Presentation on theme: "Introduction to Business Accounting Week 4"— Presentation transcript:
1 Introduction to Business Accounting Week 4 Accounts QuestionsIntroduction to Business AccountingWeek 4
2 Impact of Different Business Forms Remember, in vertical format balance sheets the owners’ equity always appears at the bottom of the balance sheetBut this part of the balance sheet looks different depending on the form of the business
3 Sole Trader£ £Capital brought forward (note 1) XXXAdd: Net Profit (earned in year) XXX Less: Drawings (note 2) (XXX)XXXCapital carried forward XXXNote 1:In the company’s first year of business, the owner will invest some money (‘capital’) in the business – include this here.Note 2:Drawings are cash or goods taken out of the business, by the owner, for personal use. If drawings are already deducted in the profit and loss account to arrive at ‘retained profit’, then use retained profit instead of net profit and do not deduct drawings here.
4 Partnership Partner: A B Total £ £ £ £ £ £ Capital brought forward XXX XXX XXX Add: Share of net profit (note 3) XXX XXX XXX Less: Drawings (XXX) (XXX) (XXX)Capital carried forward XXX XXX XXX Note 3:This is determined by the ‘partnership agreement’
5 Company £ Issued Share Capital (note 4) Ordinary Shares (note 5) XXX Preference Shares (note 6) XXXReservesShare Premium (note 7) XXXProfit and Loss Account (retained profits) XXXXXX
6 Company NotesNote 4:A company may issue any amount of shares up to its authorised limit.Note 5:Ordinary shareholders run the company and share the risk.Note 6:Preference shareholders may have guaranteed annual dividends and, if the company liquidates, will recover their investment before any money is paid out to ordinary shareholders.Note 7:Issued share capital is shown at its ‘nominal value’ – but shares may actually be sold for more than their nominal value when they are first issued. The difference is share premium.
7 Appropriation Account (P&L) Net profit before finance charges xInterest on (long-term) loan stock (x)____Net profit before tax for the year xTax payable (x)Net profit after tax xDividends (paid and proposed) (x) }____ }Retained profit for the year x }‘appropriation____ } account’
8 Things to Note Dividends are often paid twice in the year: The Dividends PROPOSED at the end of last yearAn INTERIM dividendThe Retained Profit is added to the “Profit & Loss Account” figure in the bottom part of the Balance Sheet
9 Missing Credit Sales/Purchases in double entry terms Receivables/DebtorsPLUS Opening Balance ,000PLUS Credit Sales 124,200MINUS Cash Received ,000MINUS Bad Debt w/offMINUS Returns Inward ,200MINUS Closing Balance ,500EQUALS ZERO
10 Missing Credit Sales/Purchases in double entry terms Payables/CreditorsPLUS Payments Made 75,000PLUS Returns OutPLUS Closing Creditors ,000MINUS Opening Balance 4,000MINUS Credit Purchases 74,200EQUALS ZERO
11 Answering an accounts question The start may be:A Balance SheetA Bank AccountA Trial BalanceA Trial Balance is a list of the balances on every account (P&L and BS)
12 Trial Balances A Trial Balance can: Ensure all the debits = all the creditsA Trial Balance cannot:Ensure all the accounting entries have been put in the right place or entered correctly
13 Bookkeeping Errors - 1 Omission – a transaction is not recorded at all Error of commission – an item is entered to the correct side of the wrong account (there is a debit and a credit here, so the records balance)E.g. Debit Motor Expenses to Stationery accountError of principle – an item is posted to the correct side of the wrong type of account, as when cash paid for plant repairs (expense) is debited to plant account (asset) (errors of principle are really a special case of errors of commission, and once again there is a debit and a credit)Error of original entry – an incorrect figure is entered in the records and then posted to the correct account Example: Cash £1,000 for plant repairs is entered as £100; plant repairs account is debited with £100
14 Bookkeeping Errors - 2Reversal of entries – the amount is correct, the accounts used are correct, but the account that should have been debited is credited and vice versa Example: Factory employees are used for plant maintenance: Correct entry: Debit: Plant maintenance Credit: Factory wages Easily done the wrong way roundAddition errors – figures are incorrectly added in a ledger account
15 Bookkeeping Errors - 3Posting error – a an entry made in one record is not posted at all b an entry in one record is incorrectly posted to another Examples: cash £10,000 entered in the cash book for the purchase of a car is: a not posted at all b posted to Motor cars account as £1,000Trial balance errors – a balance is omitted, or incorrectly extracted, in preparing the trial balanceCompensating errors – two equal and opposite errors leave the trial balance balancing (this type of error is rare, and can be because a deliberate second error has been made to force the balancing of the records or to conceal a fraud)
16 Things you will have to know Work out DepreciationWork out profit/loss on sale of fixed assetsFind Credit Sales (Debtors account)Find Credit Purchases (Creditors account)Deal with Prepayments & AccrualsThe layout of Profit & Loss accountThe layout of Balance Sheet
17 Example of Trial Balance type question Chippendale
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