Introduction to Business Accounting Week 4 Accounts Questions Introduction to Business Accounting Week 4

Impact of Different Business Forms Remember, in vertical format balance sheets the owners’ equity always appears at the bottom of the balance sheet But this part of the balance sheet looks different depending on the form of the business

Sole Trader £  £ Capital brought forward (note 1) XXX Add: Net Profit (earned in year) XXX  Less: Drawings (note 2) (XXX) XXX Capital carried forward XXX Note 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.

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’

Company £ Issued Share Capital (note 4) Ordinary Shares (note 5) XXX Preference Shares (note 6) XXX Reserves Share Premium (note 7) XXX Profit and Loss Account (retained profits) XXX XXX

Company Notes Note 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.

Appropriation Account (P&L) Net profit before finance charges x Interest on (long-term) loan stock (x) ____ Net profit before tax for the year x Tax payable (x) Net profit after tax x Dividends (paid and proposed) (x) } ____ } Retained profit for the year x }‘appropriation ____ } account’

Things to Note Dividends are often paid twice in the year: The Dividends PROPOSED at the end of last year An INTERIM dividend The Retained Profit is added to the “Profit & Loss Account” figure in the bottom part of the Balance Sheet

Missing Credit Sales/Purchases in double entry terms Receivables/Debtors PLUS Opening Balance 2,000 PLUS Credit Sales 124,200 MINUS Cash Received 120,000 MINUS Bad Debt w/off 500 MINUS Returns Inward 1,200 MINUS Closing Balance 4,500 EQUALS ZERO

Missing Credit Sales/Purchases in double entry terms Payables/Creditors PLUS Payments Made 75,000 PLUS Returns Out 200 PLUS Closing Creditors 3,000 MINUS Opening Balance 4,000 MINUS Credit Purchases 74,200 EQUALS ZERO

Answering an accounts question The start may be: A Balance Sheet A Bank Account A Trial Balance A Trial Balance is a list of the balances on every account (P&L and BS)

Trial Balances A Trial Balance can: Ensure all the debits = all the credits A Trial Balance cannot: Ensure all the accounting entries have been put in the right place or entered correctly

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 account Error 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

Bookkeeping Errors - 2 Reversal 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 round Addition errors – figures are incorrectly added in a ledger account

Bookkeeping Errors - 3 Posting 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 £1,000 Trial balance errors – a balance is omitted, or incorrectly extracted, in preparing the trial balance Compensating 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)

Things you will have to know Work out Depreciation Work out profit/loss on sale of fixed assets Find Credit Sales (Debtors account) Find Credit Purchases (Creditors account) Deal with Prepayments & Accruals The layout of Profit & Loss account The layout of Balance Sheet

Example of Trial Balance type question Chippendale