 Feb Rent 460
31 May Rent 690
31 Aug Rent 690
31 Aug Insurance 180
30 Sep Rent 250
(1) The monthly rent was increased to £250 from 1 October Year 4.
(2) An advertising bill amounting to £85 had not been paid by 31 December Year 4.
(3) The insurance premium paid on 31 August Year 4 covered the year ended 31 August
Year 5.
Required
Prepare accounts in the ledger of E Parker for the year ended 31 December Year 4, for:
(i) rent
(ii) insurance
(iii) advertising.
Give particular attention to dates, and show, in each account, the transfer to the Profit &
Loss Account for the year ended 31 December Year 4.
(LCCIEB)
241
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T/13.1/A
Rent
Year 4 £ Year 4 £
1 Jan Balance b/d 230 31 Dec Profit & loss 2,820
28 Feb Bank 460
31 May Bank 690
31 Aug Bank 690
30 Sep Bank 250
2,820 2,820
Year 5
Insurance
Year 4 £ Year 4 £
31 Aug Bank 180 31 Dec Balance c/d 120
245 245
Year 5
Advertising
Year 4 £ Year 4 £
31 Jan Bank 110 1 Jan Balance b/d 110
195 195
Year 5
242
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T/13.2*
The following details are from the books of Melville & Co for the year ended 30 September
Year 9:
£
Sales 279,300
Purchases 118,650
Stock at 30 Sep Yr 9 17,320
Heating and lighting 2,530
Rent and rates 9,860
Motor-vehicle expenses 11,940
Office expenses 3,970
In addition, at 30 September Year 9:

● wages and salaries owing amount to £620
● rent payable accrued due, £250
● rates prepaid amount to £180
● heating and lighting accrued due, £60
● office stationery is in stock amounting to £380.
Required
Prepare for Melville & Co a Trading and Profit & Loss Account for the year ended
30 September Year 9.
T/13.2/A
Melville & Co
£ £
Stock at 1 Oct Yr 8 20,470 Sales 269,300
Purchases 118,650
139,120
less Stock at 30 Sep Yr 9 17,320
Gross profit 147,500
269,300 269,300
Wages and salaries (+620) 84,160 Gross profit b/d 147,500
Heating and lighting (+60) 2,590
Rent and rates (+250-180) 9,930
Motor-vehicle expenses 11,940
Office expenses (-380) 3,590
Net profit 35,290
147,500 147,500
243
pages 201-266 15/3/03 11:18 am Page 244
T/13.3*
The following are details relating to N Tulloch’s Rent Payable Account:
Year 5
30 Jun Balance on the account of £300, representing 2 months’ rent paid in advance
8 Sep Paid £450 by cheque, being rent for the 3 months ended 30 November Year 5
27 Nov Paid £720 by cheque, being rent for the 4 months ended 31 March Year 6
Year 6
9 Apr Paid £360 by cheque, being rent for the 2 months ended 31 May Year 6
Required
Prepare for N Tulloch the Rent Payable Account for the year ended 30 June Year 6. Balance
the account at the year end and show the transfer to the Profit & Loss Account.
T/13.3/A
N Tulloch
Rent Payable
Year 5 £ Year 6 £
1 Jul Balance b/f 300 30 Jun Profit & loss 2,010
8 Sep Bank 450
27 Nov Bank 720
Year 6
9 Apr Bank 360
30 Jun Balance c/d 180
2,010 2,010
1 Jul Balance b/d 180
The transfer to the Profit & Loss Account is calculated as:
£
5 months at £150 = 750
7 months at £180 = 1,260
2,010
244
pages 201-266 15/3/03 11:18 am Page 245
T/13.4*
Tan Lian, a sole trader, had the following account balances on 1 January Year 5:
£
Insurance 70 Dr
Office expenses 160 Dr
Rent payable 240 Cr
During Year 5, the following payments were made by cheque:

Year 5
26 Jan Office expenses: purchase of stationery, £63
9 Feb Rent for 4 months ended 31 March Year 5, £960
25 Feb Insurance for 6 months ended 31 August Year 5, £210
12 Apr Office expenses, £92
8 Jun Rent for 4 months ended 31 July Year 5, £1,040
25 Aug Insurance for 6 months ended 28 February Year 6, £240
6 Nov Rent for 4 months ended 30 November Year 5, £1,040
11 Dec Office expenses, £280
At 31 December Year 5, there was a stock of stationery valued at a cost of £90.There was
no further increase in the monthly charge for rent in December Year 5.
Required
Open the 3 accounts listed above and enter the transactions that occurred in Year 5. Balance
the accounts and make the appropriate transfers to the Profit & Loss Account for the year
ended 31 December Year 5.
245
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T/13.4/A
Tan Lian
Insurance
Year 5 £ Year 5 £
25 Feb Bank 210 31 Dec Balance c/d 80
25 Aug Bank 240
520 520
Year 6
1 Jan Balance b/d 80 Check profit & loss transfer:

Jan–Feb 2 months 70 £35 per


Mar–Aug 6 months 210 month
Sep–Dec 4 months 160*
440
* £40 per month
Office Expenses
Year 5 £ Year 5 £
26 Jan Bank 63 31 Dec Balance c/d 90
12 Apr Bank 92
11 Dec Bank 280
595 595
Year 6
Rent Payable
Year 5 £ Year 5 £
9 Feb Bank 960 1 Jan Balance b/d 240
8 Jun Bank 1,040 31 Dec Profit & loss 3,060
6 Nov Bank 1,040
3,300 3,300
Year 6
£
Check profit & loss transfer:
Jan–Mar (960 × 3/4) 720 £240 per month
Apr–July 1,040 

Aug–Nov 1,040  £260 per month
Dec (1,040 × 1/4) 260
3,060
246
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T/14.1
M Paine, a sole trader, is about to prepare his final accounts. As book-keeper, you need to
adjust the figures shown in certain accounts.
M Paine’s financial year ends on 31 December Year 5. At that date, certain accounts carry
the following balances:
£
Rates 1,960 (Dr)
Telephone 215 (Dr)
Insurance 760 (Dr)
Rent receivable 3,840 (Cr)
Wages 45,630 (Dr)
You ascertain the following information relating to the accounts above.
(1) Rates – included in the Rates Account is a payment of £900 for the half-year to
31 March Year 6.
(2) Telephone – the amount accrued due, not yet paid to 31 December Year 5, is £47.
(3) Insurance – a premium of £720 paid for the year to 31 January Year 6 is included in
the Insurance Account.
(4) Rent receivable – the tenant owes £160 for rent outstanding at 31 December Year 5.
(5) Wages – the amount accrued due at 31 December Year 5 was £840.
Required
(a) Open these accounts, enter the balances given, deal with the accrual or prepayment
as necessary, and show the transfers to the Profit & Loss Account.
(b) Show how any remaining balances on the above accounts would appear in the balance
sheet of M Paine at 31 December Year 5.
(LCCIEB)
247
pages 201-266 15/3/03 11:18 am Page 248
T/14.2
L Reinholdt is a theatrical agent whose accounting year ends on 31 December. He provides
the following details for the year ended 31 December Year 10:
(1) On 1 January, 3 months rent had been paid in advance – £1,200.

On 1 April, he paid 6 months rent in advance – £2,400.
On 1 October, he paid rent for the 6 months ending 31 March Year 11 – £2,700.
(2) On 1 January, commission due to Reinholdt, and not yet received, amounted to £3,200.
January–December: commission received – £64,300.
At 31 December, commission due and not yet received in respect of Year 10 amounted
to £4,700.
(3) On 1 January, the estimated amount outstanding on the Telephone Account was £320.
On 31 March, he paid the telephone bill in respect of the previous 6 months, £510.
On 30 September, he paid the telephone bill in respect of the previous 6 months, £520.
On 31 December, the estimated amount outstanding on the Telephone Account was
£300.
Required
(a) Prepare the following accounts for Reinholdt for the year ended 31 December Year 10:
(i) Rent Account

(ii) Commission Receivable Account
(iii) Telephone Account.
(b) Prepare a balance sheet extract for Reinholdt at 31 December Year 10, showing how
the 3 balances would appear.
(LCCIEB)
248
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T/14.3*
At 1 January Year 8, L Johnston, a trader, owed £320 for rent, but her rates were prepaid by
£110. During Year 8, she made the following payments by cheque:
Rent
£
2 Apr 600
28 Sep 630
Rates
7 Apr 160
5 Oct 180
At 31 December Year 8 there was accrued rent of £350 and rates were prepaid by £120.
Required
Prepare L Johnston’s combined Rent & Rates Account for Year 8, showing the transfer to
the Profit & Loss Account and the account fully balanced.
T/14.3/A
In the books of L Johnston:
Rent & Rates

Year 8 £ Year 8 £
1 Jan Balance b/d (rates) 110 1 Jan Balance b/d (rent) 320
2 Apr Bank (rent) 600 31 Dec Profit & loss 1,590*
7 Apr Bank (rates) 160
28 Sep Bank (rent) 630
5 Oct Bank (rates) 180
31 Dec Balance c/d (rent) 350 31 Dec Balance c/d (rates) 120
2,030 2,030
Year 9 Year 9
1 Jan Balance b/d 1 Jan Balance b/d (rent) 350
(rates) 120
* rent £1,260
rates £330
249
pages 201-266 15/3/03 11:18 am Page 250
T/14.4
The following information relates to some of the expense and income accounts of
Jan Goldsmith for the year ended 31 December Year 5:
£
Insurance
Paid by cheque 23 Feb Yr 5 630
Prepaid 31 Dec Yr 4 85
Stationery
Paid by cheque 19 Mar Yr 5 765
Stock 31 Dec Yr 4 130
Stock 31 Dec Yr 5 160
Owing to stationery suppliers 31 Dec Yr 5 45
Telephone
Paid by cheque 11 Jun Yr 5 295
Paid by cheque 4 Dec Yr 5 285
Owing 31 Dec Yr 4 64
Rent payable
Paid by cheque 16 Feb Yr 5 2,160
Paid by cheque 12 Aug Yr 5 2,510
Rent receivable
Received by cheque 31 Mar Yr 5 450
Received by cheque 30 Sep Yr 5 375
Required
(a) Prepare the 5 ledger accounts, incorporating the information given above, for the year
ended 31 December Year 5. In each account, show the transfer to the Profit & Loss
Account and bring down the balance(s) at 1 January Year 6.
(b) Show how the balances on the accounts would be displayed in Jan Goldsmith’s balance
sheet at 31 December Year 5.
250
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T/14.5
In the books of Frank Napier, a sole trader, the following account balances were brought
forward on 1 July Year 4:
£
Advertising 260 (Cr)
Insurance 40 (Dr)
Office cleaning 260 (Cr)
Rent receivable 350 (Dr)
During the year ended 30 June Year 5, the following amounts were paid by cheque:
Year 4 £
25 Jul Office cleaning (3 months to 31 Jul Yr 4) 390
1 Aug Insurance premium (6 months to 31 Jan Yr 5) 270
5 Sep Advertising 260
24 Oct Office cleaning (3 months to 31 Oct Yr 4) 390
Year 5
26 Jan Office cleaning (3 months to 31 Jan Yr 5) 420
1 Feb Insurance premium (6 months to 31 Jul Yr 5) 300
8 Mar Advertising 210
21 Apr Office cleaning (3 months to 30 Apr Yr 5) 420
The following amounts were received by cheque during the year ended 30 June Year 5:
Year 4 £
17 Aug Rent (1 May – 31 Aug Yr 4) 700
3 Oct Rent (1 Sep – 31 Oct Yr 4) 350
15 Dec Rent (1 Nov – 31 Dec Yr 4) 380
Year 5
12 Jan Advertising (part refund) 40
3 Mar Rent (1 Jan – 31 Mar Yr 5) 570
19 May Rent (1 Apr – 31 Jul Yr 5) 760
Frank Napier was aware that, at the end of his financial year, 30 June Year 5, there was an
outstanding advertising bill for £190 and 2 months’ payment outstanding on the office
cleaning account, at £140 per month.
Required
(a) Open the following accounts:
(i) Advertising
(ii) Insurance
(iii) Office Cleaning
(iv) Rent Receivable.
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(b) Post the various items to the accounts.

(c) Show the transfer entries to the Profit & Loss Account for the year ended 30 June Year 5.
(d) Balance the accounts at 30 June Year 5.
Note
You are not required to show the Profit & Loss Account.
T/14.6
The following information is from the books of Enterprise Services in respect of the year
ended 30 June Year 9:
Rent Receivable
Year 8 £
1 Jul 3 months’ rent prepaid 630
1 Oct 8 months’ rent received by cheque 1,260
Year 9
1 Apr 6 months’ rent received by cheque at revised
rate of £2,960 per annum 1,480
Rates
Year 8
1 Jul 3 months’ rates prepaid 780
1 Oct Paid 6 months’ rates by cheque 1,680
Year 9
1 Apr Paid 6 months’ rates by cheque 1,680
Advertising
Year 8
1 Jul Accrued due 370
28 Aug Paid by cheque 1,250
Year 9
15 May Paid by cheque 2,100
Printing and Stationery

Year 8
1 Jul Stock of stationery 3,400
14 Sep Purchased stationery by cheque 850
Year 9
12 Feb Paid printing account by cheque 420
252
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At 30 June Year 9:
(1) Payments for advertising during the year included £580 for poster advertising that was
due to be carried out in August Year 9.
(2) The stock of stationery was valued at £3,100. There was also an unpaid invoice for
£615 for printing.
Required
(a) Prepare the following accounts for the year ended 30 June Year 9, including transfers
to the Profit & Loss Account and year-end balances.
(i) Rent Receivable

(ii) Rates
(iii) Advertising
(iv) Printing and Stationery
(b) Show, in the form of a balance sheet extract, how the balances on these accounts
would appear at 30 June Year 9.
T/15.1
Jack Millard commenced business on 1 January Year 3 and on that date purchased a motor
vehicle for £10,400.
On 31 December Year 3, he wished to determine the depreciation expense for the year just
completed. He is unsure whether to use the:
(a) straight line method – the vehicle would have a 3-year life with an estimated resale
value of £4,100;
(b) reducing balance method – using a rate of 40% on cost.
Required
To help Jack Millard decide between the 2 methods, draw up and complete the following
table:
Depreciation charge in
for the year ended Net book value
31 Dec Year 3 at 31 Dec Year 3
£ £
Method
(a)
(b)
253
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T/15.2
Charles Day started a business on 1 January Year 4. On that date, he purchased by cheque
a motor van costing £9,600 from Greenaway Motors Ltd. He decided to depreciate this
asset, using the rate of 40% per annum on the reducing balance method. He also purchased,
on the same day, on credit, fixtures and fittings costing £15,000 from P J Shop Fitters Ltd.
He decided to depreciate these fixtures and fittings using the straight line method. He
estimated that they would have a useful life of 15 years, and would have a scrap value of
£2,100.
He kept the asset accounts at cost, and used a provision for depreciation account for each
asset.
Required
Prepare for Charles Day the following accounts for each of Years 4, 5, 6, and 7:
(i) Motor Van

(ii) Provision for Depreciation of Motor Van (showing calculations to the nearest £)
(iii) Fixtures and Fittings
(iv) Provision for Depreciation of Fixtures and Fittings.
(LCCIEB)
T/15.3
Required
With reference to T/15.2, prepare an extract to show how both assets would appear in
Charles Day’s balance sheet at 31 December Year 7.
(LCCIEB)
254
pages 201-266 15/3/03 11:18 am Page 255
T/15.4
On 8 February Year 5, Southern Stores bought a computer for use in the office, paying
£8,600 by cheque. It was decided to provide for depreciation by use of the straight line
method. It was estimated that, at the end of 5 years, the residual (scrap) value would be
£600.
On 12 September Year 5, Southern Stores purchased a motor vehicle for use in the business,
paying £10,000 by cheque. The vehicle was to be depreciated at the rate of 40% per
annum, using the reducing balance method.
The business retained the asset accounts at cost and dealt with depreciation using a separate
Provision for Depreciation Account for each asset.The financial year ends on 31 December.
Any asset purchased in the first 6 months of a year has a whole year’s depreciation
provided, while any asset purchased in the second half of the year has only half a year’s
depreciation written off.
Required
(a) Prepare the following accounts for the years ended 31 December Years 5, 6, and 7:
(i) Computer Equipment

(ii) Provision for Depreciation of Computer Equipment
(iii) Motor Vehicle
(iv) Provision for Depreciation of Motor Vehicle.
(b) Show a balance sheet extract at 31 December Year 7 for both the Computer Equipment
and Motor Vehicle Accounts.
(LCCIEB)
255
pages 201-266 15/3/03 11:18 am Page 256
T/15.5
D Amos purchased fixtures and fittings for £6,000 by cheque on 1 January Year 3. On 1 July
of the same year, he purchased by cheque a motor vehicle for £18,000. He decided to
depreciate his fixed assets as follows:
(1) Fixtures and fittings – using the straight line method. He estimated that they would
have a working life of 8 years, with a residual (scrap) value of £1,000.
(2) Motor vehicle – using the reducing balance method. He set the rate at 40% on
reducing balance each full year.
He kept the asset accounts at cost and kept accumulated depreciation of each type of asset
in a separate Provision for Depreciation Account. Assets acquired during the year were
depreciated from the date of purchase.
Required
In the books of D Amos, prepare the following accounts for the 3 financial years ended
31 December Year 3, Year 4, and Year 5, balancing the accounts at the end of each year:
(i) Fixtures and Fittings

(ii) Provision for Depreciation of Fixtures and Fittings
(iii) Motor Vehicle
(iv) Provision for Depreciation of Motor Vehicle.
(LCCIEB)
T/15.6
On 1 January Year 4, Frank Saunders purchased furniture and equipment by cheque for
£11,000. He decided to provide for depreciation on this asset using the straight line
method over 8 years. He estimated that the scrap value at the end of that time would be
£600.
On 14 February Year 4, he purchased a motor van by cheque for £8,400, for use in the
business. He decided to provide for depreciation on this asset at the rate of 40% per annum,
using the reducing balance method. He allowed a full year’s depreciation in the year of
purchase and calculated the depreciation to the nearest £.
On 31 December Year 6, he sold the motor van for £3,200 and was paid by cheque.
His practice is to record and leave the asset accounts at cost and to accumulate the
depreciation in a Provision for Depreciation Account for each asset. His financial year ends
on 31 December.
256
pages 201-266 15/3/03 11:18 am Page 257
Required
In the books of Frank Saunders, open the following accounts and enter the transactions for
the years ended 31 December Years 4, 5, and 6:
(i) Furniture and Equipment

(ii) Provision for Depreciation of Furniture and Equipment
(iii) Motor Van
(iv) Provision for Depreciation of Motor Van
(v) Disposal of Motor Van.
(LCCIEB)
T/16.1
F Openshaw submitted the following information at 31 March for Years 4, 5, and 6:
Total debtors
before writing off Bad debts
Date bad debts to be written off
£ £
31 Mar
Yr 4 18,640 F Dale 117
T Wylie 163
31 Mar
Yr 5 20,835 G Block 315
31 Mar
Yr 6 17,694 A Dolt 78
E Fox 216
Openshaw provides for doubtful debts at the rate of 2 1/2% of the remaining debtors at the
end of each financial year. At 31 March Year 3, the provision for doubtful debts was £380.
Required
(a) In the books of F Openshaw, prepare the following accounts for the years ended 31 March
Years 4, 5, and 6, including the transfers to the Profit & Loss Account at the end of each
financial year:
(i) Bad Debts

(ii) Provision for Doubtful Debts.
(b) Show extracts from the balance sheets of F Openshaw at 31 March Years 4, 5, and 6,
placing debtors under current assets.
(LCCIEB)
257
pages 201-266 15/3/03 11:18 am Page 258
T/16.2
(a) It is the practice of Coniston & Son to write off bad debts as they occur and to
provide for doubtful debts. For the 3 years from the commencement of business to
31 December Year 3, the following information is available:
At year ended 31 December:
Year 1 Year 2 Year 3

£ £ £
Balance of debtors before
writing off bad debts 47,800 76,300 91,400
Bad debts to be written off 800 1,100 1,500
Provision for doubtful

debts, as a percentage
of debtors 3% 4% 2%
Required
(i) Prepare the following accounts for Years 1, 2, and 3, showing the transfers to the
Profit & Loss Account at the end of each year:
● Bad Debts
● Provision for Doubtful Debts.
(ii) Show the balance sheet extract in respect of debtors at 31 December each year.
(b) On 7 June Year 4, Coniston & Son received a payment of £129 from S Atkins for an
outstanding debt of £320. Coniston wrote off the balance as a bad debt.
Required
Show the account of S Atkins in Coniston’s ledger.
258
pages 201-266 15/3/03 11:18 am Page 259
T/16.3*
At 31 December Year 8, AB & Co has debtors totalling £42,560. Debts amounting to £760
have yet to be written off as bad. A specific provision is to be created covering in full the
following debts:
D £620
E £570
F £710
A general doubtful debts provision of 4% of remaining debts is also to be created. No

provision exists as yet.
Required
(a) Show in a statement:
(i) how the 2 provisions are calculated

(ii) the amount of net debtors.
(b) Show as an extract how the item ‘debtors’ would appear in the balance sheet of AB & Co
at 31 December Year 8.
T/16.3/A
(a) Calculation of debt provisions
£
Gross debtors 42,560
41,800
less Specific provision: D 620

E 570
F 710 1,900
39,900
less General provision at 4% 1,596
Net debtors 38,304
(b) AB & Co
Balance sheet (extract)
at 31 December Year 8
£ £
Current assets
Debtors 41,800
less Provision for bad and
doubtful debts 3,496 38,304
259
pages 201-266 15/3/03 11:18 am Page 260
T/16.4
Donald Lisher, a sole trader, maintains a provision for doubtful debts that he adjusts at the
end of each financial year. At 1 January Year 8, the balance on the account was £860.
The following additional information is available:
Bad debts
written off Debtor year-end Provision for
Year ended during year balances doubtful debts
£ £ %
31 Dec Yr 8 1,235 25,300 4
31 Dec Yr 9 1,640 29,600 6
31 Dec Yr 10 1,320 28,800 5
On 12 October Year 10, Donald Lisher received a cheque for £240 in respect of a debt
which had been written off in Year 9.
Required
(a) From the above information, prepare for the years ended 31 December Years 8, 9,
and 10:
(i) the Bad Debts Account, including the closing entries;

(ii) the Provision for Doubtful Debts Account, showing the balance carried forward
each year.
(b) Show, in a brief statement, the entries which would be made in the books of
Donald Lisher to record the recovery of £240 for the debt written off in Year 9.
Note
Bad debts written off should not be taken to the Provision for Doubtful Debts Account.
260
pages 201-266 15/3/03 11:18 am Page 261
T/16.5
The accounting year of R Cleaver, a trader, ends on 31 December.At 31 December Year 3,
his trade debtors amounted to £37,500 and he had a provision for doubtful debts amounting
to 2% of debtors.
During Year 4, Cleaver wrote off debts as follows:
(1) The whole of the debt of £460, due from L Paul, was written off as irrecoverable on
15 August Year 4.
(2) Another debtor, K Sang, who owed £220, paid a contribution of 25%; the balance was
immediately written off as irrecoverable on 26 November Year 4.
At 31 December Year 4, debtors amounted to £41,000 and the provision for doubtful
debts was adjusted to 2.5% of this figure.
In Year 5, bad debts written off amounted to £560. In addition, on 20 October, K Sang
paid the balance of his debt, which had been written off in Year 4. It was the practice of
Cleaver to keep a Bad Debts Recovered Account for recording debts recovered in a year
following the one in which they were written off.
At 31 December Year 5, debtors amounted to £39,000 and the Provision for Doubtful
Debts was adjusted to 2% of this figure.
Required
Prepare the following accounts to include the above information relating to the years
ended 31 December Year 4 and 31 December Year 5:
(i) L Paul
(ii) K Sang
(iii) Bad Debts
(iv) Provision for Doubtful Debts
(v) Bad Debts Recovered.
261
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T/17.1
The following information is available in respect of A Wolfson, a trader:
CASH BOOK (bank only)

Year 5 £ Year 5 £
1 Sep Balance b/f 2,806 4 Sep Purchases (915) 234
5 Sep Sales 1,020 9 Sep Wages (916) 635
10 Sep T Swithin 857 16 Sep N Victor (917) 526
15 Sep Sales 1,370 24 Sep Rent (918) 370
23 Sep K Smart 524 26 Sep Wages (919) 680
25 Sep T Hunt 413 27 Sep N Hills (920) 416
28 Sep Sales 1,245 29 Sep S Twitchin (921) 285
30 Sep Purchases (922) 540
30 Sep Balance ?
Bank statement
Paid out Paid in Balance
Year 5 £ £ £
1 Sep Balance 2,806 Cr
7 Sep Cash: 915 234 2,572 Cr
9 Sep Credit 1,020 3,592 Cr
12 Sep Cash: 916 635 2,957 Cr
15 Sep Credit 857 3,814 Cr
17 Sep Credit transfer – P Mott 271 4,085 Cr
19 Sep Credit 1,370 5,455 Cr
21 Sep Standing order – Minster 96 5,359 Cr
Publications
23 Sep Credit transfer – T Lennox 870 4,489 Cr
26 Sep Direct debit – Insurance 230 4,259 Cr
28 Sep Cash: 919 680 3,579 Cr
30 Sep Bank interest 8 3,587 Cr
Required
(a) Calculate the missing balance in the Cash Book and enter it in your answer book as
the balance brought down at 30 September Year 5.
(b) Bring the Cash Book up to date by entering in it the items you consider appropriate
from the bank statement. Balance the Cash Book and bring down the new balance at
1 October Year 5.
(c) Prepare the bank reconciliation statement at 30 September Year 5.
262
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T/17.2
The following is a copy of F Holme’s Cash Book for April Year 5:
CASH BOOK
Cheque
Bank no Bank
Year 5 £ Year 5 £
1 Apr Balance b/d 3,240 3 Apr Purchases 10648 1,060
4 Apr Sales 1,250 6 Apr Rates 10649 650
10 Apr Sales 2,610 9 Apr Electricity 10650 196
16 Apr Sales 1,925 12 Apr Purchases 10651 1,400
24 Apr Sales 1,368 15 Apr Telephone 10652 245
28 Apr Sales 1,701 18 Apr Stationery 10653 98
30 Apr F Tait 450 20 Apr Travelling 10654 72
30 Apr Sales 1,116 25 Apr Salary 10655 1,057
27 Apr G Stewart 10656 746
29 Apr D Usher 10657 2,360
29 Apr Fixtures 10658 2,200
30 Apr Balance c/d 3,576
13,660 13,660
1 May Balance b/d 3,576
He received the following bank statement for April Year 5:
Bank statement
Date Details Paid out Paid in Balance
Year 5 £ £ £
1 Apr Balance 3,240 Cr
3 Apr Cash: 10648 1,060 2,180 Cr
4 Apr Standing order –
Insurance Co 260 1,920 Cr
5 Apr Credit 1,250 3,170 Cr
9 Apr 10649 650 2,520 Cr
11 Apr Credit 2,610 5,130 Cr
12 Apr 10651 1,400 3,730 Cr
13 Apr 10650 196 3,534 Cr
16 Apr Direct debit – Water 50 3,484 Cr
17 Apr Credit 1,925 5,409 Cr
19 Apr 10652 245 5,164 Cr
22 Apr Credit transfer –
John Bates 360 5,524 Cr
23 Apr 10654 72 5,452 Cr
25 Apr Credit 1,368 6,820 Cr
27 Apr Dividends 400 7,220 Cr
29 Apr 10655 1,057 6,163 Cr
30 Apr Credit 1,701 7,864 Cr
30 Apr Charges 60 7,804 Cr
263
pages 201-266 15/3/03 11:18 am Page 264
Required
(a) Starting with the balance of £3,576, bring F Holme’s Cash Book up to date by posting
to it the items you consider appropriate from the bank statement. Balance the Cash
Book and bring down the new balance on 1 May Year 5.
(b) Prepare a bank reconciliation statement at 30 April Year 5, commencing with the
bank statement balance of £7,804.
(LCCIEB)
T/17.3
The following information relates to the business of M Rhodes:
Bank statement at 30 June Year 5

Date Details Debits Credits Balance
£ £ £
1 Jun Balance 4,619 Cr
5 Jun 10659 230 4,389 Cr
5 Jun 10658 176 4,213 Cr
8 Jun Counter credits 813 5,026 Cr
11 Jun Standing order –
Ajax Insurance 242 4,784 Cr
13 Jun 10660 459 4,325 Cr
15 Jun Counter credits 1,121 5,446 Cr
15 Jun 10661 150 5,296 Cr
19 Jun Standing order – L White 462 5,758 Cr
24 Jun Direct debit – Town Council 517 5,241 Cr
26 Jun 10663 324 4,917 Cr
29 Jun 10665 138 4,779 Cr
30 Jun Charges 74 4,705 Cr
Cheque book counterfoils

£
1 Jun 10658 A Parry 176
1 Jun 10659 C Harris 230
7 Jun 10660 L Goddard 459
11 Jun 10661 A Parry 150
22 Jun 10662 D Fletcher 376
23 Jun 10663 Lines Ltd 324
23 Jun 10664 Star & Co 289
25 Jun 10665 A Parry 138
29 Jun 10666 C Thorpe 247
(continued)
264
pages 201-266 15/3/03 11:18 am Page 265
T/17.3 (continued)
Paying-in book counterfoils
£ £
8 Jun S Moon 611
G Race 202 813
15 Jun Rayne & Co 129
C Mills 325
T Orchard 667 1,121
Note
Cheques are paid into the bank on the day they are received.
Required
(a) Write up the bank account in the books of M Rhodes starting with a debit balance
of £4,619 on 1 June Year 5. Entries should be in date order.
(b) Prepare a bank reconciliation statement at 30 June Year 5, commencing with the bank
statement balance of £4,705.
(LCCIEB)
T/17.4*
You are required to prepare a bank statement from the details below.
Thomas Snodden banks at Wilmster Bank, 46 High Street, Ledbury, Eastshire LE2 5SR –
account number 96015. On 1 September Year 2, he had a balance at the bank of £126.00
(Dr).The following were his transactions with the bank during Setpember Year 2:
4 Sep Received cheque from R Grafton for £57.00

6 Sep Drew cheque no 100567 payable to T Lucas for £95.50
This was debited to Snodden’s account on 11 September
9 Sep The bank made a standing order payment to Moody Publishers for £162.00
12 Sep Drew cheque no 100568 payable to N Swift for £73.00
14 Sep Received by credit transfer from K Hanson £214.00
17 Sep Drew cheque no 100569 payable to T Cavendish for £106.50
20 Sep Received cheque from N Speedy for £165.00
22 Sep The bank made direct debit payment to Eastwise Electricity for £89.00
25 Sep The bank made credit transfer payment to Spacewell Ltd for £105.00
27 Sep Received cheque from L Morsewell for £235.00
30 Sep The bank charged interest of £17.00
Note
Any cheques received by Thomas Snodden are paid into the bank on the day of receipt. In
each instance above, the bank credited Snodden’s account on the same day.
265
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T/17.4/A
Wilmster Bank
46 High Street
Ledbury
Eastshire LE2 55R
Mr Thomas Snodden
Account No 96015
Date Particulars Paid out Paid in Balance

Year 2 £ £ £
1 Sep Balance b/f 126.00 Cr
4 Sep R Grafton 57.00 183.00 Cr
9 Sep Standing order –
Moody Publishers 162.00 21.00 Cr
11 Sep T Lucas: 100567 95.50 74.50 O/D
14 Sep Credit transfer – K Hanson 214.00 139.50 Cr
16 Sep N Swift: 100568 73.00 66.50 O/D
20 Sep N Speedy 165.00 231.00 Cr
21 Sep T Cavendish: 100569 106.50 125.00 Cr
22 Sep Direct debit –
Eastwise Electricity 89.00 36.00 Cr
25 Sep Credit transfer –
Spacewell Ltd 105.00 69.00 O/D
27 Sep L Morsewell 235.00 166.00 Cr
30 Sep Interest 17.00 149.00 Cr
266
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T/18.1
Lynn Parton owns a small business. She keeps a Petty Cash Book and uses the imprest system.
The imprest is set at £100.
On 1 June Year 7 the petty cash balance was £70.30 and on that date the imprest was
restored with cash drawn from the business bank account.
During June Year 7, the following amounts were paid from petty cash:
Voucher
Details no Amount
Year 7 £
2 Jun Travelling expenses 76 12.30
4 Jun Stationery 77 4.23
5 Jun Postage 78 1.75
6 Jun Cash purchases 79 32.30
14 Jun Cleaning expenses 81 7.37
18 Jun Stationery 82 9.34
22 Jun Cash purchases 82 21.17
29 Jun Travelling expenses 84 4.54
The imprest amount was restored on 1 July Year 7.
Required
Write up the Petty Cash Book from 1 June to 1 July Year 7. You should use the following
analysis columns:
Travelling Cleaning
expenses Stationery Postage Purchases expenses
267
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T/18.2
Peter Sharsby uses the petty cash imprest system.The amount of the float is £300. At 1 March
Year 6, the balance of petty cash in hand was £83.20.
The petty cashier dealt with the following transactions during March Year 6:
Voucher
no Amount
Year 6 £
1 Mar Drew cash from bank to restore the float
3 Mar Stationery 83 15.30
6 Mar Petrol 84 23.40
9 Mar J Lane – travel expenses 85 27.50
11 Mar Motor-vehicle repairs 86 51.80
14 Mar Refund to debtor, A Lucan 87 32.60
16 Mar Postage 88 4.30
19 Mar Stationery 89 15.70
21 Mar Petrol 90 22.40
24 Mar F Coster – train fare 91 19.10
27 Mar Postage 92 13.90
29 Mar Paid to L Vine, creditor 93 27.80
Required
(a) Enter the above transactions in the Petty Cash Book of Peter Sharsby for March Year 6,
and show the balance at the end of the month. Bring down the balance and show the
entry to make up the float (from the bank) on 1 April Year 6.
Peter Sharsby uses the following analysis columns:
Motor-vehicle Travelling
expenses Postage Stationery expenses Ledger
(b) In relation to the posting of the total of the motor-vehicle expenses analysis column:
(i) show the entry that will be made in the relevant expense account;
(ii) in which ledger is that account kept?
268
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T/18.3*
Ellen Franks keeps her Petty Cash Book on the imprest system. The imprest amount was
set at £250. On 1 July Year 3, the balance of petty cash brought forward was £83.00. The
following transactions took place during July Year 3:
Voucher
no Amount
Year 3 £
1 Jul Drew cash from bank to restore the imprest
5 Jul Stationery 69 17.50
7 Jul Train fare reimbursed 70 23.70
10 Jul Postage 71 12.30
12 Jul Received by petty cashier from L Ward,
in payment for a private telephone call 1.90
14 Jul Motor-vehicle expenses 72 35.60
19 Jul T Tarrant – travel expenses 74 28.40
22 Jul Petrol 75 11.00
24 Jul Payment of amount owing to
K Tutt in the purchases ledger 76 31.00
27 Jul Stationery 77 14.30
On 1 August Year 3 the float was increased to £300.
Required
(a) Draw up Ellen Franks’ Petty Cash Book using the following analysis columns:
Travel Motor-vehicle
expenses Postage expenses Stationery Ledger
(b) Balance the account at 31 July Year 3, bring down the balance of cash at that date, and
show the amount of cash drawn from the bank for the revised imprest on 1 August
Year 3.
(c) Show the Telephone Account in the General Ledger for July Year 3, assuming that the
Telephone Account had been paid by direct debit £97.60 on 6 July Year 3.
269
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T/18.3/A
(a) and (b) PETTY CASH BOOK
Voucher Travel Motor-v
Receipts Date Details no Total expenses Postage expenses Stationery Ledger
£ Year 3 £ £ £ £ £ £
83.00 1 Jul Balance b/f
167.00 1 Jul Bank
5 Jul Stationery 69 17.50 17.50
7 Jul Train fare 70 23.70 23.70
10 Jul Postage 71 12.30 12.30
1.90 12 Jul Telephone –
L Ward
14 Jul Motor-vehicle
expenses 72 35.60 35.60
17 Jul Postage 73 7.20 7.20
19 Jul T Tarrant –
travel 74 28.40 28.40
22 Jul Petrol 75 11.00 11.00
24 Jul K Tutt,
creditor 76 31.00 31.00
27 Jul Stationery 77 14.30 14.30
30 Jul Postage 78 7.00 7.00
188.00 52.10 26.50 46.60 31.80 31.00
31 Jul Balance c/d 63.90
251.90 251.90
63.90 1 Aug Balance b/d

236.10 1 Aug Bank
(c) GENERAL LEDGER

Telephone
Year 3 £ Year 3 £
6 Jul Bank 97.60 12 Jul Petty cash 1.90
Note
The question does not require the Telephone Account to be balanced.
270
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T/18.4
Carol Garner maintains an analysed Petty Cash Book on the imprest system. She restores
the imprest amount to £85 on the first day of each week. The analysis columns in the Petty
Cash Book are headed:
Wages Postage Travelling Sundries Ledger
At the close of business on Friday, 31 July Year 6, Carol balanced the Petty Cash Book and
carried down the balance of £23.15.The cash held in the petty cash box agreed with this
balance.
The following transactions took place during the 2 weeks that followed:
£
Monday, 3 Aug Imprest restored
Postage 3.80
Tuesday, 4 Aug Window cleaning 4.70
Creditor – R Jackson 9.75
Wednesday, 5 Aug Postage 4.26
Tea and coffee 1.88
Travelling expenses 2.93
Thursday, 6 Aug Wages 45.00
Postage 1.94
Friday, 7 Aug Travelling expenses 3.22
Monday, 10 Aug Imprest restored

Tuesday, 11 Aug Advertising 12.00
Postage 3.22
Thursday, 13 Aug Wages 48.00
Postage 4.21
Friday, 14 Aug Stationery 2.48
Postage 1.30
Required
(a) Write up Carol Garner’s analysed Petty Cash Book for the 2-week period. Balance the
Petty Cash Book and total the analysis columns at the end of each week.
(b) Give 2 reasons why the cash in the petty cash box on Friday, 7 August might not have
agreed with the Petty Cash Book balance.
(LCCIEB)
271
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T/19.1
State whether each of the following is capital expenditure or revenue expenditure. You only
have to write one word, either ‘capital’ or ‘revenue’ in each case.
(1) Purchase of a motor van for use within the business.

(2) Purchase of goods intended for resale in the normal course of business.
(3) Purchase of petrol for the motor van.
(4) Purchase of materials to be used in building an extension to the firm’s business premises.
(5) Payment of insurance on the business premises.
T/19.2
Matthew Dawalla owns a restaurant and the following were some of his transactions during
the year ended 31 October Year 7:
(1) Purchase of flour for immediate use in the kitchen.

(2) Purchase, in September Year 7, of a motor van for delivery of prepared foods to
customers.
(3) Payment for advertising.
(4) Payment for carriage inwards in respect of foodstuffs for the kitchen.
(5) Payment of £6,400 for work done on the restaurant premises. £5,100 was for an
extension to the restaurant seating area, while the remainder was for painting and
decorating the restaurant.
(6) Payment for heating and lighting.
(7) Purchase, in July Year 7, of new ovens for the kitchen.
(8) Payment for expenses of running the motor van.
Required
State whether each of the 8 transactions is revenue expenditure, capital expenditure, or
both. If an item is both capital and revenue expenditure, you should state the respective
amounts.
272
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T/19.3
JK Distributors Ltd purchases motor vehicles from manufacturers and sells them to other
companies and to the general public. Jameson Partners is a firm of accountants.
Required
Classify the following transactions into either capital expenditure or revenue expenditure.
Transactions by JK Distributors Ltd:

(1) Purchase of motor vehicles for resale.
(2) Purchase of a transporter lorry for moving vehicles.
(3) Payments for the building of a showroom extension.
(4) Salaries and commission paid to showroom sales staff.
(5) Purchase of a computer for stock control purposes.
Transactions by Jameson Partners:

(1) Purchase of motor vehicles for use in the business.
(2) Purchase of an office safe.
(3) Rent paid for use of office premises.
(4) Payment of course fees for staff training.
(5) Payment of staff salaries and travelling expenses.
273
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T/19.4
P Arkan is a builder. He designs and builds superior houses to meet individual customer
specification.
The following invoices were received from suppliers in October Year 4:
£
Invoice 1 From Mellow Brick Company:
40,000 high quality bricks 24,800
Delivery charge 375
25,175
Invoice 2 From Premier Equipment Company:

One earth moving machine 42,700
4 replacement tyres for existing machine 890
43,590
Invoice 3 From Excel Office Supplies:

One photocopier for use within the firm 1,460
10 reams of copier paper 62
1,522
Invoice 4 From Arbor Construction Company:

Building an extension to the
cement storage area 12,400
Repairs to fencing as instructed:
Fencing panels and other materials 1,475
Labour charges 1,060
14,935
Required
Analyse the amount of each invoice and apportion it to capital expenditure and revenue
expenditure. Present your answer in a table as follows:
Capital Revenue Total

expenditure expenditure expenditure
£ £ £
Invoice 1
Invoice 2
Invoice 3
Invoice 4
(LCCIEB)
274
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T/19.5*
Show the effect of the way each of the following transactions was recorded in the accounts
of a retailer of electrical equipment. If there was no effect, state ‘no effect’.
Effect on
Gross Net Balance
Transaction profit profit sheet
(1) Purchase of motor vehicle for deliveries
to customers – entered in Purchases Account
(2) Invoice for electricity wrongly entered in
Water Supply Account
(3) Payment for repairs to premises entered in
Premises Account
(4) Bill for petrol for delivery vehicle
entered in Motor Vehicle Account
(5) Invoice for legal services in respect of
the purchase of premises entered in
Office Expenses Account
(6) The cost of installing new shop fittings
was charged to Wages Account
T/19.5/A
Effect on
Transaction Gross profit Net profit Balance sheet
(1) Understated Understated Fixed assets
understated
Capital understated
(2) No effect No effect No effect
(3) No effect Overstated Fixed assets
overstated
Capital overstated
(4) No effect Overstated Fixed assets
overstated
Capital overstated
(5) No effect Understated Fixed assets
understated
Capital understated
(6) No effect Understated Fixed assets
understated
Capital understated
275
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T/19.6*
This question has reference to the information given in T/19.2 (Matthew Dawalla).
Matthew Dawalla makes no provision for depreciation in respect of fixed assets purchased
in the last 6 months of any financial year.
Using the format shown below, indicate by means of a tick () which of the Trading
Account, Profit & Loss Account, or balance sheet prepared at 31 October Year 7 would be
affected by each of the transactions. In the case of item (5), also state the amount.
Trading Profit & Loss

Items Account Account Balance sheet
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
T/19.6/A
Trading Profit & Loss
Items Account Account Balance sheet
(1)
(2)
(3)
(4)
(5) £1,300 £5,100
(6)
(7)
(8)
276
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T/19.7*
Andrew Smithers has recently prepared the following Trading and Profit & Loss Account:
Andrew Smithers
£ £
Sales 73,200
Opening stock 3,860
Purchases 49,750
53,610
less Closing stock 4,200 49,410
Gross profit 23,790
less Expenses:
Rent 4,400
Wages 18,900
General expenses 860 24,160
Net loss (370)
On reviewing his books of account you find that:
(1) The item ‘Purchases’ includes:

● a desktop computer bought for use in the office for £2,200;
● a new delivery van bought for use in the business for £7,600;
● the purchase of materials for extending the shop premises £2,350.
(2) The sales figure includes the sale of the old delivery van for £1,600. This figure had
been shown in the books at £3,400.
(3) The closing stock includes £300 of materials in hand for work on extending the shop
premises.
(4) Rent accrued £400.
(5) The figure for wages includes £2,100 for building work on extending the shop premises.
Andrew Smithers tells you that he wishes to allow £1,500 first-year depreciation on the
new delivery van.
Required
Prepare a revised Trading and Profit & Loss Account for Andrew Smithers for the year
ended 30 September Year 3.
277
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T/19.7/A
Andrew Smithers
(Revised) Trading and Profit & Loss Account
£ £
Sales (-1,600) 71,600
Opening stock 3,860
Purchases (-2,200
-7,600
-2,350) 37,600
41,460
less Closing stock (-300) 3,900 37,560
Gross profit 34,040
less Expenses:
Rent (+400) 4,800
Wages (-2,100) 16,800
Depreciation: £
Old van 1,800
New van 1,500 3,300 25,760
Net profit 8,280
278
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T/19.8*
John Bradford ended his first year of trading on 31 December Year 4. He has no knowledge
of book-keeping and accounts but has prepared what he calls his profit statement for the
year:
John Bradford
Profit statement at 31 December Year 4
£ £
Cash takings from customers 22,664
Purchases
Goods for resale 14,173
Motor vehicle, bought 1 Jan Yr 4 2,200
16,373
Advertising 838
Vehicle running costs 1,092
Wages paid 2,640
Insurances 310
Heat and light 429
Cash taken for own use 394 22,076
Profit 588
Other information at 31 December Year 4:
(1) Customers invoiced for £1,082 had not yet paid their accounts.
(2) Wages accrued due £286.
(3) Purchases that had cost £1,730 were still unsold (stock).
(4) John Bradford expects the motor vehicle to last 3 years and to have a trade-in value
then of £700.
Required
(a) State what important distinction John Bradford has failed to make in his treatment of
the motor-vehicle purchase.
(b) Prepare a revised Trading and Profit & Loss Account for John Bradford for the year
ended 31 December Year 4.
279
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T/19.8/A
(a) John Bradford has not made the distinction between capital and revenue expenditure.
(b) John Bradford

£ £
Sales 23,746**
Purchases 14,173
less Closing stock 1,730
12,443
Gross profit 11,303
Advertising 838
Vehicle running costs 1,092
Wages 2,926
Insurance 310
Heat and light 429
Depreciation – van 500 6,095
Net profit 5,208
** Cash takings 22,664

add accrued due 1,082 23,746
T/20.1
After trading for some years, Lorna Freele decides to keep a double-entry set of books. At
1 May Year 7, records show her financial position to be as follows:
Assets Premises £47,000 Office equipment £11,200

Fixtures and fittings £3,800
Motor vehicle £9,700 Stock £8,650
Debtors D Crawle £570 F Munster £312 J Tester £423
Office cash £107
Liabilities Creditors: A Farmer £318 T North £165 Bank overdraft £1,730
Required
(a) In the journal, show the opening entries to record the assets and liabilities of Lorna Freele
at 1 May Year 7.
(b) Post the figures for assets and liabilities as balances in appropriate ledger accounts.
Name the division of the ledger in which each account appears.
280
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T/20.2*
The following details are available concerning the business of Walter Masson for the year
ended 30 June Year 4:
£
Stock at 1 Jul Yr 3 4,600
Purchases 15,120
Sales 29,360
Returns inwards 410
Stock, 30 Jun Yr 4 5,300
Wages 7,300
Rent, rates, and insurance 3,200
Required
Prepare closing entries for Walter Masson at 30 June Year 4, showing transfers to the Trading
Account, Profit & Loss Account, and Capital Account relating to the year ended 30 June
Year 4.
T/20.2/A
Walter Masson
Journal
Dr Cr
Year 4 £ £
30 Jun Trading 4,600
Stock 4,600
Book value of stock at
1 Jul Yr 3

Purchases 15,120
Purchases for year ended
30 Jun Yr 4
30 Jun Trading 410

Returns inwards 410
Returns inwards for year
ended 30 Jun Yr 4
30 Jun Sales 29,360

Trading 29,360
Sales for year ended
30 Jun Yr 4
(continued)
281
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T/20.2/A (continued)
30 Jun Returns outwards 140
Trading 140
Returns outwards for year
ended 30 Jun Yr 4
30 Jun Stock 5,300

Trading 5,300
Value of stock at
30 Jun Yr 4

Profit & loss 14,670
Gross profit for the year
30 Jun Profit & loss 1,740

Office expenses for year
ended 30 Jun Yr 4

Wages 7,300
Wages for year ended
30 Jun Yr 4

Rent, rates, and insurance 3,200
Rent, rates, and insurance
for year ended 30 Jun Yr 4

Capital 2,430
Net profit for year transferred
Comment
The ‘sides’ the individual items (eg purchases) appear on in these journal entries correspond
to the transfer entries appearing in the individual accounts concerned.
282
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T/20.3
At 31 August Year 5, the end of his financial year, B C Holt’s books included the following
balances:
£
Stock at 1 Sep Yr 4 9,580
Purchases 58,960
Sales 90,440
Purchases returns 1,030
Sales returns 2,105
Carriage inwards 1,760
B C Holt valued his stock at cost, £10,380, at 31 August Year 5.
Required
In the books of B C Holt:
(a) Prepare journal entries, without narrations, to transfer the above balances to the Trading
Account for the year ended 31 August Year 5. The closing stock valuation should also
be journalized.
(b) Prepare the Trading Account for the year ended 31 August Year 5.
(LCCIEB)
283
pages 267-326 15/3/03 11:18 am Page 284
T/20.4*
C Stanton’s financial year ends on 30 June; the following transactions took place during
June Year 7:
(1) On 1 June, Stanton purchased a new car, for use in the business, for £9,600 from the
Smart Vehicle Company. He was allowed £2,200 for his old car and paid the balance
by cheque.
(2) On 1 June, Stanton paid £360 by cheque for car insurance to 31 May Year 8.
(3) On 11 June, he purchased a new computer for £2,685 on credit from E Byte & Son.
(4) On 19 June,T Wilson paid £65 by cheque as the only payment on his debt of £260.
Stanton decided to write off the balance as a bad debt.
(5) During the month of June, Stanton had taken goods costing £419 for his own use.
On 30 June Year 7, Stanton decided to make adjustments for the following matters, before
preparing the final accounts:
(a) Car insurance premium is prepaid.

(b) Bank charges amounting to £71 had not been entered in the books.
(c) Telephone charges of £124 for the month of June had not been paid.
Required
Prepare the journal entries to record the above transactions and adjustments, including
bank, in the books of C Stanton.
Note
Narrations are not required.
(LCCIEB)
284
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T/20.4/A
C Stanton
Journal
Dr Cr
Year 7 £ £
1 Jun Motor car 9,600
Motor-car disposal 2,200
Bank 7,400
1 Jun Insurance 360
Bank 360
11 Jun Office machinery 2,685
E Byte & Son 2,685
19 Jun Bank 65
Bad debts 195
T Wilson 260
30 Jun Drawings 419
Purchases 419
30 Jun Car insurance (Year 7/8) 330
Car insurance (Year 6/7) 330
30 Jun Bank charges 71
Bank 71
30 Jun Telephone (Year 6/7) 124
Telephone (Year 7/8) 124
285
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T/20.5*
The following information relates to James Grant, a trader, in respect of the financial year
ended 31 December Year 5:
(1) On 8 January, Grant purchased motor van number 5, for £10,800 from Roundstar
Garages, according to invoice number K/6807. He paid a deposit of £2,000 by cheque,
the balance of the purchase being on credit.
(2) On 12 March, T Hardwicke, a debtor, paid £350 as a first and final instalment on a
debt of £1,400.The balance of the debt was written off as irrecoverable.
(3) On 20 June, Grant took from stock, for his own private use, goods which had been
purchased within the current trading year for £135.
(4) On 15 October, Grant sold motor van number 3 for £4,000, which was paid by
cheque. It had been purchased in Year 2 for £8,800. The Provision for Depreciation
on the motor van Number 3 Account showed a balance of £5,200.
(5) On 31 December, Grant’s debtors totalled £18,600. He decided to adjust the provision
for doubtful debts of £650 to 4% of total debtors.
Required
Prepare journal entries to record the above items, including narrations.
(LCCIEB)
286
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T/20.5/A
James Grant
Journal
Dr Cr
Year 5 £ £
(1) 8 Jan Motor vehicles 10,800
Bank 2,000
Roundstar Garages 8,800
Purchase of motor van no 5, ref invoice
no K/7807. Payment by cheque £2,000
with balance on credit
(2) 12 Mar Bank 350

Bad debts 1,050
T Hardwicke 1,400
Payment of 25% of amount due;
balance of debt written off
(3) 20 Jun Drawings 135

Purchases 135
Goods taken for private use
(4) 15 Oct Disposal 8,800

**Motor van 8,800
Provision for depreciation
on motor van 5,200
Disposal 5,200
Bank 4,000
Disposal 4,000
Disposal 400
Profit & loss 400
Sale of motor van no 3, previously
purchased in Year 2 for £8,800.
Cheque received £4,000
(5) 31 Dec Pofit & loss 94

Increase in provision to 4% of total
debtors of £18,600
**This journal entry has been set out in this way to show the different elements in the disposal. Other
forms of layout may be acceptable.
287
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T/21.1
In the year ended 31 December Year 9, the following errors occurred in the books of
Ching Wong:
(1) Both the Office Expenses Account and Sales Account were overcast by £100.
(2) The purchase of equipment, for use in the business, was debited to the Purchases
Account.
(3) A sale of goods to B Winlock for £346 was entered in the Sales Day Book as £316.
(4) A purchase of goods from T Lister was posted to T Mister’s Account.
(5) A bill for cleaning had not been entered in the books.
(6) A bill for travelling expenses had been entered in the Telephone Account.
Required
Prepare a statement as follows and, against each item, state the type of error, eg ‘error of
omission’:
Type of error
(1)
(2)
(3)
(4)
(5)
(6)
288
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T/21.2
The following accounts appeared in the books of a trader:
Purchases Account
Year 5 £ Year 5 £
31 Dec Balance b/d 16,220 31 Dec Balance c/d 18,360
31 Dec Bank (new fixed
assets) 2,140
18,360 18,360
Year 6
Fixed Assets (at cost)

Year 5 £ Year 5 £
31 Dec Balance b/d 19,450 31 Dec Balance c/d 20,500
31 Dec Bank (goods for
resale) 1,050
20,500 20,500
Year 6
Required
(a) What type or types of error have been made in these accounts?
(b) Would the correction of these errors increase or decrease the gross profit and, if so, by
how much?
T/21.3
Required
Name each of the following errors:
(1) The proceeds from the sale of some office furniture had been posted from the Cash
Book to the credit of the Sales Account.
(2) The proprietor of a business had taken for his own use goods purchased for resale.This
had not been recorded in the books.
(3) An invoice for £271 for goods sold on credit to N Pinter had been entered in the
books as £217.
(4) A payment for electricity had been posted from the Cash Book to the debit of the
Rent Payable Account.
289
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T/21.4
The following trial balance was prepared incorrectly for K Masters at 31 December Year 8,
with some balances entered in the wrong column:
Dr Cr
£ £
Debtors 19,084
Cash at bank and in the office 22,315
Rent receivable 4,600
Purchases 137,918
Sales 183,217
Creditors 11,584
Drawings 14,600
Bad debts written off 560
Discount allowed 765
Discount received 580
Provision for depreciation on
motor vehicles 4,800
Salaries and wages 18,886
Sundry expenses 754
Premises 130,000
Capital 176,391
369,054 395,150
Required
Prepare a correct trial balance for K Masters at 31 December Year 8.
(LCCIEB)
290
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T/21.5
Laurence Grant failed to agree his trial balance at 30 June Year 5.The following errors were
later discovered:
(1) The Purchases Day Book total of £5,960 had been posted to the Purchases Account
in the General Ledger as £5,690.
(2) The withdrawal by Laurence Grant of £95 in cash for private use had been posted to
the debit of the Office Expenses Account.
(3) The purchase on credit of computer stationery for £135 had been debited to the
Office Equipment Account.
(4) Discount allowed of £157 had been credited to the Discount Received Account.
(5) A cheque for £430 had been correctly debited in the Cash Book but the double entry
had not been completed.
Required
Prepare a statement showing the effect of these errors upon the trial balance of Laurence
Grant.You should set out your answer as follows:
Cause debit total Cause credit total

to exceed credit total by to exceed debit total by
£ £
(1)
(2)
(3)
(4)
(5)
Note
If there is no effect on the trial balance, you should state ‘no effect’.
(LCCIEB)
291
pages 267-326 15/3/03 11:18 am Page 292
T/22.1
Lynn Webster is a sole trader whose financial year ends on 30 September. At 30 September
Year 5, she failed to agree her trial balance and found the following errors and omission:
(1) The payment by cheque of an invoice for £515 for repairs to the office computer had
been recorded in the Cash Book and posted to the Office Equipment Account.
(2) A payment of £390 for advertising had been posted to the Travelling Expenses
Account.
(3) Lynn Webster had taken goods, bought during the year ended 30 September Year 5 for
£186, for her personal use, but no entry had yet been made in the books.
(4) The sale of goods for cash £730 had been entered as a credit to the Cash Account and
a debit to the Sales Account.
(5) The payment of wages, £1,560 in cash, to Webster’s employees for building an
extension to the firm’s offices, had been entered in the Cash Book and posted to the
Wages Account.
Required
Prepare journal entries, including narrations, necessary to deal with the errors in (1), (2),
(4), (5) and the omission in (3).
T/22.2
The following errors occurred in the books of Eric Sawyer, a sole trader, in one accounting
period:
(1) The cost for petrol of £26 was wrongly debited to the Motor Vehicles Account.
(2) The purchase of goods on credit for £86 from T Lawton was recorded in both the
Purchases Day Book and the personal account as £68.
(3) The payment of a subscription to a trade association, £60, was wrongly debited to
the Purchases Account.
(4) The total of one month’s discount-received column in the Cash Book, which was
£54, was posted to the credit side of the Discount Allowed Account.
(5) The total of the stationery analysis column of the Petty Cash Book for February Year 8,
£13.50, was posted to the Postages Account.
(6) A purchase of a new motor van for £10,500 had been debited to Fixtures and Fittings.
Required
Show the correction of each of the above errors by means of a journal entry. Your entries
should include narrations.
292
pages 267-326 15/3/03 11:18 am Page 293
T/22.3*
Henry James, a sole trader, extracted a trial balance at 30 September Year 6. It did not agree.
On checking the entries in his books, he discovered the following:
(1) A payment of £380 from a debtor, C Bates, had been posted to another debtor’s
account in the name of C Yates.
(2) The total of credit sales for March appeared in the Sales Day Book as £5,680 but this
had been posted in the Sales Account as £6,680.
(3) A credit purchase of £100 had been correctly entered in the Purchases Day Book for
the month of September; it had also, however, been wrongly posted as a cash purchase.
(4) Rent of £500 for the month of May had been paid by cheque but no double entry
had been completed in the Rent Account.
(5) A telephone bill paid by cheque, amounting to £230, had been posted in error to the
Electricity Account.
(6) A cash sale of £300 had been completely omitted from the books.
(7) The purchase of a motor van costing £7,000 had been posted in error to the Purchases
Account.
Required
Prepare the necessary journal entries on 30 September Year 6 to correct the above errors
and omission. Narrations are not required.
T/22.3/A
Henry James
Journal
Dr Cr
Year 6 £ £
(1) 30 Sep C Yates 380
C Bates 380
(2) 30 Sep Sales 1,000
No entry –
(3) 30 Sep Cash/bank 100
Purchases 100
(4) 30 Sep Rent 500
No entry –
(5) 30 Sep Telephone 230
Electricity 230
(6) 30 Sep Cash/bank 300
Sales 300
(7) 30 Sep Motor van 7,000
Purchases 7,000
293
pages 267-326 15/3/03 11:18 am Page 294
T/22.4*
The following relates to the business of W Lennon:

£ £ £
Stock at 1 Jan Yr 5 12,600 Sales 138,400
less Returns inwards 670
Purchase 76,300 137,730
add Carriage inwards 1,150
77,450
less Returns outwards 980
76,470
89,070
less Stock at 31 Dec Yr 5 13,200
75,870
137,730 137,730
Discount allowed 640 Gross profit b/d 61,860
Motor-vehicle expenses 8,200 Discount received 720
Wages 24,300
Insurance 1,850

Motor vehicles 8,500 9,620
Net profit 15,600

62,580 62,580
294
pages 267-326 15/3/03 11:18 am Page 295

Premises 45,000 – 45,000
Office equipment 5,600 1,680 3,920
Motor vehicles 34,800 12,850 21,950
85,400 14,530 70,870
Current Assets
Stock 13,200
Debtors 6,300
Cash and bank 1,050
20,550

Creditors 4,100 16,450
87,320
Financed by:
87,320
It was later found that the following errors/omissions had been made during the year ended
31 December Year 5:
(1) Stock at 31 December Year 5 had been wrongly valued. It should have been valued at
£12,900.
(2) A bill, not yet paid, for carriage inwards, £100, for Year 6, had wrongly been charged
to Year 5.
(3) No adjustment had been made for prepayment of insurance, £350, at 31 December
Year 5.
(4) £300 paid in wages had been posted wrongly to the Office Expenses Account.
(5) The provision for depreciation of motor vehicles had been wrongly calculated. It
should have been £8,700.
Required
(a) In a statement, show for each of the 5 errors/omissions the effect upon gross profit, net
profit and the balance sheet of:
(i) the error/omission
(ii) correcting the error/omission.
(b) Show, for W Lennon, the revised Trading and Profit & Loss Account and balance
sheet after the necessary adjustments have been made.
295
pages 267-326 15/3/03 11:18 am Page 296
T/22.4/A: part (a) only

Effect of correcting for
Effect of error/omission the error/omission
(1) Gross profit overstated
by £300 Gross profit reduced by £300
Net profit overstated
by £300 Net profit reduced by £300
Balance sheet: Balance sheet:
 
Stock overstated 
 by Stock reduced 
by
Capital overstated £300 Capital reduced £300
(2) Gross profit and net profit Gross profit and net profit
understated by £100 both increased by £100
Sundry creditors  Sundry creditors 
by
 by

overstated  reduced 
£100 £100
Capital understated Capital increased
(3) Net profit understated Net profit increased

by £350 by £350
Current assets  Current assets 
understated by by

 increased 
Capital understated £350 £350
Capital increased
(4) Office expenses  Reduced office expenses 

 by
overstated
 by Increased wages

£300

Wages understated £350
No further effects No further effects
(5) Net profit overstated Net profit reduced by £200

by £200

Fixed assets  Fixed assets reduced  by
overstated
 by Capital reduced

£200

Capital overstated £200
Note
It will be clear that the effect of correcting for the error/omission is the reverse of the effect
of the error/omission. Both effects would not be included in any examination question.
They are both included in this instance to emphasize the difference in the wording of the
two parts of the answer to (a). Incorrect or unsuitable wording of answers in this topic can
result in a significant loss of marks.
296
pages 267-326 15/3/03 11:18 am Page 297
T/22.5
Helen Sagan, a sole trader, prepared a trial balance at 30 September Year 5, which did not
agree.You have found the following errors:
(1) A cash payment for material purchases for £726 had been entered in the Cash Book
as £762.The correct entry had been made in the Purchases Account.
(2) A receipt of £2,320 from a debtor, J Wilson, had been posted to the account of
S Williamson.
(3) A purchase, on credit, of a new machine for £5,300 had been debited to the Machine
Repair Account. Depreciation is not charged on assets in the year they are purchased.
(4) A cheque payment of £856 to a creditor had been entered in the creditor’s account
but had been omitted from the Cash Book.
(5) A cheque payment of £2,000 for rent had been entered in the Cash Book as £200.
This incorrect amount had also been entered into the expense account.
(6) An invoice from P Rees for purchases of £240 had been omitted from the ledger.
Required
(a) Prepare journal entries to correct the errors. Narrations are not required.
(b) Prepare a statement, as shown below, and enter the effect on profit of each of the errors,
including the amount. If there is no effect enter a tick () in the right hand column.
Effect on profit
Error
number Overstated £ Understated £ No effect
(1)
(2)
(3)
(4)
(5)
(6)
297
pages 267-326 15/3/03 11:18 am Page 298
T/22.6
This exercise refers to the errors set out in T/22.2.
Required
State the effect of the correction of each of these errors on the draft net profit of Sawyer.
You should set out your answer as follows:
Increase of net profit Reduction of net profit
£ £
(1)
(2)
(3)
(4)
(5)
(6)
Note
Enter each amount in the appropriate column. If there is no effect on the net profit, you
should state ‘no effect’.
(LCCIEB)
T/22.7
This exercise refers to T/22.1. Despite having failed to agree her trial balance, Lynn Webster
calculated a provisional profit of £5,670.
Required
Prepare a statement as shown below and against each of the items (1) – (5) enter the effect,
with the amounts, on the provisional profit of correcting for the error/omission. If there is
no effect, you should enter a tick () in the column headed ‘no effect’.
Effect of corrections on net profit

Increase £ Reduce £ No effect
(1)
(2)
(3)
(4)
(5)
Underneath your statement, you should state the amount of the revised net profit, after the
necessary adjustments have been made.
298
pages 267-326 15/3/03 11:18 am Page 299
T/23.1*
J Salmon, a sole trader, prepared the following trial balance from her books at 30 June Year 6:
Dr Cr
£ £
Motor vehicles at cost 80,000
Fixtures and fittings at cost 82,000
Purchases and purchases returns 263,500 7,300
Sales and sales returns 3,400 370,000
Stock (1 Jul Yr 5) 15,700
Discounts 2,300 1,600
Bad debts 650
Debtors and creditors 35,000 27,400
Capital 108,000
Drawings 28,200
Rent 12,000
Rates and insurances 3,420
Salaries 12,300
Cash at bank 10,720
Cash in hand 420
556,900 556,900
At 30 June Year 6:
(1) Depreciation is to be provided as follows:

Motor vehicles 25% on cost
Fixtures and fittings 10% on cost
(2) Stock was valued at cost £17,400.
(3) The provision for doubtful debts is to be set at 2% of the debtors.
(4) Motor-vehicle running expenses at £510 and lighting and heating at £420 were
accrued.
(5) The rates and insurances were prepaid by £120.
Required
Prepare for J Salmon:
(a) a Trading and Profit & Loss Account for the year ended 30 June Year 6
(b) a balance sheet at 30 June Year 6.
(LCCIEB)
299
pages 267-326 15/3/03 11:18 am Page 300
T/23.1/A
J Salmon
for the year ended 30 June Year 6
£ £ £
Stock at 1 Jul Yr 6 15,700 Sales 370,000
less Sales returns 3,400
Purchases 263,500 366,600
less Purchases
returns 7,300 256,200
271,900
less Stock at 30 June
Yr 6 17,400
366,600 366,600
Depreciation: Gross profit b/d 112,100
Fixtures and fittings 8,200 28,200 Discounts received 1,600
Discounts allowed 2,300
Bad debts 650
Rent 12,000
Motor-vehicle running
expenses (3,360 + 510) 3,870
Rates and insurances
(3,420 - 120) 3,300
Salaries 12,300
Lighting and heating
(3,930 + 420) 4,350
Net profit 46,630
113,700 113,700
300
pages 267-326 15/3/03 11:18 am Page 301
Balance sheet at 30 June Year 6

Motor vehicles 80,000 43,000 37,000
Fixtures and fittings 82,000 27,200 54,800
162,000 70,200 91,800
Current Assets
Stocks 17,400
Debtors 35,000
less Provision for
doubtful debts 700 34,300
Prepayments 120
Cash at bank 10,720
Cash in hand 420
62,960
Creditors 27,400
Accrued (510 + 420) 930 28,330
126,430
Financed by:
Capital 108,000
126,430
301
pages 267-326 15/3/03 11:18 am Page 302
T/23.2
Hilda Braquette prepared the following trial balance at 31 October Year 5:
Dr Cr
£ £
Stock at 1 Nov Yr 4 6,820
Provision for depreciation of fixtures
and fittings at 1 Nov Yr 4 2,800
Bank 3,200
Cash in hand 148
Debtors and creditors 10,300 6,920
Motor vehicles at cost 24,000
Provision for depreciation of motor
vehicles at 1 Nov Yr 4 7,200
Purchases and sales 75,820 161,360
Discounts allowed and received 2,140 1,580
Drawings 13,200
Wages 43,972
Bad debts 390
Returns inwards and outwards 1,180 850
Rent 10,400
Light and heat 650
Insurance 1,080
Capital 34,340
215,260 215,260
Additional information at 31 October Year 5:

£ £
(1) Stock at cost 8,460
(2) Insurance prepaid 240
(3) Accrued due:
Light and heat 80
Office expenses 140 220
(4) Depreciation is provided as follows:
Fixtures and fittings – 10% per annum on cost
Motor vehicles – 20% per annum on cost
(5) Provision for doubtful debts is to be adjusted to 4% of debtors
Required
For Hilda Braquette, prepare:
(a) the Trading and Profit & Loss Account for the year ended 31 October Year 5
(b) a balance sheet at 31 October Year 5.
(LCCIEB)
302
pages 267-326 15/3/03 11:18 am Page 303
T/23.3
The following trial balance was extracted from the ledger of P Lippis, a sole trader, on
31 March Year 12:
Dr Cr
£ £
Business premises at cost 85,000
Capital 93,420
Stock at 1 Apr Yr 11 8,310
Purchases returns 285
Provision for depreciation of fixtures
and fittings 2,540
Trade debtors:
R Prince 480
K Evitts 1,010
J Carr 180
Archway Supplies 370
Trade creditors:
K Porter 2,210
Archway Supplies 4,096
Cash in hand 47
Cash at bank 1,093
Wages 8,942
Advertising 110
Heat and light 1,092
Insurances 368
Other expenses 459
Drawings 7,240
167,201 167,201
The following additional information is to be taken into account:

(1) Stock valued at cost on 31 March Year 12, £7,935.
(2) Accruals at 31 March Year 12: wages £230; heat and light £98.
(3) Prepayment at 31 March Year 12, Insurances £46.
(4) Lippis received a bank statement, showing that there was a balance in his favour
on 31 March Year 12, amounting to £1,140.A creditor had not yet presented a cheque
drawn by Lippis for £79, and the bank applied bank charges amounting to £32.
(5) Depreciation was to be provided on fixtures and fittings at 10% per annum on cost.
(6) Archway Supplies was Lippis’ main supplier. Unusually, Archway purchased goods from
Lippis, and it was agreed that the debtor balance should be a contra against the
creditor balance.
Required
Prepare for P Lippis:
(a) a Trading and Profit & Loss Account for the year ended 31 March Year 12
(b) a balance sheet at 31 March Year 12.
(LCCIEB)
303
pages 267-326 15/3/03 11:18 am Page 304
T/23.4
At 31 December Year 3, the end of her first year of trading, Hilda Braquette produced the
following list of stock items and asked for your help:
Original Selling Stock

Item Quantity cost price Comments value
£ £ £
(i) 200 2.00 3.00
(ii) 500 5.00 7.50 20 broken – to be
thrown away
(iii) 1,200 1.00 1.50 40 damaged – saleable
at half price
(iv) 50 3.00 2.50 old stock
(v) 75 4.00 6.00
(vi) 350 3.00 4.50
(vii) 450 2.00 3.00 20 damaged – saleable
at half price
Required
Calculate the stock valuation of each item and total to show the value of Hilda Braquette’s
closing stock at 31 December Year 3.
304
pages 267-326 15/3/03 11:18 am Page 305
T/23.5
The following balances were included in the trial balance of James Hanson at 31 March
Year 4:
Debit Credit
£ £
Returns 238 194
Stock at 1 Apr Yr 3 1,146
At 31 March Year 4, James Hanson counted and valued his stock in hand at cost, £1,382.
This included the following 3 items of stock:
Net realizable
Cost price value
£ £
Item 1 120 140
Item 2 72 60
Item 3 80 45
Required
(a) Prepare a statement, starting with the stock value of £1,382, showing any necessary
adjustments in respect of the 3 items of stock above, to show a new stock valuation at
31 March Year 4.
(b) Prepare a Trading Account for James Hanson for the year ended 31 March Year 4.
305
pages 267-326 15/3/03 11:18 am Page 306
T/23.6
The financial year of F Lang, a trader, ends on 31 March. F Lang sells goods at a mark-up
of 33 1/3 % on cost price. On 31 March Year 4, the value of his stock at cost was £12,360.
On 17 March Year 5, he provisionally valued his stock at £14,220.
Between 18 March Year 5 and the end of that financial year, the following took place:
(1) Lang bought goods to a purchase invoice value of £740.
(2) He returned goods to suppliers that had been invoiced to him at £273.
(3) He sold goods to a selling value of £1,320.
(4) Lang took goods that had cost £195 for his own private use.
Required
(a) Prepare a statement adjusting the value of stock at 31 March Year 5 for entry into the
Stock Account at cost price.
(b) Calculate the effect of the adjustment of the value of stock on the amount of the gross
profit £94,800 for the year ended 31 March Year 5.
(c) Prepare the Stock Account for the years ended 31 March Years 5 and 6 respectively,
assuming that the value of stock at 31 March Year 6 was £15,300.
(LCCIEB)
306
pages 267-326 15/3/03 11:18 am Page 307
T/24.1
The Treasurer of the Southern Jazz Club drew up the following Receipts & Payments
Account for the year ended 31 December Year 19:
£ £
Balance at bank, Hire of rooms 2,100
1 Jan Yr 19 3,860 Annual subscription to
Members’ subscriptions 3,520 National Jazz Association 150
Sale of Festival tickets 1,840 Festival expenses 1,970
Sale of food and drink 2,730 Printing and postage 868
Purchase of equipment 1,200
Purchase of food and drink 2,480
11,950 11,950
The following additional information was available:
(1) Members’ subscriptions in arrears at 31 December Year 19 amounted to £50.

(2) On 1 January Year 19, the Club owned equipment worth £2,600. It was decided that
the equipment owned at 31 December Year 19 should be depreciated by £700.
Required
Prepare the Income & Expenditure Account in respect of the Southern Jazz Club for the
year ended 31 December Year 19.
Note
307
pages 267-326 15/3/03 11:18 am Page 308
T/24.2*
Walton Cricket Club had the following Receipts & Payments Account for the year ended
31 December Year 8:
Balance at bank 2,920 Purchases – refreshments 3,000
Subscriptions 8,120 Purchases – equipment 2,460
Refreshment takings 5,200 Wages of groundsman 4,180
Hire of ground 650 Wages of refreshment staff 1,600
Sale of raffle tickets 1,010 Telephone 215
Secretary’s expenses 468
Light and heat 366
Insurance 450
Repairs/renewals 1,272
Purchase – raffle prizes 500
17,900 17,900
The following information was also available:
At 31 December At 31 December
Year 7 Year 8
£ £
Stock of refreshments 340 560
Creditors for refreshments 590 630
Subscriptions in arrears – 180
Subscriptions in advance – 50
Pavilion 8,000 7,000
Sports equipment 5,600 7,254
Insurance prepaid 50 80
Required
Prepare, for the Walton Cricket Club, for the year ended 31 December Year 8:
(a) the Refreshments Account

(b) the Income & Expenditure Account.
(LCCIEB)
308
pages 267-326 15/3/03 11:18 am Page 309
T/24.2/A
Walton Cricket Club
Refreshments Account
£ £
Stock at 1 Jan Yr 8 340 Sales 5,200
Purchases (3,000 - 590 + 630) 3,040
3,380
less Stock at 31 Dec Yr 8 560
Cost of sales 2,820
Wages 1,600
Profit on trading 780
5,200 5,200

Expenditure £ £ Income £ £
Wages – groundsman 4,180 Profit from refreshments 780
Telephone 215 Subscriptions 8,120
Secretary’s expenses 468 add Arrears 180
Light and heat 366 8,300
Repairs and renewals 1,272 less In advance 50 8,250
Insurance
(450 + 50 - 80) 420 Profit on raffles:
Depreciation: Sale of tickets 1,010
Pavilion 1,000 less Cost of prizes 500 510
Equipment 806 1,806 Hire of ground 650
Surplus, excess of
income over expenditure 1,463
10,190 10,190
309
pages 267-326 15/3/03 11:18 am Page 310
T/24.3*
The Treasurer of the Belvedere Sports Club prepared the following Receipts & Payments
Account for the year ended 30 September Year 11:
Balance at bank 3,160 Purchase of refreshments 2,460
Sale of raffle tickets 810 Insurance 250
Sale of refreshments 4,020 Printing and stationery 165
Subscriptions 4,160 Light and heat 235
Repairs to equipment 430
Purchase of raffle prizes 390
Wages – refreshments staff 1,710
Purchase of equipment 2,400
Wages – ground staff 1,220
Postage 80
12,150 12,150
30 September 30 September
Year 10 Year 11
£ £
Subscriptions in advance 90 60
Subscriptions in arrears 100 170
Stock of refreshments 1,020 1,310
Insurance paid in advance 35 50
Light and heat accrued due 30 54
Equipment 6,500 8,000
Required
Prepare, for the Belvedere Sports Club, for the year ended 30 September Year 11:
(a) a Refreshments Trading Account

(b) an Income & Expenditure Account.
Note
310
pages 267-326 15/3/03 11:18 am Page 311
T/24.3/A
Belvedere Sports Club
Refreshments Trading Account
£ £
Stock at 1 Oct Yr 10 1,020 Sales 4,020
Purchases 2,460
3,480
less Stock at 30 Sep Yr 11 1,310
Cost of sales 2,170
Wages 1,710
Profit on trading 140
4,020 4,020

Expenditure £ Income £ £
Insurance (250 + 35 - 50) 235 Profit on refreshments 140
Printing and stationery 165 Subscriptions 4,260**
Light and heat (235 - 30 + 54) 259 Profit from raffle:
Repairs to equipment 430 Sale of tickets 810
Wages – ground staff 1,220 less Cost of prizes 390 420
Postage 80
Depreciation of equipment 900
Surplus of income over
expenditure 1,531
4,820 4,820
£ £
** Subscriptions: 4,160
add In advance 30 Sep Yr 10 90
In arrears 30 Sep Yr 11 170 260
4,420
less In arrears 30 Sep Yr 10 100

In advance 30 Sep Yr 11 60 160
4,260
311
pages 267-326 15/3/03 11:18 am Page 312
Appendix 2: Summarized answers to selected

exercises
1.1 (1) Goods +350 Bank -350
(2) Cash +290 Goods -290
(3) Office furniture +318 D Jackson, Creditor +318
(4) Loan,T Walls -1,500 Bank -1,500
(5) Bank +965 F Wiles -965
(6) Postage +11 Cash -11
(7) Bank -617 T Gates -617
1.2 (i) Computer -3,600 Bank +3,600

(ii) Computer -3,600 Debtor +3,600
(iii) Computer -3,600 Bank +2,000 Debtor +1,600
1.3 Assets £23,660 Capital £16,190 Other liabilities £7,470
1.5 (i) 31 Oct Yr 3: Assets £22,905 Capital £16,045

Other liabilities £6,860
(ii) 30 Nov Yr 3: Assets £22,145 Capital £16,045
Other liabilities £6,100
2.1 Debited Credited

(1) Purchases T Ball
(2) Cash Sales
(3) Equipment Bank
(4) T Ball Returns outwards
(5) D Trill Sales
(6) Office furniture Creditor,T Doyle

(1) A Darby Sales
(2) Returns inwards A Brittle
(3) Bank A Darby
(4) T Zuck Returns outwards
(5) Creditor, F Lane Bank
(6) Returns inwards A Darby

(1) Purchases Cash
(2) Creditor Bank
(3) Office equipment Office Services Ltd
(4) Rent Cash
(5) Cash Sales
(6) Bank F Tracey
312
pages 267-326 15/3/03 11:18 am Page 313
Appendix 2: Summarized answers

(1) Bank T Ward (loan)
(2) J King Sales
(3) Telephone Bank
(4) Cash Office furniture
(5) Insurance Bank
(6) Purchases R Veal
(7) Returns inwards B Trent
4.1 (a) Cr balance £1,215
4.1 (b) Debit balance – on debtor’s account; representing an asset
4.6 Trial balance totals £31,780
5.3 Gross profit £17,210 Net profit £5,090

£
Balance sheet: Fixed assets 162,500
Current assets 40, 894
Amounts due in more
than 1 year 26,000
Creditors 16,394
Capital 161,000
9.2 Multiple choice: (1) (b) and (d)

(2) (a) and (c)
(3) (b) and (d)
10.1 Balances at 31 Mar Yr 5: Cash £117 Bank £978 (Dr)
Discount Allowed Account Dr £18

Discount Received Account Cr £16
10.2 Balances at 31 May Yr 6: Cash £423 Bank £8,259
Discount totals: Discount allowed Dr £80

Discount received Cr £71
313
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10.3 Balances of Cash Book before adjustment: Cash £99

Bank £383 (Dr)
Balances after adjustment: Cash £99 Bank £200 (Dr)
10.4 (a) Bank balance at 31 May Yr 11: £1,198 (Dr)

(b) Discount Allowed Account Dr £25
Discount Received Account Cr £47
Both recorded in the General (Nominal) Ledger
11.1 (a) Sales Day Book total for August Year 6 £2,133
11.2 (a) Sales Day Book total for September Year 6 £1,672
11.3 (a) Purchases Day Book total for October Year 8 £1,930
11.4 Balances at 31 Jul Yr 2: Cash £263 Bank £2,129
Discount totals: Dr Discount allowed £60

Cr Discount received £30
12.1 (a) (i) Sales Day Book total £1,305

(ii) Returns inwards Day Book total £152
12.2 (a) (i) Purchases Day Book total £1,141

(ii) Returns Outwards Day Book total £109
12.3 (a) Purchases Day Book total £988

Sales Day Book total £1,349
Returns Outwards Day Book total £127
Returns Inwards Day Book total £174
12.4 (a) Purchases Day Book total £1,436

Purchases Returns Day Book total £64
Sales Day Book total £1,336
(b) To encourage prompt payment.
12.5 (a) Purchases Day Book total £15,155
14.1 (a) To P/L 31 Dec Yr 5 Balance b/d 1 Jan Yr 6

Rates 1,510 Cr 450 Dr
Telephone 262 Cr 47 Cr
Insurance 700 Cr 60 Dr
Rent receivable 4,000 Dr 160 Dr
Wages 46,470 Cr 840 Cr
314
pages 267-326 15/3/03 11:18 am Page 315
14.1 (b) M Paine

Balance sheet (extract) at 31 December Year 5
£ £
Current Assets Amounts due within 1 year
Prepayments: Rates 450 (current liabilities)
Insurance 60 Accruals: Telephone 47
Rent receivable 160 Wages 840
670 887

(i) Rent 4,950 Cr 1,350 Dr
(ii) Commission receivable 65,800 Dr 4,700 Dr
(iii) Telephone 1,010 Cr 300 Cr
14.2 (b) L Reinholdt

Balance sheet (extract) at 31 December Year 10
£ £
Current Assets Amounts due within 1 year
Rent in advance 1,350 (current liabilities)
Commission due 4,700 Telephone – accrual 300
6,050

Insurance 620 Cr 95 Dr
160 Dr
Stationery 780 Cr { 45 Cr
Telephone 572 Cr 56 Cr
Rent payable 3,570 Cr 740 Dr
Rent receivable 900 Dr 150 Dr
14.5 (a) To P/L 30 Jun Yr 5 Balance b/d 1 Jul Yr 5
(i) Advertising 360 Cr 190 Cr
(ii) Insurance 560 Cr 50 Dr
(iii) Office cleaning 1,640 Cr 280 Cr
(iv) Rent receivable 2,220 Dr 190 Cr
14.6 (a) To P/L 30 Jun Yr 9 Balance b/d 1 Jul Yr 9
Rent receivable 2,630 Dr 740 Cr
Rates 3,300 Cr 840 Dr
Advertising 2,400 Cr 580 Dr
Printing/stationery 2,185 Cr { 3,100 Dr
615 Cr
15.1 Depreciation charge Net book value
(a) £2,100 £8,300
(b) £4,160 £6,240
315
pages 267-326 15/3/03 11:18 am Page 316
15.2 Balances at 1 Jan Yr 8: (ii) Provision for depreciation of motor van £8,356 Cr
(iv) Provision for depreciation of fixtures
and fittings £3,440 Cr
15.4 Balances at 1 Jan Yr 8: (ii) Provision for depreciation of computer

equipment £4,800 Cr
(iv) Provision for depreciation of motor vehicle £7,120 Cr
15.5 Balances at 1 Jan Yr 6: (1) Provision for depreciation of fixtures

and fittings £1,875 Cr
(2) Provision for depreciation of motor vehicle £12,816 Cr
15.6 Balance at 1 Jan Yr 7: (ii) Provision for depreciation of furniture

and equipment £3,900 Cr
(v) Disposal of Motor Van Account:
debit entry – P/L profit on sale £1,386
16.1 (a) (ii) Provision for doubtful debts: To P/L Account

31 Mar Yr 4 £79 Cr
31 Mar Yr 5 54 Cr
31 Mar Yr 6 78 Dr
Balance 1 Apr Yr 6 £435 Cr
16.2 (a) (i) (2) Provision for doubtful debts: To P/L Account
31 Dec Yr 1 £1,410 Cr
31 Dec Yr 2 1,598 Cr
31 Dec Yr 3 1,210 Dr
Balance 1.1.4 £1,798 Cr
16.4 (a) Provision for doubtful debts: To P/L Account

31 Dec Yr 8 £152 Cr
31 Dec Yr 9 764 Cr
31 Dec Yr 10 336 Dr
(b) Journal
£ £
Debtor 240
Bad debts recovered 240
Cash/bank 240
Debtor 240
16.5 (iv) Provision for doubtful debts: To P/L Account

31 Dec Yr 4 £275 Cr
31 Dec Yr 5 245 Dr
Balance 1 Jan Yr 6 £780 Cr
316
pages 267-326 15/3/03 11:18 am Page 317
17.1 Cash Book (bank) balance: before adjustment £4,549 Dr

after adjustment £3,632 Dr
17.2 (a) Cash Book (bank) balance after adjustment £3,966 Dr
17.3 Cash Book (bank) balance after adjustment £3,793 Dr
18.1 Total outlay £97.20 Travelling expenses £16.84 Stationery £13.57

Postage £5.95 Purchases £53.47 Cleaning expenses £7.37
Balance b/d 1 Jul Yr 7 £2.80 Reimbursement £97.20
18.2 (a) Total outlay £253.80 Motor-vehicle expenses £97.60

Postage £18.20 Stationery £31.00 Travelling expenses £46.60
Ledger £60.40
Balance b/d 1 Apr Yr 6 £46.20 Reimbursement £253.80
(b) (i) To debit of Motor Vehicle Expenses Account

(ii) General (Nominal) Ledger
18.4 (a) Week 1: Total outlay £77.48 Wages £45.00 Postage £10.00 Travel £6.15
Sundries £6.58 Ledger £9.75 Reimbursement £77.48
Week 2: Total outlay £74.56 Wages £48.00 Postage £8.73 Travel £3.35
Sundries £14.48
(b) Any 2 from:

● theft from box;
● cash in box incorrectly counted;
● incorrect amount paid out;
● amount paid out without being recorded, ie without a voucher.
19.1 (1) Capital (2) Revenue (3) Revenue (4) Capital (5) Revenue
19.2 (1) Revenue (2) Capital (3) Revenue (4) Revenue

(5) £5,100 Capital £1,300 Revenue (6) Revenue (7) Capital (8) Revenue
19.3 JK Distributors Jameson Partners

(1) Revenue Capital
(2) Capital Capital
(3) Capital Revenue
(4) Revenue Revenue
(5) Capital Revenue
317
pages 267-326 15/3/03 11:18 am Page 318
19.4 Capital Revenue Total

expenditure expenditure expenditure
£ £ £
Invoice 1 25,175 25,175
Invoice 2 42,700 890 43,590
Invoice 3 1,460 62 1,522
Invoice 4 12,400 2,535 14,935
20.3 (b) Gross profit £29,445
21.1 (1) Compensating error (2) Error of principle (3) Error of original entry
(4) Error of commission (5) Error of omission (6) Error of commission
21.2 (a) Errors of principle

(b) Increase the gross profit by £1,090
21.3 (1) Principle (2) Omission (3) Original entry (4) Commission
21.4 Totals £382,102
21.5 Cause debit total Cause credit total

to exceed credit total to exceed debit total
(1) £270
(2) No effect
(3) No effect
(4) £314
(5) £430
22.5 (b)
Profit overstated Profit understated No effect
(1)
(2)
(3) £5,300
(4)
(5) £1,800
(6) £240
22.6 Increase of net profit Reduction of net profit

(1) £26
(2) £18
(3) No effect
(4) No effect
(5) No effect
(6) No effect
318
pages 267-326 15/3/03 11:18 am Page 319
22.7 Increased Reduced

net profit net profit No effect
£
(1) 515
(2)
(3) 186
(4) 1,460
(5) 1,560
3,206 515
£
Provisional net profit 5,670
add Net adjustment 2,691
Adjusted net profit 8,361
23.2 (a) Gross profit £86,850 Net profit £15,456
(b) Balance sheet: Net assets £36,596

Closing capital £36,596
23.3 (a) Gross profit £24,760 Net profit £12,205
(b) Balance sheet: Net assets £98,385

Closing capital £98,385
23.4 (i) £400 (ii) £2,400 (iii) £1,190 (iv) £125

(v) £300 (vi) £1,050 (vii) £890 Total £6,355
23.5 (a) £
Pre-adjusted stock value 1,382
Item 1 – no change
Item 2 (12)
Item 3 (35) (47)
Revised stock value 1,335
(b) Gross profit £10,935
£ £
23.6 (a) Provisional value 14,220
add Purchases 740
less Returns 273 467
14,687
less Sales (£1,320 less 25%) 990
13,697
less Drawings 195
13,502
319
pages 267-326 15/3/03 11:18 am Page 320
£
(b) Pre-adjusted gross profit 94,800
deduct reduction in value
of closing stock
(14,220 -13,502) 718
Revised gross profit 94,082
24.1 Deficit (on income/expenditure) £128

Closing accumulated fund £6,332
320
pages 267-326 15/3/03 11:18 am Page 321
Appendix 3: Glossary
Account A record of transactions by category (such as purchases) or by person or
organization.
Accumulated fund The capital account of a club or society.
Allowance An amount set against a previous purchase or sale.
Assets Resources or items owned by the business.
Bad debt A debt which is expected never to be paid; that is, an irrecoverable debt.
Balance The amount on one side of an account that exceeds the amount on the other
side ‘to balance’.The book-keeper finds and enters the difference and brings it down.
Balance sheet A form of financial statement.
Bank current account This account is used for the regular banking and withdrawal of
money.
Bank deposit account A relatively stable account; withdrawals are usually infrequent.
Bank reconciliation statement A statement that accounts for the difference between
the bank statement balance and the adjusted Cash Book balance.
Bank statement A statement issued by a bank showing the customer’s account as
recorded by the bank.
Capital The amount of the owner’s financial stake in the business.
Capital expenditure Expenditure that is expected to be of benefit to the firm over the
long term. It is generally incurred on the purchase, alteration, or improvement of fixed
assets.
Carriage An expense incurred in, or charge made for, the delivery of goods.
Carriage inwards A payment made for having purchases delivered. It should be added to
purchases in the Trading Account.
Carriage outwards A payment to a carrier for delivering goods to customers. It should
be shown in the Profit & Loss Account.
Cash discount An allowance for the early settlement of an account.
Cash purchases Goods bought and paid for immediately (in cash or by cheque).
Cash sales Goods sold with immediate payment (in cash or by cheque).
Cheque A written instruction to a bank to make payment.
Cheque clearance the passing of a cheque through the bank system, with payment
completed.
321
pages 267-326 15/3/03 11:18 am Page 322
Commission Payment or money received (paid) for carrying out (benefiting from) a
service, for example on sales, or providing (receiving) advice. Commission is commonly
calculated as a percentage.
Compensating error When errors cancel each other out.
Contra Used for entries in the Cash Book where a debit bank entry is matched by a credit
cash entry and vice versa.
Cost of goods sold Opening stock plus purchases less closing stock for a given period.
Counter credits Payments into a bank account (a number of cheques, for example)
amounting to a stated sum, which are acknowledged by the bank as a credit into the
account.
Credit note Issued by the seller, granting credit for the return of goods or for deficiency
in supply.
Credit purchases Goods bought, with payment to be made at a later date.
Credit sales Goods sold, with payment to be received by an agreed future date.
Credit transfer A direct means of transferring money through the bank system, initiated
by the paying party.
Creditor A person (or business) to whom money is owed by a business.
Current assets Short-term assets, which are directly involved in the trading activities of
the firm.
Current liabilities Amounts payable within one year.
Debtor A person (or business) who owes money for goods or services supplied by a
business.
Deficit An excess of expenditure over income (for a given period).
Depreciation The estimate of the fall in value of fixed assets over a period of time.
Direct debit Credit transfer in reverse: it is the direct transfer of money through the
banking system, initiated by the payee.
Discount allowed A discount granted to a debtor for early payment.
Discount received A discount granted by a creditor for early received payment.
Dishonoured cheque A cheque that the drawer has failed to honour.
Donation A gift of money.
Doubtful debts As in ‘provision for doubtful debts’: debts that may never be recovered
and for which an allowance is made.
Drawer The party who first signs a cheque, that is, on whose bank account the cheque is
drawn.
322
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Drawings Money, goods, or services withdrawn from the business for the owner’s personal
benefit.
Effective purchase price (or selling price) The list price less trade discount.
Error of commission When a transaction is entered in a wrong account of the same
class.
Error of principle When a transaction is entered in the wrong class of account.
Expense Outlay or cost.
Expense accrual An amount due in respect of an accounting period that remains
unpaid at the end of that period.
Final accounts Used as a broad term to include the Trading and Profit & Loss Account
and the balance sheet.
Fixed assets Longer-term assets bought for use within the business.
Gross profit An excess of sales income over cost of goods sold.
Horizontal balance sheet Two-sided presentation, with assets on the balance sheet on
the left and capital/liabilities on the right.
Impersonal accounts Accounts concerning things rather than people, such as assets or
expenses.
Imprest system A system in which a fixed float is reimbursed periodically.
Income accrual Income other than sales revenue, outstanding at the end of the period
for which it was due.
Income prepayment Income received in advance of the due period.
Invoice A document issued on a credit sale, prepared by the seller and sent to the buyer.
It gives details of the goods supplied, the amount to be paid and the terms of sale.
Ledger The set of accounts belonging to a business. In a traditional manual system, these
would be kept in a book or series of books.
Liabilities Amounts owing to persons outside the business.
List price The price of goods before the deduction of a trade discount.
Longer-term liabilities Amounts payable in more than one year.
Net profit Gross profit less other expenses.
Net realizable value Selling price less any costs of getting the goods into a saleable
condition.
Nil balance No balance remaining on a given account.
323
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Nominal accounts Income and expense accounts.

On account Payment towards an amount owing; a part payment.
Opening entries Journal entries recording the opening balances of a new set of accounts.
Overdrawn account Occurs when more funds have been withdrawn than put into the
account; that is, a deficit.
Payee The party to whom a payment is due to be made.
Personal accounts Accounts of people or organizations with whom the business deals.
Posting Entering transactions or period totals in accounts from day books (including the
Cash Book).
Prepayment A payment made in advance of an accounting period or due date.
Prime entry As in ‘books of prime entry’: the point at which a transaction is recorded
for the first time, prior to entry in the ledger.
Private Ledger Normally used for keeping accounts of a highly confidential nature, such
as the Capital Account.
Profit The surplus of income over costs, usually calculated for a given time period.
Provision An accounting allowance for an estimated known or possible fall in the value
of an asset.
Purchases Goods bought on credit or for cash, which are intended to be sold later.
Purchases Ledger Comprised of suppliers’ accounts, that is, ledger creditors.
Real accounts Comprised of assets.
Receipts & Payments Account A summarized version of the Cash Book of a club or
society.
Reducing balance depreciation A fixed percentage is written off the reduced balance
of the asset each year.
Reimbursement Makes good the total of outlays in a given period.
Returns inwards The return of previously sold goods by the customer, for which an
allowance is given.
Returns outwards The return of previously bought goods, to the supplier, who makes
an allowance.
Revenue Income.
Revenue expenditure Expenses incurred in running the business and in maintaining
fixed assets.
324
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Running balance The balance on the account is shown, updated, after each transaction
entry. A running balance is presented in columnar format.
Sales Ledger Comprised of customers’ accounts, that is, debtors.
Set off One amount set against another, to reduce the amount owed or receivable.
Source document The basis of an entry in the accounting system, such as a sales invoice.
Standing order A direct transfer between bank accounts, involving fixed amounts at
regular intervals.
Straight line depreciation A fixed proportion is written off the original cost of the asset
each year.
Terms of sale The conditions for settlement of an account, such as a period of credit
allowed or the rate of any cash discount.
Trade discount The amount allowed as a reduction of the list price when goods are sold
by one business to another business.
Transaction on credit Taking ownership of an asset now but paying for it at a later date.
Trial balance A periodic check that the total of the debit balances equals the total of the
credit balances.
Unpresented cheque A cheque not yet presented to the bank for payment.
Vertical balance sheet A balance sheet presented to read downwards, like a story.
325
pages 267-326 15/3/03 11:18 am Page 326
Notes
Lesson 11
1 In practice, an invoice may be raised for all sales, both cash and credit. From the audit
viewpoint, it is better to have all sales evidenced by an invoice. A retailer is unlikely to
enter directly each small sale transaction by debiting the Cash Book and crediting the
Sales Account. A summarizing method is likely to be used, eg a till roll acting as a day
book.
Lesson 12
1 If the account were to be settled before a return is made, payment would then be made
on the gross figure.
Lesson 19
1 Note that the relevant Financial Reporting Standard allows development expenditure
to be capitalized, provided there is substantial belief that future product income will
arise as a result of the development expenditure.
Lesson 20
1 In a computerized system, entering purchases of fixed assets into a journal may not be
necessary. All purchases can be dealt with through the Sales Journal (or Sales Day
Book), with coding to ensure that revenue and capital purchases are properly separated.
326

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prelims 15/3/03 12:36 pm Page iii

First published 1999

© LCCI CET 1999

British Library Cataloguing-in-Publication Data

ISBN 1 86247 060 X

All rights reserved; no part of this publication may be reproduced, stored

Typeset by the London Chamber of Commerce and Industry

Appendix 1: Exercises, some worked solutions, and support

About the author

It is advisable to make full use of the Glossary.

Cross-references to How to Pass Book-keeping,

Lesson 1: The accounting equation

Extended Syllabus references

The accounting equation

Aim: to develop an appreciation of the need for business records of account

● to run (more) effectively and efficiently;

Aim: to recognize the key areas of information that need to be recorded

Cash: availability and movements Purchases

While the students remain in pairs,

The accounting equation

Assets = capital + liability (eg a loan)

Alternatively, the equation may be expressed as:

Assets less liabilities = capital

The accounting equation

Assets Capital Liabilities

Aim: to understand the effect of business transactions; their double aspect

2 Explain the term ‘business transaction’.

(a) On 2 March, a typewriter (classed as office equipment) is bought by drawing a

The accounting equation

This example shows that only the assets have changed.

Here, there has been a switch between two assets.

The accounting equation

6 Use the following to show the effect after transaction (d):

From this balance sheet, a change of assets can be seen.

7 Use the following to show the effect after transaction (e):

8 Use the following to show the effect after transaction (f ):

The accounting equation

(a) drawing on the bank account; and

11 Emphasize the equation:

Aim: to be able to record transactions through double entry

The accounting equation

Left-hand side Right-hand side

Assets an increase debit

Liabilities an increase credit

Capital an increase credit

Alternatively, you may show the following layout:

The accounting equation

(a) emphasize the transaction effect;

The accounting equation

Lesson 2: Purchases, sales, and returns

Extended Syllabus references

Aim: to recognize the various meanings of the term ‘purchases’

Purchases, sales, and returns

2 Goods are now to be divided into:

(a) goods bought to sell, ie as part of trading;

1 Purchase of goods for cash

Purchases, sales, and returns

2 Purchase of goods on credit

3 Work through the following exercise with the students.

Purchases, sales, and returns

5 Sales for cash

Purchases, sales, and returns

(a) When a credit sale is made, the book-keeper should: