Every business transaction has an equal and opposite effect. Example 1 Terry is a sole trader and commences business on 1 July 2015. The following transactions took place during his first week of trading: 1.7.2015 Terry put $20,000 cash into the business. 3.7.2015 Terry purchased a motor vehicle for use within the business for $9,500. 7.7.2015 Terry takes out a five-year loan from the bank for $5,000. Required: Show the accounting equation for Terry at the end of the week. CHAPTER 7 - ACCRUALS AND PREPAYMENTS ACCRUED EXPENSES An accrual is required in the event that a business has received goods or a service, but has neither recorded an invoice or made payment in the relevant financial period. The double entry journal to record an accrual is: Dr Expense Cr Accruals (Statement of profit or loss) (Statement of financial position) Example 1 Fleetwood Designs Co incorporates on 1 February 2014. The business receives gas bills quarterly in arrears. The company's year-end is the 31 December. The following bills were received and paid: 30 April 2014 $300 31 July 2014 $310 31 October 2014 $300 31 January 2015 $300 Required: What is the amount for the gas expense to be shown in the statement of profit or loss for the period ended 31 December 2014? Example 2 Julia is a sole trader who has been in business for a number or years. 2014 she had an accrual brought forward of $1,200 in relation to rent. Rent is paid as follows: March 7 April 2014 9 July 2014 6 October 2014 9 January 2015 9 April 2015 Required: $1,500 (for the quarter ended 31 March 2014) $1,950 (for the quarter ended 30 June 2014) $2,250 (for the quarter ended 30 September 2014) $1,650 (for the quarter ended 31 December 2014) $1,650 (for the quarter ended 31 March 2015) Prepare the rent ledger account showing the rent expense to be included in the statement of profit or loss for the year ended 28 February 2015. CHAPTER 7 - ACCRUALS AND PREPAYMENTS PREPAID EXPENSES A prepayment arises when an expense is recorded in the accounts which relates to a future accounting period. The double entry journal to record a prepayment is: Dr Prepayments (Statement of financial position) Cr Expense (Statement of profit or loss) Example 3 Mariah starts her business on 1 August 2014, and pays her insurance for the year to 31 July 2015 totaling $1,800. Her year-end is 31 December each year. Required: What is the amount for the insurance expense to be shown in the statement of profit or loss for the year ended 31 December 2014? Example 4 Continuing the previous example, on 1 August 2015 Mariah pays her insurance for the year to 31 July 2016 totaling $2,200. Required: What is the amount for the insurance expense to be shown in the statement of profit or loss for the year ended 31 December 2015? ACCRUED INCOME Accrued income arises when goods/services have been provided in an accounting period, yet no income has been recorded. The double entry journal to record accrued income is: r > Dr Accrued income (Statement of financial position) Cr Income (Statement of profit or loss) CHAPTER 7 - ACCRUALS AND PREPAYMENTS Example 5 Jen has been sub-letting one of her properties to a tenant for many years. She receives rent quarterly in arrears. At 30 November 2014 she had a balance of rent in arrears of $27,600. The total amount of rent received during the year ended 30 November 2015 was $718,050. At 30 November 2015 there was still rent in arrears of $31,800. Required: What is the amount of rental income to be shown in the statement of profit or loss for the year ended 30 November 2015? DEFERRED INCOME Deferred income arises when income has been recorded, but the goods/service has yet to be provided, which will take place during a future accounting period. The double entry journal to record deferred income is: Dr Income Cr Deferred income (Statement of profit or loss) (Statement of financial position) Example 6 Mandy receives rent quarterly in advance; her financial year-end is 30 April each year. She has a balance on deferred income at 1 May 2014 of $200. Rent is received as follows: 1 June 2014 $600 (covering the quarter ended 31 August 2014) 1 September 2014 $450 (covering the quarter ended 30 November 2014) 1 December 2014 $500 (covering the quarter ended 28 February 2015) 1 March 2015 $600 (covering the quarter ended 31 May 2015) Required: What is the amount of rental income to be shown in the statement of profit or loss for the year ended 30 April 2015? CHAPTER 11- CORRECTION OF ERRORS AND SUSPENSE ACCOUNTS Example 1 The following errors were discovered: 1. A purchase of stationery for $500 cash has not been recorded in the ledger accounts. 2. Computer repairs worth $400 were posted on the debit side of the computer equipment account. 3. Commission received of $60 was posted to the credit side of the discount received account. 4. Cash paid of $5,500 for property maintenance has been entered into the property maintenance account and cash account as $550. 5. A contra between the receivables control account and the payables control account of $1,000 has been posted to both accounts on the wrong side Required: Prepare the journal entries to correct each error as well as describing the type of error in each instance. Example 1 - Published accounts The following information has been extracted from the books of Picklette for the year to 31 March 20X9. Cr $000 $000 | Administrative expenses 170 Interest paid 5 rai 1 Called up share capital (ordinary shares of 200 $1 each) Dividend 6 Cash at bank and in hand 9 Income tax (remaining balance from 10 [ previous year) Warranty provision 90 Distribution costs 240 I Land and buildings: | at cost (Land $110, Buildings $100) 210 | accumulated depreciation (at 1 April 20X8) 48 Plant and machinery: at cost 125 accumulated depreciation (at 1 April 20X8) 75 i Retained earnings (at 1 April 20X8) 270 | 10% Loan (issued in 20X7) 80 \ Purchases 470 ; Sales 1,300 \ Inventory (at 1 April 20X8) 150 ! Trade payables 60 \ Trade receivables 728 i I 2,123 2,123 i Additional information (1) Inventory at 31 March 20X9 was valued at $250,000. (2) Buildings and plant and machinery are depreciated on a straight-line basis (assuming no residual value) at the following rates: On cost: Buildings 5% Plant and machinery 20% (3) There were no purchases or sales of non-current assets during the year to 31 March 20X9. (4) The depreciation charges for the year to 31 March 20X9 are to be apportioned as follows: Cost of sales 60% Distribution costs 20% Administrative expenses 20% (6) Income taxes is for the year to 31 March 20X9 (at a rate of 30%) are estimated to be $135,000. (7) The loan is repayable in five years. (8) The year end provision for warranty claims has been estimated at £75,000. Warranty costs are charged to administrative expenses. Required: Prepare Picklette pic's statement of profit or loss for the year to 31 March 20X9 and a statement of financial position as at that date. Test your understanding 1 The following trial balance has been extracted from the books of Arran as at 31 March 20X7: $000 $000 Administration expenses 250 Distribution costs 295 Share capital (all ordinary shares of $1 each) 270 Share premium 80 Revaluation surplus 20 Dividend 27 Cash at bank and in hand 3 Receivables 233 Interest paid 25 Dividends received 15 Interest received 1 Land and buildings at cost (land 380, buildings 100) 480 Land and buildings: accumulated depreciation 30 Plant and machinery at cost 400 Plant and machinery: accumulated depreciation 170 Retained earnings account (at 1 April 20X6) 235 Purchases 1,260 Sales 2,165 Inventory at 1 April 20X6 140 Trade payables 27 Bank loan 100 3,113 3,113 Additional information (1) Inventory at 31 March 20X7 was valued at a cost of $95,000. Included in this balance were goods that had cost $15,000. These goods had become damaged during the year and it is considered that following remedial work the goods could be sold for $5,000. (2) Depreciation for the year to 31 March 20X7 is to be charged against cost of sales as follows: Buildings 5% on cost (straight line) Plant and machinery 30% on carrying value (CV) (reducing balance) (3) Income tax of $165,000 is to be provided for the year to 31 March | 20X7. I (4) Land is to be revalued upwards by $100,000. ! Prepare the statement of profit or loss and other comprehensive I income, statement of changes in equity and statement of financia i position for year ended 31 March 20X7. Test your understanding 2 The following trial balance relates to P at 31 March 20X1 Revenue Cost of sales Dividends received Administration expenses Distribution costs Interest payable Prepayments Dividends paid Property, plant and equipment Short-term investments Inventory at 31 March 20X1 Trade receivables Cash and cash equivalents Trade payables Long-term loans (repayable 20X9) Share capital Share premium Retained earnings at 31 March 20X0 Dr $000 1,350 490 370 190 25 390 4,250 2,700 114 418 12 Cr $000 5,300 210 136 1,200 1,500 800 1,163 10,309 10,309 The following information should also be taken into account: (1) The tax charge for the year has been estimated at $470,000. (2) The directors declared a final dividend of $270,000 on 3 April 20X1. Required: Prepare, in a form suitable for publication, the statement of profit or loss and other comprehensive income, statement of financial position and statement of changes in equity for the year ended 31 March 20X1.