Trial Balance, Income Statement, Statement of Financial Position, Statement of Financial Position - Assignment Example

BUSINESS College Business Question KW Enterprise Trial Balance for the year ended 31 October 2011 Debit Credit Capital 61,280 Sales 487,360 Sales returns 8,900 Purchases 288,330 (286330+2000) Purchases returns 650 Stock (inventory) at 1 November 20XO 25,870 Rent 36,000 (33000+3000) General expenses 87,700 Motor expenses 28,540 Irrecoverable debts 1520 (1220+300) Allowance for doubtful debts 950 3200 Motor vehicles (MV) at cost 36000 Accumulated depreciation (MV) 23,670 (19560+4110) Fixtures and fittings (F&F) at cost 57,020 Accumulated depreciation (F&F) 43,133 (34580+8553) Drawings 30,000 Debtors (SL) control account 56,550 300 Creditors (PL) control account 33500 (31500+2000) Bank 2700 VAT 350 10,420 Suspense 230 Depreciation 12,663 Allowance for doubtful debts - adjustment 950 Closing stock (inventory) - P&L (IS) 375 Closing stock (inventory) - balance sheet (SFP) 375 Accruals 3000 Total 670,768 670,768 KW Enterprises Income Statement for the year ended 31 October 2011 £ £ £ Sales 487,360 Less: Sales Return 8,900 478,460 Cost of Goods Sold Opening Inventory 25,870 Purchases 288,330 Less: Return 650 287,680 313,550 Closing Stock 29665 283,885 Gross Profit 194,575 Less:Expenses General Expenses 87,700 Rent 36,000 Motor Expense 28,540 Bad Debts 300 Depreciation 12,663 VAT 350 165,553 Net Profit 29,022 KW Enterprises Statement of Financial Position as at 31 October 2011 £ £ £ Non-Current Assets Motor Vehicle 36,000 Less: Depreciation 23,670 12,330 Fixture & Fittings 57,020 Less: Depreciation 43,133 13,887 26,217 Current Assets Closing Stock 29,665 Debtor 56,550 Less: Bad Debt 2,250 54,300 83,965 110,182 Equity & Liabilities Equity Capital 61,280 Add: Net Profit 29,022 90,302 Less: Drawings 30,000 60,302 Liabilities Creditor 33,500 Bank 2,700 VAT Payable 10,420 Suspense 260 Accrual 3,000 49,880 110,182 (Droms & Wright, 2010) Question 2 Len & Fred Partnership appropriation account for the year ending 30 Sep 2011 Len Fred Total $ $ $ Salaries 6,000 6,000 Interest on Capital 1,320 800 2,120 Profit Share 19,920 9,960 29,880 (ratio 2:1) (β) 21,240 16,760 38,000 Len & Fred Current Account Len Fred Len Fred Balance b/f 500 Balance b/f 1,000 Drawings 17,000 14,000 Profit Share (from Appropriation Account) 21,240 16,760 Balance c/f 4,240 3,260 21,240 17,760 21,240 17,760 Bal b/d 4,240 3,260 Len & Fred Statement of Financial Position as at 30 Sep 2011 $ $ $ Non-Current Assets Motor Vehicle – Cost 40,000 Accumulated Depreciation 16,000 24,000 Fixture & Fittings 22,000 Accumulated Depreciation 8,000 14,000 38,000 Current Assets Closing Inventory 16,000 Debtors 32,000 Bank 5,000 Cash 500 53,500 Total Assets 91,500 Equity and Liabilities Equity Capital Accounts – Len 20,000 Fred 33,000 53,000 Current Accounts – Len 4,240 Fred 3,260 7,500 60,500 Liabilities Loan 10,000 Creditors 21,000 31,000 91,500 (Stott et al, 2010; Randall, 2004) Question 3 Accounting concepts are certain set of rules that are followed and stuck to while preparing the financial statements of an organization. There are four basic concepts that are used while recording transactions within concerned financial statements. The four main accounting concepts that are used while preparing the financials statements of a company include: Accrual This is an accounting concept whereby the transactions are recorded within a company’s financial statements as soon as they occur rather than when the cash is received for them. Under the accrual concept, a company recognizes the income and expense in their relevant books as soon as the event has occurred rather than recording it on a cash basis. The rule further encourages the recording of the transaction to be in the accounting period in which the event has occurred. The only exception to this rule applies during the preparation of the Cash Flow statement whereby the cash position of a company is reflected and only those entries are recorded which have the element of cash involved to them. Under the Accrual basis, income is recorded within the period to which it pertains rather than being recorded in the upcoming periods e.g. Accrued income is recorded in the period in which it occurs while prepaid income is shown in the period to which is pertains rather than being recorded in the period in which the cash is been received (Wood & Sangster, 2008). Expenses, under the accrual basis, are also recorded in the period to which they relate to e.g. Accrued Expense is recognized in the period in which the expense takes place while prepaid expense is recorded in the subsequent period to which relates to. Accruals basis ensures that expenses are "matched" with the revenue earned in an accounting period, hence it is considered to be similar to the Matching principle. Consistency This concept focuses on the uniformity of accounting standards which are followed by organizations while preparing the financial statements. The main purpose of this is to bring consistency when comparing the financial statements of two organizations within the same industry. This consistency in the rules helps in analyzing one company’s performance with that of another in order to assess any shortfalls and overcome any financial weaknesses faced by a company (Fields, 2011). The consistency concept is to be followed by a company in order to provide a meaningful financial comparison e.g. Two company following different accounting will not provide a like-with-like comparison. If a company choses to change an accounting policy, it must provide a proper disclosure along with the necessary changes that the policy would bring (Marsh, 2012). Prudence Uncertainty with respect to the timing and estimation of a transaction is a very serious issue within accounting. Whenever a company makes an estimate of a transaction, it must be prudent in doing so. Under the prudence concept, a company has to ensure that it does not overstate its assets and income or understate its liabilities and expenses while preparing its financial statements. Allowance for bad debt is one such example of an estimation account. With the use of the allowance for bad debts account, a company estimates it debtors appropriately by deducting some of the debtors which it deems irrecoverable hence preventing the overstatement of their assets. According to the prudence concept, profits are not recognized as soon as a sale has been completed, while on the other hand, losses and costs are incurred immediately within the accounts as soon as a probable chance arises (Wood & Sangster, 2008). Going Concern All organizations prepare their financial statements on the basis of going concern which means that the company would continue its operation and its business in the foreseeable future. Following the determination of the going concern concept, a company follows the Generally Accepted Accounting Standards. The prime idea of this concept is to give a clear picture of the company’s operation to the company’s stakeholders especially its shareholders and its potential creditors. If for e.g. a company which may not continue its business due to any hidden reason, it is appropriate to disclose the information since it would give a clear picture to its shareholders and its potential investors about whether to give further capital to the business or not (BPP, 2011). While auditing a company’s financial statements, the first obligation of auditors is to check the going concern of its client company before further auditing its accounts (IFA, 1997). If a company is found not to be a going concern, the company’s assets need to be liquidated and all their debts fall due immediately. References INTERNATIONAL FEDERATION OF ACCOUNTANTS. (1997). Going concern. New York, N.Y., Issued by the International Auditing Practices Committee of the International Federation of Accountants. BPP LEARNING MEDIA (FIRM), & ASSOCIATION OF CHARTERED CERTIFIED ACCOUNTANTS (GREAT BRITAIN). (2011). ACCA. Paper F8, Audit and assurance (international). Study text. London, BPP Learning Media. DROMS, W. G., & WRIGHT, J. O. (2010). Finance and accounting for nonfinancial managers: all the basics you need to know. New York, Basic Books. FIELDS, E. (2011). The essentials of finance and accounting for nonfinancial managers. New York, AMACOM, American Management Association MARSH, C. (2012). Financial management for non-financial managers. London, Kogan Page. RANDALL, H. (2004). Accounting : AS Level and A Level. Cambridge, Cambridge University Press. STOTT, J. R., TRUMAN, M., LYMER, A., & AZMAT, N. (2010). Basic accounting. Abingdon, Oxon, Bookpoint Ltd. WOOD, F., & SANGSTER, A. (2008). Business accounting. New York [etc.], Financial Times/Prentice Hall. Read More