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Level Book-keeping Solutions Booklet For further information contact us: Tel +44 (0) 8707 202909 Email enquiries@ediplc.com www.lcci.org.uk London Chamber of Commerce and Industry (LCCI) International Qualifications are provided by EDI, a leading international awarding body Passport to Success Level Book-keeping Solutions Booklet The initials LCCI and the words LONDON CHAMBER OF COMMERCE AND INDUSTRY are registered trademarks belonging to the London Chamber of Commerce and Industry and are used under licence Every effort has been made to trace all copyright holders, but if any have been inadvertently overlooked the Publishers will be pleased to make the necessary arrangements at the first opportunity © EDI 2008 First published in 2008 All rights reserved Apart from any use permitted under UK copyright law, no part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, or held within any information storage and retrieval system, without permission in writing from the publisher or under licence from the Copyright Licensing Agency Limited Further details of such licences (for reprographic reproduction) may be obtained from the Copyright Licensing Agency Limited, Saffron House, 6–10 Kirby Street, London EC1N 8TS Cover photo: www.fotolia.com TABLE OF CONTENTS The Accounting Equation and the Balance Sheet Double entry system for assets, liabilities and capital Recording double entry for stock The double entry system for Expenses and Revenues and 11 the Effect of Profit (or loss) and drawings upon capital Balancing accounts and the Trial Balance 16 Trading and Profit & Loss Accounts: An introduction 25 The Balance Sheet 28 Final Accounts with further considerations 31 The Division of the Ledger and Books of Original Entry 38 10 Bank Facilities 39 11 Cash Books 41 12 The Sales and Purchases Day Books 44 13 The Returns Day Books 48 14 The Journal 53 15 The Petty Cash Imprest System 56 16 Adjusting for accruals and prepayments 59 17 Depreciation of Fixed Assets 62 18 Bad Debts 68 19 Bank Reconciliation Statements 71 20 Capital and Revenue Expenditure 75 21 Errors in the accounts and their corrections 77 22 Control Accounts 81 23 Final Accounts and year end adjustments 82 Chapter The Accounting Equation and the Balance Sheet Answers to ‘Think about it’ Questions Page – Why are liabilities shown on the right hand side of the balance sheet and not on the left? ƒ Because based on the accounting equation it has to be on the same side as capital Answers to Activities Activity 1.1 (a) (b) (c) (d) L A A A (e) L (f) A (g) C Activity 1.2 (a) (b) (c) (d) (e) ASSETS £ 000 200 100 500 900 CAPITAL £ 000 500 800 400 100 LIABILITIES £ 000 700 300 100 800 Solutions to Target Practice Questions Question (a) (b) (c) (d) (e) (f) ‘…assets less liabilities equals capital’ assets liabilities debtor creditor Balance Sheet Question Shop fittings Cash register Stock of goods Creditors Loan – T Armani Bank ASSETS £ 100 800 200 LIABILITIES £ 000 800 870 970 800 Capital = Assets – Liabilities Capital = 6970 – 2800 = £4170 Question M Williams Balance Sheet at 30 June 20X6 £ 150 600 £ Cash at Bank Stock of goods Fixtures and Fitting Debtors Motor vehicles 614 860 900 750 200 18 324 Creditors Loan – D Wong Capital (missing item) 10 574 _ 18 324 Question Transactions Assets Effect upon Liabilities (a) The owner borrows £5000 from L Pole and the money is put into the business’ bank account + Bank + Loan (b) A debtor pays the business £250 by cheque + Bank - Debtors (c) The owner buys a motor vehicle on credit £6200 + Motor Vehicle (d) The owner withdraws £160 from the business’s bank account for his personal use - Bank (e) The business sells goods on credit for £840 - Stock + Debtors (f) The owner puts a further £3000 in cash into the business The money is put into the business’s bank account (g) The business pays a creditor £290 by cheque + Creditors - Capital + Capital + Bank - Bank Capital - Creditors Question W Mandrake Balance Sheet at 30 June 20X5 Stock of goods Debtors Cash at Bank Fixtures and fittings Motor vehicles £ 360 500 845 800 100 19 605 Creditors Loan – L Walter Capital (balancing figure) W Mandrake Balance Sheet at 31 July 20X5 £ Stock of goods Creditors (5360 + 700 – 600) 460 (2900 + 700 – 400) Debtors Loan – L Walter (4500 – 1100 + 600) 000 Capital Cash at Bank (balancing figure) (1845 – 400 + 1100) 545 Fixtures and Fittings 800 Motor Vehicles 100 19 905 £ 900 000 13 705 _ 19 605 £ 200 000 13 705 ……… 19 905 Question D Duncan Balance Sheet at 21 January 20X7 Motor Vehicles Stock of goods (1500 + 600) Debtor – A Gianna Cash at Bank (101 000 – 300) £ 20 000 100 Capital Creditor – Stax Suppliers (3000 + 600 – 300) £ 120 000 300 500 100 700 123 300 123 300 Question The difference between a cash transaction and a credit transaction is based on when payment is made With a cash transaction, payment is made immediately for goods and/or services purchased while in a credit transaction payment is made Chapter Double Entry System for Assets, Liabilities and Capital Answers to ‘Think about it’ Questions Page 16 – Why is it necessary to keep separate accounts for each debtor and creditor? ƒ So it can clearly be seen how much is owed to individual creditors and how much is owed by individual debtors Answers to Activities Activity 2.1 (a) Bought office furniture for cash Debit Office Furniture Credit Cash (b) Sold some office furniture on credit to C Bing (c) Bought motor vehicles on credit from Wong Ltd C Bing Motor Vehicles Office Furniture Wong Ltd (d) A debtor, P Butler, pays the business by cheque (e) The owner puts a further amount into the business by cheque (f) Returned one of the motor vehicles to Wong Ltd Bank Bank P Butler Capital Wong Ltd Motor Vehicles (g) Paid a creditor, T Bird, by cash (h) Paid by cheque for the motor vehicle bought from Wong Ltd T Bird Wong Ltd Cash Bank Solutions to Target Practice Questions Question The left hand side of a ‘T’ account is the debit side and the right hand side is the credit side To ‘debit’ an account the transaction is entered on the left hand side and to ‘credit’ an account, the transaction is entered on the right hand side Question There must be a debit entry and a corresponding credit entry of the same value (and vice versa) for every transaction that occurs Question To know when to debit or credit an account, you will first need to determine the type of the account and decide how the transaction will affect the account ;( whether increase or decrease) and then apply the double entry rules as below: ƒ ƒ ƒ ƒ To increase an asset, DEBIT the account To decrease an asset, CREDIT the account To increase a liability or capital, CREDIT the account To decrease a liability or capital, DEBIT the account Question 20X2 July 01 Capital Bank £ 20X2 000 July 15 July 29 Capital 20X2 July 01 20X2 July 06 Bank £ 000 Motor vehicle £ 800 Motor Vehicle £ Elstead Garage 800 Bank Elstead Garage £ 20X2 800 July 06 20X2 July 15 Bank Office Machinery £ 420 20X2 July 23 Office Equipment £ Longmore & Sons 70 20X2 July 29 Office Machinery Elstead Garage £ 420 900 Longmore & Sons 20X2 July 23 Office equipment £ 370 Question 20X9 April 01 April 29 Capital Bank Cash £ 20X9 000 April 08 300 April 30 Bank Furniture World £ 000 800 Chapter 19 Bank Reconciliation Statements Answers to ‘Think about it’ Questions Page 184 – Why items on the bank statement appear on the opposite side to the cash book? ƒ Because the bank statement is prepared from the point of view of the bank, while the cash book is prepared from the point of view of the business To the bank the business is a creditor so money deposited in the account would show on the credit side instead of the debit side Page 186 – Why unpresented cheques and late lodgements are treated the way they are in the bank reconciliation statement? ƒ If the bank reconciliation statement starts with the cash book balance then unpresented cheques are added and late lodgements are subtracted in order to work towards the balance on the bank statement As unpresented cheques reduces the cash book balance these are added back to get to the bank statement balance and as late lodgements increase the cash book balance these are subtracted to get to the bank statement balance If the bank reconciliation statement starts with the bank statement balance then it would be the opposite of the explanation given Answers to Activities Activity 19.1 Balance Balance b/d Cash Book £ 800 Dishonoured cheque – T Bell Bank charges …… Balance c/d 800 560 £ 200 40 560 800 Solutions to Target Practice Questions Question (a) Balance T Palmer Bank interest Balance b/d Cash Book £ 716 Rates 268 Insurance Balance c/d 992 703 £ 136 153 703 992 71 (b) N Swann Bank Reconciliation Statement at 31 August 20X9 £ Balance as per Bank statement Add: Late lodgements R Quaile Sales £ 670 185 640 _825 495 Less: Unpresented cheques Rent (1016) T Wagstaffe (1018) 290 502 _792 703 Balance as per cash book Question (a) Balance Credit transfer (A Cox) Dividends received Balance b/d (b) Cash Book £ £ 56 024 Bank and interest charges 97 185 Dishonoured Cheque (B Lampe) 350 420 Standing order (Rent) 126 …… Balance c/d 629 629 126 A Cox – credit £185 Bank and interest charges – debit £56 B Lampe – debit £97 Rent – debit £350 Dividends received – credit £420 (c) D Marr Bank Reconciliation Statement at 30 June 20X6 £ £ Balance as per Bank statement 075 Add: Late lodgements 068 Less: Unpresented cheques 363147 363152 363161 Balance as per cash book 720 39 258 017 126 72 Question (a) Balance Credit Transfer (T Brock) P May (£740 - £470) Sales Balance b/d Cash Book £ 23 399 Standing order (Rent) 814 Bank charges 270 Dishonoured cheque (D Holt) 626 Balance c/d 25 109 23 871 £ 672 46 520 23 871 25 109 (b) G Johnson Bank Reconciliation Statement at 31 March 20X8 £ Balance as per Bank statement Less: Unpresented cheques 22 900 (1 215) Add: Late lodgements Balance as per cash book 186 23 871 (c) A bank reconciliation statement is prepared to show an agreement between the balances on the bank statement and the cash book and to get an explanation for any differences Question (a) Credit transfer (S Jolly) Balance b/d Cash Book £ 528 Balance b/d Bank charges Bankers order (Subscription) Dishonoured Cheque (P Rose) _ Balance c/d 528 114 £ 271 62 37 44 114 528 73 (b) T Merry Bank Reconciliation Statement at 31 July 20X1 £ Balance as per cash book Add: Unpresented cheques Less: Late lodgement Balance as per Bank statement £ 114 91 67 211 369 453 233 250 (c) An overdraft is like a short-term loan It is where the bank allows the account holder to withdraw more money than is actually in the account (d) The amount in words and figures did not agree The cheque is more than months old P Rose did not have sufficient money in his account to cover the value of the cheque 74 Chapter 20 Capital and Revenue Expenditure Answers to ‘Think about it’ Questions Page 194 – What is meant by the term fixed assets? Give examples ƒ Fixed assets are bought for use in the business and are expected to have a long life Examples include land and buildings, fixtures and fittings, machinery, motor vehicles, office equipment etc Answers to Activities Activity 20.1 Expenditure Purchase of a delivery van for the business Maintenance of the van Signage on the van Purchase of stock Installation cost of a new computer Repainting the office Painting new offices Insurance for year Wages to cleaners Wages to employees who are extending the offices Type of Expenditure Capital Revenue Revenue Revenue Capital Revenue Capital Revenue Revenue Capital Solutions to Target Practice Questions Question (a) (b) (c) (d) (e) (f) (g) Revenue Revenue Capital Capital Revenue Revenue Revenue Question No Capital Expenditure £1050 £150 Revenue Expenditure £210 £2300 £12 000 £890 75 Question (a) 10 Capital Revenue Revenue Revenue Capital Revenue Capital Capital Revenue Revenue (i) Capital expenditure is the expenditure on the purchase of fixed assets, or expenditure to increase the value of an existing fixed asset (ii) Revenue expenditure is the cost incurred in the day-to-day running of the business; it is not concerned with increasing the value of fixed assets (b) Question Unicorn Trading Company Trading and Profit and Loss Account for year ended 31 December 20X7 £ Sales Less : Cost of goods sold : Opening stock Add Purchases Less : Closing stock of unsold goods Gross profit Less : Expenses : Wages Rent Other expenses Depreciation Net profit 24 050 24 050 (3 200) 890 400 280 750 £ 43 600 (20 850) 22 750 (10 320) 12 430 76 Chapter 21 Errors in the Accounts and their Corrections Answers to Activities Activity 21.1 Error Type of Error (a) A purchases invoice for £452 had been entered into the books of account as £425 Error of Original entry (b) A sales invoice for £200 was debited to the account of S Smith instead of S Smyth Error of Commission (c) A purchases invoice for stationery, totalling £375, had not been entered into the books of account Error of Omission (d) The purchase of a computer, costing £1200, had been posted to the Stationery Account Error of Principle (e) A sales receipt from Co-Com Ltd was entered in the books of account as a debit in Co-Com Ltd’s Ledger Account and a credit in the Bank Account Reversal of entries (f) Compensating error The additions on the Sales Account were overcast by £200 and the additions on the Rent Account were overcast by £200 77 Solutions to Target Practice Questions Question Journal Dr £ Britsom Ltd Bryson Ltd Purchases incorrectly credited to Britsom Ltd Cr £ 500 500 Walters Ltd Sales Sales invoice for £295 incorrectly entered as £259 36 Carriage inwards Carriage outwards Carriage inwards posted as carriage outwards 62 Slipshod Ltd Bank Purchase payment of £678 posted wrong way round Petrol 36 62 356 356 38 Bank Petrol payment not entered in books 38 Question (a) Debit Overstated Understated £ £ Yes Yes Yes - (1) (2) (3) (4) (5) (6) Credit Overstated £ - Understated £ Yes - (b) £ Provisional net profit (1) (2) No effect (3) (4) (5) No effect (6) No effect Revised net profit 90 54 _ 144 £ 100 280 … 380 144 236 78 Question (a) J Gill Journal Dr £ Purchases P Sawyer A Rae Cr £ 90 90 220 Sales Interest Payable Interest Receivable Stock (Trading Account) Stock (Balance Sheet) Drawings Purchases Motor Vehicle – cost Bank 220 65 65 450 450 60 60 000 000 Depreciation Motor Vehicle – aggregate depreciation 500 R Chen R Chin 200 500 200 (b) £ Provisional net profit (1) (2) (3) No effect (4) (5) (6) (7) No effect Revised net profit £ 820 + 90 450 220 60 500 …… 040 …… 100 040 060 79 Question (a) (i) Omission Reversal Commission Compensating Principle (ii) Henry Lim Journal Dr £ General expenses Bank 320 Sales returns Kowloon Trading Co 660 Insurance Light & heat 103 Purchases Creditors Bank Wages Sales Equipment 250 Cr £ 320 660 103 250 250 250 198 198 (b) Provisional net profit Item Number (1) (2) (3) No effect (4) No effect (5) £14 560 + - £320 £660 £1 198 £2 178 £12 382 80 Chapter 22 Control Accounts Solutions to Target Practice Questions Question 20X7 Balance b/d Sales 20X7 Returns outwards Discounts received Bank Balance c/d Sales Ledger Control Account £ 20X7 37 170 Bad Debts 100 819 Discounts allowed Bank _ Balance c/d 137 989 Purchase Ledger Control Account £ 20X7 901 Balance c/d 554 Purchases 56 381 20 715 81 551 £ 198 597 96 371 39 823 137 989 £ 20 372 61 179 _ 81 551 Question 20X5 Balance b/d Sales 20X5 Bank Returns outwards Discounts received Balance c/d Sales Ledger Control Account 20X5 £ 15 030 Returns inwards 93 478 Bank Bad debts Discounts allowed _ Balance c/d 108 508 Purchase Ledger Control Account 20X5 £ 70 264 Balance b/d 518 Purchases 138 930 82 850 £ 126 89 948 195 610 14 629 108 508 £ 11 165 71 685 _ 82 850 81 Chapter 23 Final Accounts and Year-end Adjustments Solutions to Target Practice Questions Question J Cleaver Trading and Profit & Loss Account Year ended 31 December 20X6 £ £ Sales Less : Returns inwards Less : Cost of goods sold: Opening stock Add : Purchases Less : Returns inwards Less : Closing stock Gross profit Less : Expenses Loan interest Depreciation Bank interest Wages Rent Insurance Heat & light Advertising Carriage outwards Bad debts Net Profit £ 82 758 188 82 390 930 49 370 326 49 044 52 974 876 200 200 245 593 860 270 440 265 803 436 50 098 32 292 15 312 16 980 82 Cleaver Balance Sheet at 31 December 20X6 Cost Fixed Assets £ Aggregate Depn £ 32 000 400 Current Assets Stock Debtors Net Book Value £ 25 600 876 22 100 24 976 Less : Current Liabilities: Loan (8,000 + 1,200) Creditors Bank overdraft Net Current Assets 200 380 196 19 776 200 30 800 Financed by: Capital Net Profit Drawings 26 120 16 980 12 300 680 30 800 Question M Tiong Trading and Profit & Loss Account Year ended 30 April 20X5 £ Sales Less : Cost of goods sold: Opening stock Add : Purchases (13 890 – 90) Less : Closing stock Gross profit Add : Discount received Less : Expenses Wages and salaries (9 350 + 280) Depreciation – Delivery vehicle Furniture & equipment Rent, rates and insurance (2340 – 120) Discounts allowed Vehicle running expenses Sundry expenses Net Profit £ 35 030 970 13 800 16 770 160 630 200 500 220 170 840 410 13 610 21 420 390 21 810 16 970 840 83 M Tiong Balance Sheet at 30 April 20X5 Cost £ Fixed Assets Furniture & equipment Delivery vehicle 000 400 13 400 Current Assets Stock Debtors Prepayment – Insurance Bank Cash Less : Current Liabilities Accrual – Wages Creditors Net Current Assets Aggregate Depn £ 500 200 700 Net Book Value £ 500 200 700 160 400 120 240 160 15 080 280 650 Financed by : Capital Net profit Drawings (4,500 + 90) 930 11 150 20 850 20 600 840 590 250 20 850 Question (a) ƒ ƒ Net realisable value of microwave = £65 - £20 = £45 Cost of microwave = £47 Since the net realisable value (NRV) of the microwave is lower than the cost, the microwave should be valued at NRV (£45) in the closing stock (b) Stock should be valued at cost or net realisable value (NRV), which ever is lower This is an example of using the concept of prudence Question 4 Yes, extending a fixed asset It will increase the value of fixed assets Appears under fixed assets heading in the balance sheet No, as it is an expense Expenses are accounted for in the Profit and Loss account Yes, this is a prepayment which is shown as a current asset in the balance sheet Yes, withdrawal of capital by the proprietor Shown as a reduction of capital Yes, stock is an asset and is shown as a current asset in the balance sheet 84 EDI International House Siskin Parkway East Middlemarch Business Park Coventry CV3 4PE UK Tel +44 (0) 8707 202909 Fax +44 (0) 2476 516505 Email enquiries@ediplc.com www.ediplc.com 85 ... General expenses Net profit £ 23 380 650 19 730 11 14 0 30 870 900 320 860 200 16 5 695 11 14 0 Sales £ 30 870 _ 30 870 Gross profit b/d 11 14 0 _ 11 14 0 Question B Betty Trading and Profit &... April 11 Purchases A Smart £ 420 £ 35 12 20X3 April 14 20X3 April 15 20X3 April 18 Cash 20X3 April 15 Bank £ 13 0 Cash Wages £ 11 5 Sales R Squires £ 17 5 Sales 20X3 April 18 April 24 20X3 April 21. .. considerations 31 The Division of the Ledger and Books of Original Entry 38 10 Bank Facilities 39 11 Cash Books 41 12 The Sales and Purchases Day Books 44 13 The Returns Day Books 48 14 The Journal 53 15
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