aat apii tutor study notes d12

Study Notes aat

QCF Level 3

ACCOUNTS PREPARATION II (APII)

TUTOR NOTES

AAT STUDY NOTES (TUTOR) : AP II

ii KAPLAN PUBLISHING

Kaplan Financial Limited, 2012 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any firm or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of Kaplan Publishing. The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials.

KAPLAN PUBLISHING iii

CONTENTS

SESSION TITLE PAGE 1 Introduction to APII 1 2 Preparation of financial statements for a sole trader 3 3 Partnership accounts 11 4 Incomplete records 37


iv KAPLAN PUBLISHING

KAPLAN PUBLISHING 1

SESSION 1: INTRODUCTION TO APII This session covers the background for APII

Accounts Preparation II The logical progression from Accounts Preparation I is Accounts Preparation II. The unit develops the students knowledge and skills in preparing final accounts for a sole trader and a partnership. Preparing final accounts from incomplete records will involve a given scenario for a business with incomplete information. The student will need to use a range of techniques including control account reconciliations, mark ups and margins and journal entries to establish the figures for the final accounts. For preparing final accounts for a sole trader the students should be able to prepare a trial balance and produce an income statement and a statement of financial position. Preparing partnership accounts will involve students dealing with specialised partnership transactions, such as admission or retirement of a partner, preparing partnership appropriation account or current accounts and then the final accounts. There will be a maximum of three partners in any given scenario. Assessment Section 1 is about incomplete records. There will be two independent tasks and a variety of techniques will need to be applied to find missing figures. Section 2 is about final accounts for sole trader and partnerships. There will be four independent tasks The assessment for the units will be two hours computer based and the computer will mark the assessment for the student. Learners will be expected to demonstrate competence in both sections of the assessment. Successful completion of Accounts Preparation II will result in the award of one QCF unit: Prepare accounts for partnerships (knowledge and skills)


2 KAPLAN PUBLISHING

When students have successfully completed both Accounts preparation I and Accounts Preparation II they will be awarded a further four QCF units: Principles of accounts preparation (knowledge) Prepare final accounts for sole traders (skills) Accounting for non-current assets (skills) Extending the trial balance using accounting adjustments (skills) General For both Accounts Preparation I and II, student should be familiar with International terminology including that within International Accounting Standards. Knowledge of principles of accounts preparation is required for both units.

KAPLAN PUBLISHING 3

SESSION 2: PREPARATION OF FINANCIAL STATEMENTS FOR A SOLE TRADER You should be familiar with the preparation of financial statements from the knowledge acquired in API. This section recaps the basic principles of preparing finance accounts for a sole trader

The two main financial statements you should be familiar with are:

The income statement, and

The statement of financial position

Explain what appears in each statement i.e. IS historical information SFP items that straddle a year-end and are carried forward.

Template for an income statement

Income Statement for the year ended 31 December 20X1

$ $ Revenue X Less: sales returns (X) X Less: Cost of sales Opening inventory X Purchases X Carriage inwards X Closing inventory (X) (X) Gross profit X Sundry income X Expenses Rent X Carriage outwards X Electricity X Depreciation X Irrecoverable debt X Stationery X Telephone X Total expenses (X) Net profit for the year X


4 KAPLAN PUBLISHING

Template for a statement of financial position

Statement of Financial Position as at 31 December 20X1

Cost Depreciation Carrying Value

$ $ $ Non-current assets e.g. land and buildings X X X Current assets Inventories X Trade receivables X Less allowance for receivables (X) X Bank X Prepayment X X Non-current liabilities (X) Current liabilities Trade payables X Accruals X (X) Total net assets X Capital account Capital X Profit/(Loss) for the year X/(X) Less: Drawings (X) X

SESSION 2 : PREPARATION OF FINANCIAL STATEMENTS FOR A SOLE TRADER

KAPLAN PUBLISHING 5

Example 1 (Go through this with your learners) At the end of the financial year the following trial balance was drafted for Hardy who owns a design business.

Prepare the income statement and statement of financial position of Hardy from this information.

Trial balance for the year ended 31 December 2009 for Hardy, trading as Design Gecko.

Description Dr Cr Sales 365,200 Purchases 266,800 Opening inventory 23,340 Closing inventory SFP 25,680 Closing inventory IS 25,680 Wages 46,160 Printing and stationery 13,000 Motor expenses 3,720 Computer consumables 760 Sales ledger control 17,330 Purchase ledger control 23,004 Bank current account 4,560 Irrecoverable debts 120 Allowance for doubtful debts

588

Discounts allowed 864 Discounts received 1,622 Drawings 20,800 Capital 200,000 Motor vehicles at cost 24,000 Accumulated depreciation 12,240 Fixtures and fittings at cost 28,000 Accumulated depreciation 16,800 Land 170,000 Total 645,134 645,134


6 KAPLAN PUBLISHING

Income Statement for the year ended 31 December 2009 for Hardy

trading as Design Gecko.

$ $ Sales 365,200 Opening inventory

23,340

Purchases

266,800

Closing inventory

25,680

Cost of goods sold

(264,460)

Gross profit

100,740

Sundry income

Discounts received 1,622 102,362 Expenses Wages

46,160

Printing and stationery

13,000

Motor expenses

3,720

Computer consumables

760

Irrecoverable debts

120

Discounts allowed

864

Total expenses

(64,624)

Net profit for the year 37,738


KAPLAN PUBLISHING 7

Statement of Financial Position as at 31 December 2009

For Hardy trading as Design Gecko Cost Accumulated

Depreciation Carrying

Value $ $ $ Non-current assets Land Fixtures & fittings Motor vehicles

170,000 28,000 24,000

- 16,800 12,240

170,000 11,200 11,760

222,000 29,040 192,960 Current assets Inventories 25,680 Trade receivables 17,330 Less allowance for receivables (588) 16,742 Bank 4,560 Prepayment - 46,982 Non-current liabilities - Current liabilities Trade payables 23,004 Accruals - (23,004) Total net assets 216,938 Capital account Capital 200,000 Profit 37,738 Less: Drawings (20,800) 216,938


8 KAPLAN PUBLISHING

The accounting equation

Assets = capital + liabilities OR Assets liabilities = capital + profit drawings

(Explain the application using the above example)

Activity 1

The following information is available for Beppes pizza and pasta parlour for the year ended 31 December 20X8.

$ Purchase ledger control 6,400 Sales ledger control 5,060 Purchases 16,100 Sales 28,400 Motor van 1,700 Accumulated depreciation 340 Fixtures and fittings 5,000 Accumulated depreciation 1,000 Drawings 5,100 Advertising 174 General expenses 1,596 Rent and rates 2,130 Salaries 4,000 Irrecoverable debts 162 Inventory at 31 December 20X8 2,050 Discounts received 100 Sales returns 200 Cash at bank 2,628 Cash in hand 50 Capital 7,660

Required Prepare an Income statement for the year ended 31 December 20X8 and a statement of financial position at that date.


KAPLAN PUBLISHING 9

Income Statement for the year ended 31 December 20X8 for Beppes Pizza and Pasta Parlour $ $

Sales 28,400

Less: sales returns (200)

28,200

Opening inventory

Purchases 16,100

Less: closing inventory (2,050)

Cost of goods sold (14,050)

Gross profit 14,150

Sundry income

Discounts received 100

14,250

Expenses

Salaries 4,000

Rent and rates 2,130

Advertising 174

General expenses 1,596

Irrecoverable debts 162

Total expenses (8,062)

Net profit for the year 6,188


10 KAPLAN PUBLISHING

Statement of Financial Position as at 31 December 20X8 for Beppes Pizza and Pasta Parlour

Cost Accumulated Depreciation

Carrying Value

$ $ $Non-current assets Motor van 1,700 340 1,360Fixtures and fittings 5,000 1,000 4,000 6,700 1,340 5,360 Current assets Closing inventory 2,050 Trade receivables 5,060 Cash at bank 2,628 Cash in hand 50 9,788 Non-current liabilities - Current liabilities Trade payables (6,400) Total net assets 8,748 Capital Capital introduced 7,660Profit 6,188Less: Drawings (5,100) 8,748 Further reading/activities For more detailed explanations on this topic and for further questions to practice please refer to chapter 1 of the APII textbook.

KAPLAN PUBLISHING 11

SESSION 3: PARTNERSHIP ACCOUNTS What is a partnership?

A partnership is two or more people carry on business together with a view to making a profit and sharing that profit.

In a partnership each partner will introduce capital into the business and agree a fixed share of the annual profits and losses.

Note: the profits will not necessarily be shared equally. The profit share depends on many factors, such as: the amount of capital invested; the amount of time they dedicate to working at the partnership; and whether they draw a fixed salary.

Sole trader vs. partnership

The main differences between a sole trader and a partnership are:

There is more than one capital account in a partnership as each partner will have their own.

Instead of having a profit/loss account in the capital section of the SoFP each partner has a current account. This is where the partners profit shares, and any drawings they make, are allocated.

A partnership requires additional workings. The main one is the appropriation account or statement of division of profit which is a working to calculate how the profit/loss of the partnership will be split.

Steps to preparing partnership accounts The income statement is exactly the same as that of a sole trader The statement of financial position is slightly different see below:



$ $ $

Non-current assets Shop fittings X (X) X Computer equipment X (X) X X Current assets Trade Receivables X Cash X X Non-current liabilities (X) Current liabilities Trade payables X Accruals X (X) Total net assets X Partners accounts Capital A X Capital B X Current A X Current B X X

Preparation of final accounts of the partnership

Prepare the trial balance, extended trial balance (where applicable) and deal with the adjustments as you would do in a sole trader

Prepare the income statement for the partnership (exactly the same as a sole trader)

Write up the top half of the statement of financial position down to total net assets (exactly the same as a sole trader)

Prepare the profit appropriation account or statement of division of profit

Write up the partners' current accounts

Complete the bottom half of the statement of financial position

SESSION 3 : PARTNERSHIP ACCOUNTS


Appropriation of profit

As mentioned above, the appropriation account is purely a working to establish how much profit is allocated to each of the partners.

Profit allocation is dependent on a number of factors and should reflect the partners individual involvement in the partnership.

The split will normally incorporate the following:

Salary allocation this will reflect the amount of work put in by the individual partners

Interest on capital this will reflect the amount of initial investment made by each of the partners

Interest on drawings this will reflect that partners have taken funds from the business and are therefore getting charged for taking the funds in advance of their allocation

Residual profit split this is the profit left over after all of the preceding allocations

The appropriation account has two alternative layouts the horizontal and the vertical.

The notes contain examples of both the horizontal and vertical formats; ensure that you familiarise yourself with both formats.



Appropriation accounts

OR alternative layout

Total Net profit* X Salary A B

(X) (X)

Interest on capital A B

(X) (X)

Interest on drawings A B

X X

Profit available for distribution

X

Profit share A B

X X

* This is the net profit from the profit and loss account

Example 1

Sam and Sally are in partnership Sam has a balance on her capital account of $32,000 Sally has a balance on her capital account of $48,000 The profit for this financial period is $54,000 The partners decide to share profit on the following basis:

Interest on capital 10% per annum Sally will get a salary of $10,000 Residual profits are to be split Sam 2/3 and Sally 1/3

Prepare the appropriation account.

Profit Partners Total A B Net profit * X Salary (X) X X Interest on capital (X) X X Interest on drawings X (X) (X) Residual profit X Residual profit split (X) X X X X



Profit Partners Total Sam Sally

Profit 54,000

Salary (10,000) 10,000

Interest on capital (8,000) 3,200 4,800

Residual profit 36,000

Residual profit split (36,000) 24,000 12,000

27,200 26,800

Activity 1

As above but the profit for the year is now only $14,400 Profit Partners Total Sam Sally

Profit 14,400

Salary (10,000) 10,000

Interest on capital (8,000) 3,200 4,800

Residual loss (3,600)

Residual loss split 3,600 (2,400) (1,200)

800 13,600

AA

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PA

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Changes in profit sharing ratio effect on appropriation account

You may come across the situation where the partnership profit sharing arrangements change during an accounting period. This may happen if a partner joins or leaves.

This will have an effect on the appropriation account.

Example 3

Starsky joined Lacey and Cagneys business on the 1 February 2008. (You do not need to use any information from Activity 2) The following information relates to the partnership agreement:

Profit share effective until 31 January 2008 Lacey 50% Cagney 50%

Profit share effective from 1 February 2008 Lacey 40% Cagney 40% Starskey 20%

Interest on capital accounts 10% per annum on the balance invested calculated on a monthly basis. Starsky invested $10,000 on the 1 February 2008 Lacey invested $20,000 Cagney invested $14,000

Partners annual salaries Lacey $2,500 Cagney $1,500 Starsky $1,000 for the period 1 February 2008 to 30 April

2008

The profit for the year ended 30 April 2008 was $50,000



Complete the following table to show the interest on capital for each of the partners

Interest on capital 1 May 07 31 Jan 08

1 Feb 08 30 Apr 08

Total

Lacey 1,500 500 2,000

Cagney 1,050 350 1,400

Starsky 0 250 250

Workings

1 May 07 31 Jan 08

Interest on capital Salaries Profit distribution

Lacey 20,000 x 10% x 9/12 = 1,500

2,500 x 9/12 = 1,875 31,950 x 50% = 15,975

Cagney 14,000 x 10% x 9/12 = 1,050

1,500 x 9/12 = 1,125 31,950 x 50% = 15,975

Starsky Nil Nil Nil

1 Feb 08 30 Apr 08

Interest on capital Salaries Profit distribution

Lacey 20,000 x 10% x 3/12 = 500

2,500 x 3/12 = 625 9,400 x 40% = 3,760

Cagney 14,000 x 10% x 3/12 = 350

1,500 x 3/12 = 375 9,400 x 40% = 3,760

Starsky 10,000 x 10% x 3/12 = 250

1,000 9,400 x 20% = 1,880



Appropriation account for Lacey, Cagney and Starsky

1 May 07 31 Jan 08

1 Feb 08 30 Apr 08

Total

Net profit 37,500 12,500 50,000

Salaries:

Lacey 1,875 625 2,500

Cagney 1,125 375 1,500

Starsky 0 1,000 1,000

Interest on capital

Lacey 1,500 500 2,000

Cagney 1,050 350 1,400

Starsky 0 250 250

Profit available for distribution

31,950 9,400 41,350

Profit share

Lacey 15,975 3,760 19,735

Cagney 15,975 3,760 19,735

Starsky 0 1,880 1,880



Activity 3

The following trial balance is prepared for the B, C, and G Partnership.

Bess, Charles and George Trial balance as at 31 March 2006 Detail Dr Cr Motor expenses 3,769 Drawings Bess 46,000 Drawings Charles 42,000 Drawings George 38,000 Capital Bess 60,000 Capital Charles 40,000 Capital George 20,000 Sales 568,092 Purchase returns 7,004 Trade payables 9,904 Sales returns 8,271 Purchases 302,117 Delivery costs 617 Insurance 6,659 Rent, rates, insurance 32,522 Current account Bess 4,670 Current account Charles 5,600 Current account George 3,750 Opening inventory 127,535 Motor vehicle cost 37,412 Office equipment cost 2,363 Fixtures and fittings cost 8,575 Wages 48,317 Light and heat 3,240 Postage and stationery 705 Accum depn motor vehicles 18,651 Accum depn office equipment 1,285 Accum depn fixtures and fittings 3,754 Depn charge motor vehicles 4,765 Depn charge office equipment 236 Depn charge fixtures and fittings 1,613 Telephone 2,926 Sundries 1,740 Bank 23,980 Cash 228 Accruals 880 743,590 743,590



Further information:

The inventory at 31 March 2006 is valued at $143,936

The partners are entitled to the following salaries Bess $30,000 Charles $25,000 George $17,000

Interest on capital is to be paid at 5%

No interest on drawings

The residual profit sharing ratio is: Bess 5/12 Charles 4/12 George 3/12

You are required to:

Prepare the Income statement for the year ended 31 March 2006.

Prepare the appropriation account

Write up the partners current accounts

Prepare the statement of financial position as at 31 March 2006



Income Statement for the year ended 31 March 2006 $ $ Sales 568,092Sales returns (8,271) 559,821Less: Cost of sales Opening inventory 127,535 Purchases 302,117 Purchase returns (7,004) Closing inventory (143,936) (278,712) Gross profit 281,109 Expenses Motor expenses 3,769 Insurance 6,659 Delivery expenses 617 Rent, rates and insurance 32,522 Wages 48,317 Light and heat 3,240 Printing and stationery 705 Telephone 2,926 Sundries 1,740 Depreciation 6,614 (107,109) Net profit for the year 174,000



Appropriation Account

Current accounts

Detail Bess Charles George Detail Bess Charle

s George

B/d 4,670 5,600 3,750

Drawings 46,000 42,000 38,000 Salary 30,000 25,000 17,000

Balance c/d 31,670 22,600 7,750

Int. on capital 3,000 2,000 1,000

Profit share 40,000 32,000 24,000

77,670 64,600 45,750 77,670 64,600 45,750

$ Total $ Net profit 174,000 Salary:

Bess 30,000 Charles 25,000 George 17,000 (72,000)

Interest on capital: Bess 3,000

Charles 2,000 George 1,000 (6,000)

Profit available for distribution 96,000 Profit share:

Bess 40,000 Charles 32,000 George 24,000 (96,000)

Balance Nil



Statement of Financial Position as at 31 March 2006

$ $ $ Non-current assets Motor vehicles 37,412 (18,651) 18,761 Office Equipment 2,363 (1,285) 1,078 Fixtures and Fittings 8,575 (3,754) 4,821 48,350 (23,690) 24,660 Current assets Closing stock 143,936 Bank 23,980 Cash 228 168,144 Non-current liabilities - Current liabilities Trade payables 9,904 Accruals 880 (10,784) Total net assets 182,020 Partners accounts Capital Bess 60,000 Capital Charles 40,000 Capital George 20,000 120,000 Current Bess 31,670 Current Charles 22,600 Current George 7,750 62,020 182,020



Admission of a new partner effect on statement of financial position accounts

We have considered the effect on the appropriation account, however we must also see how this is reflected in the statement of financial position accounts.

In the event of a new partner joining a partnership, it is likely that the original partners will want some sort of compensation for the fact that they have run the business and developed it for the period up to the new partner joining.

Therefore there is an additional accounting adjustment that you must deal with.

This adjustment is referred to as a goodwill adjustment. Goodwill is an intangible asset, in that it cannot be touched physically. It could be the reputation that a business has built up or the fact that the business has a good workforce.

The new partner joining the partnership purchases a share in this goodwill from the original partners in the partnership.

Admission of a new partner

The double entry for the additional capital introduced by a new partner is a follows:

Dr Bank X Cr New partners capital account X

Goodwill and the admission of a new partner

Step 1 Set up a goodwill account with the estimated value of goodwill

Dr Goodwill account (with estimated value of goodwill) X Cr Old partners capital accounts (using the old profit share ratio) X

Step 2 Account for the new partners cash is accounted for by:

Dr Bank X Cr New partners capital account X

Step 3 Eliminate the goodwill from the books as follows:

Dr New partnership capital accounts (using new profit share ratio) X Cr Goodwill account X



Example 4

A & B have been in a partnership for many years sharing the profit equally. The balance on As capital account is $50,000 and Bs $40,000.

They have decided to admit a new partner C who will contribute $30,000 in cash.

The new profit share ratio is A:B:C, 2:2:1 and goodwill is estimated at $15,000.

Goodwill A B C A B C Capital 7,500 7,500 Capital 6,000 6,000 3,000

Capital account

A B C A B C Goodwill 6,000 6,000 3,000 B/d 50,000 40,000 Bank 30,000 Goodwill 7,500 7,500 C/d 51,500 41,500 27,000 57,500 47,500 30,000 57,500 47,500 30,000 B/d 51,500 41,500 27,000

Activity 4

X & Y have been in a partnership for many years sharing the profit equally. The balance on Xs capital account is $100,000 and Ys $80,000.

They have decided to admit a new partner Z who will contribute $60,000 in cash.

The new profit share ratio is X:Y:Z, 2:2:1 and goodwill is estimated at $30,000.

Goodwill X Y Z X Y Z Capital 15,000 15,000 Capital 12,000 12,000 6,000



Capital account

X Y Z X Y Z Goodwill 12,000 12,000 6,000 B/d 100,000 80,000 Bank 60,000 C/d 103,000 83,000 54,000 Goodwill 15,000 15,000 115,000 95,000 60,000 115,000 95,000 60,000 B/d 103,000 83,000 54,000 Retirement of a partner

When a partner retires from a partnership, the full amounts that are due to him must be calculated. This includes:

The balance on his capital account The balance on his current account Any share of goodwill

This is achieved as follows:

Step 1 Transfer the retiring partners current account balance to his capital account.

Step 2 Set up a goodwill account and

Dr Goodwill account with the estimated value of goodwill X Cr Partners capital account (using the old profit share ratio) X

Step 3 Pay the retiring partner total monies owed

Dr Retiring partners capital account X Cr Bank X

If the partnership does not have enough money to pay the retiring partner he may agree to provide a loan to the partnership

Dr Retiring partners capital account X Cr Loan account X

Step 4 Remove goodwill from the ledger

Dr Remaining partners capital accounts (new profit share ratio) X

Cr Goodwill account X



Example 5

A, B and C have been in partnership for a number of years sharing profits in the ratio of 3:2:1. On 1 March 20X5 A retired from the partnership and at that date the goodwill was valued at $60,000. The other two partners agreed with A that he would be paid $20,000 of what was due to him in cash and the remainder would be a loan to the partnership. After A retirement B and C are to share profits in the ratio of 2:1.

The capital account and current account balances at 1 March 20X5 were as follows:

$ Capital accounts A B C

65,000 55,000 40,000

Current accounts A B C

8,000 5,000 2,000

Write up the partners current and capital accounts and the goodwill and loan accounts to reflect the retirement of partner A.

Goodwill A B C A B C Capital 30,000 20,000 10,000 Capital 40,000 20,000

Capital account A B C A B C Goodwill 40,000 20,000 B/d 65,000 55,000 40,000 Loan 83,000 Goodwill 30,000 20,000 10,000 Bank 20,000 Current 8,000 C/d 35,000 30,000

103,000 75,000 50,000 103,000 75,000 50,000 B/d 35,000 30,000



Current account

A B C A B C Capital 8,000 B/d 8,000 5,000 2,000

Loan account (retired partner A) Capital 83,000

Activity 5

X, Y and Z have been in partnership for a number of years sharing profits in the ratio of 3:2:1. On 1 March 20X5 X retired from the partnership and at that date the goodwill was valued at $120,000. The other two partners agreed with X that he would be paid $40,000 of what was due to him in cash and the remainder would be a loan to the partnership. After X retirement Y and Z are to share profits in the ratio of 2:1.

The capital account and current account balances at 1 March 20X5 were as follows:

$ Capital accounts X Y Z

130,000 110,000 80,000

Current accounts X Y Z

16,000 10,000

4,000 Write up the partners current and capital accounts and the goodwill and loan accounts to reflect the retirement of partner X.



Goodwill X Y Z X Y Z Capital 60,000 40,000 20,000 Capital 80,000 40,000

Capital account X Y Z X Y Z Goodwill 80,000 40,000 B/d 130,000 110,000 80,000 Bank 40,000 Goodwill 60,000 40,000 20,000 Loan 166,000 Current 16,000 C/d 70,000 60,000 206,000 150,000 100,000 206,000 150,000 100,000 B/d 70,000 60,000

Current account X Y Z X Y Z Capital 16,000 B/d 16,000 10,000 4,000

Loan account (retired partner X) Capital 166,000



Activity 6

Simon, Sheryl and Daniella started a business as music directors. They called their business The A factor. During the year ended 31 December 2008, Daniella decided to leave the business, to have a baby. She left on the 31 March 2008. The following information relates to the partnership agreement:

Profit share effective until 31 March 2008 Simon 50% Sheryl 25% Daniella 25%

Profit share effective from 1 April 2008 Simon 75% Sheryl 25%

Interest on capital accounts 6% per annum on the balance invested calculated on a monthly basis. The partners invested Simon $150,000 Sheryl $100,000 Daniella $100,000

Partners annual salaries Simon $50,000 Sheryl $30,000 Daniella $30,000

Profit for the year ended 31 December was $500,000

SESS

ION

3 :

PA

RTN

ER

SH

IP A

CC

OU

NTS

KAP

LAN

PU

BLI

SH

ING

33

Com

plet

e th

e fo

llow

ing

tabl

e to

sho

w th

e in

tere

st o

n ca

pita

l for

eac

h of

the

part

ners

1

Jan

08

31

Mar

08

1 A

pr 0

8

31 D

ec 0

8 To

tal

Sim

on

2,25

0 6,

750

9,00

0

She

ryl

1,50

0 4,

500

6,00

0

Dan

iella

1,

500

0 1,

500

Wor

king

s 1

Jan

08

31

Mar

08

Inte

rest

on

capi

tal

Sala

ries

Prof

it di

strib

utio

n

Sim

on

150,

000

x 6%

x

3/12

= 2

,250

50

,000

x 3

/12

= 12

,500

92

,250

x 3

/12

= 46

,125

Sher

yl

100,

000

x 6%

x

3/12

= 1

,500

30

,000

x 3

/12

= 7,

500

92,2

50 x

3/1

2 =2

3,06

3

Dan

iella

10

0,00

0 x

6%

x 3/

12 =

1,5

00

30,0

00 x

3/1

2 =

7,50

0 92

,250

x 3

/12

=23,

063

1 A

pr 0

8

31

Dec

08

Inte

rest

on

capi

tal

Sala

ries

Prof

it di

strib

utio

n

Sim

on

150,

000

x 6%

x

9/12

= 6

,750

50

,000

x 9

/12

= 37

,500

92

,250

x 9

/12

=227

,813

Sher

yl

100,

000

x 6%

x

9/12

= 4

,500

30

,000

x 9

/12

= 22

,500

92

,250

x 9

/12

= 75

,937

Dan

iella

N

il N

il N

il

Com

plet

e th

e ap

prop

riatio

n ac

coun

t for

The

A F

acto

r

1

Jan

08

31

Mar

08

1 A

pr 0

8

31 D

ec 0

8 To

tal

Net

pro

fit

125,

000

375,

000

500,

000

Sala

ries:

Sim

on

12,5

00

37,5

00

50,0

00

She

ryl

7,50

0 22

,500

30

,000

Dan

iella

7,

500

0 7,

500

Inte

rest

on

capi

tal

Sim

on

2,25

0 6,

750

9,00

0

She

ryl

1,50

0 4,

500

6,00

0

Dan

iella

1,

500

0 1,

500

Prof

it av

aila

ble

for d

istr

ibut

ion

92,2

50

303,

750

396,

000

Prof

it sh

are

Sim

on

46,1

25

227,

813

273,

938

She

ryl

23,0

63

75,9

37

99,0

00

Dan

iella

23

,062

0

23,0

62



Additional information: Daniella left the partnership on 31 March 2008 and at that date the goodwill was valued at $200,000.

Simon and Sheryl agreed with Daniella she would be paid the balance of what was due to her in cash.

All other information remains the same as before.

Complete the current account, capital account and the goodwill account for the year ended 31 December 2008

Current account Simon

Sheryl Daniella Simon Sheryl Daniella

Capital account

32,062 Balance b/d

0 0 0

Balance c/d

332,938 135,000 0 Salaries

50,000 30,000 7,500

Interest on capital

9,000 6,000 1,500

Profit

273,938 99,000 23,062

332,938 135,000 32,062 332,938 135,000 32,062

Balance b/d

332,938 135,000 0

Capital account

Simon Sheryl Daniella Simon Sheryl Daniella

Goodwill eliminated

150,000 50,000 Balance b/d

150,000 100,000 100,000

Bank 182,062 Goodwill created

100,000 50,000 50,000

Balance c/d

100,000 100,000 0 Current account

32,062

250,000 150,000 182,062 250,000 150,000 182,062

Balance b/d

100,000 100,000 0



Goodwill account

Simon Sheryl Daniella Simon Sheryl Daniella

Goodwill created

100,000 50,000 50,000 Goodwill eliminated

150,000 50,000 0

100,000 50,000 50,000 150,000 50,000 0

Further reading/activities For more detailed explanations on this topic and for further questions to practice please refer to chapter 2 of the APII textbook.


SESSION 4: INCOMPLETE RECORDS When you are preparing a set of accounts, it is likely you may not have all of the information available to you to complete a set of financial statements.

It is likely that you will have an incomplete ledger system.

If this is the case, you will have to use the best information available to you and guestimate missing items.

Approaches

There are a number of different ways that you can calculate missing information and balances.

The three main approaches are:

1 Accounting equation method 2 Working control accounts (balancing figure approach) 3 Ratios - mark ups and margins

Accounting equation (or the net assets) method

This method is often used when you need to calculate missing balances from the statement of financial position namely profit, drawings or capital.

It is based on the accounting equation:

Assets = capital + liabilities OR Assets liabilities (also known as net assets) = capital + profit drawings

Example 1

Net assets of a business are $183,540. Profit for the year is $203,000 and capital is $20,000.

What are the drawings for the year?

Capital 20,000 + profit 203,000 net assets 183,540 = drawings 39,460

Activity 1

Net assets of a business are $45,276. Capital is $40,000 and drawings are $13,254.

What is profit?

Net assets 45,276 capital 40,000 + drawings 13,254 = profit 18,530



Working control accounts (balancing figure approach)

There are four different accounts that you can use to calculate missing items. The one/ones used will be dependent on the missing item(s) you are asked to calculate.

Bank Cash Receivables Payables

With each control account, it is simply the case of drafting the T account, putting in the information you know and the balancing item will be what is asked for in the question.

Receivables/payables

The key thing to remember is the layout of each control account. You can then use it as a proforma and put in the information you know; the missing item will be the balancing figure

SLCA

Detail $ Detail $ Balance b/d X Irrecoverable debts X Sales X Bank X Discounts allowed X Sales returns X Contra X Balance c/d X

X X

PLCA Detail $ Detail $

Bank X Balance b/d X Discounts received X Purchases X Purchase returns X Contra X Balance c/d X

X X

SESSION 4 : INCOMPLETE RECORDS


Example 2

The opening balance on the sales ledger control account was $650 the closing balance was $950 and cash received from receivables was $1,700.

Using the control account method, calculate the sales for the period.

SLCA Balance b/d Credit sales bal fig

650

2,000

2,650

Bank Balance c/d

1,700

950

2,650

Example 3

The opening payables balance was $3,500 and the closing balance stood at $4,000. During the year, payments to payables were $10,000.

Using the control account method, calculate the purchases for the period.

PLCA Bank Balance c/d

10,000

4,000

14,000

Balance b/d 3,500 Credit purchases bal fig 10,500 14.000



Activity 2

During the year, sales of $25,450 where made. Opening receivables were $5,460 and closing receivables were $6,800.

What cash was received through the bank during the year?

SLCA Balance b/d Credit sales

5,460

25,450

30,910

Bank bal fig Balance c/d

24,110

6,800

30,910

Activity 3

During the year, irrecoverable debts of $600 were written off. Opening receivables were $750 and closing receivables were $950. Cash received from receivables was $8,640.

What were the credit sales during the year?

SLCA Balance b/d Credit sales bal fig

750

9,440

10,190

Irrecoverable debt write off Bank Balance c/d

600

8,640

950

10,190



Activity 4

Payables at the end of the year amounted to $4,653. During the year, credit purchases were $84,560. Payments to payables were $86,000.

What were the opening payables?

PLCA Bank Balance c/d

86,000

4,653

90,653

Balance b/d bal fig Credit purchases

6,093

84,560

90,653

Activity 5

During the year, payments to payables were $5,680. Opening and closing payables were $550 and $630 respectively. Goods of $350 were returned to the supplier.

What were credit purchases during the year?

PLCA Bank Returns Balance c/d

5,680

350

630

6,660

Balance b/d Credit purchases bal fig

550

6,110

6,660



Cash and bank

Cash control account

Detail $ Detail $ Balance b/d X Cash expenditure X Cash income X Cash banked X Balance c/d X

X X

Bank control account Detail $ Detail $

Balance b/d X Balance b/d (if O/D) X Cash from receivables X Cheque payments X Cash banked X Balance c/d (if O/D) X Balance c/d X

X X

Example 4

All sales in the period were made in cash.

During the year:

Cash banked was $35,000 Cash expenses paid were $12,500 Opening cash balance $800 Closing cash balance $400

Using the control account method, what were the sales for the year?

Cash Control Account Balance b/d Cash sales bal fig

800

47,100

47,900

Bank Expenses Balance c/d

35,000

12,500

400

47,900



Example 5

Cheque banked from receivables during the year was $153,250. Cheques paid to suppliers were $126,250 Expenses paid through the bank were $52,750 Opening bank balance was $476 Closing bank balance was $700

What cash was banked during the period?

Bank Control Account Balance b/d Cash from receivables Cash banked bal fig

476

153,250

25,974

179,700

Cash to suppliers Expenses Balance c/d

126,250

52,750

700

179,700



Ratios - mark ups and margins

These are often used when dealing with missing items in the top part of the income statement, i.e. sales, cost of sales (or elements making up that figure) and gross profit.

Mark up

Is the percentage added to the cost of a sale to calculate the selling price.

E.g. if cost of sales is $100 and the mark up on cost of sales is 50% then our selling price will be $100 + 50% = $150.

Using a basic proforma you can calculate any missing item as long as you are given your mark up percentage.

$ % Sales X 100 + mark up Cost of sales X 100 Gross profit X Mark up E.g. if sales are $125,000 and mark up is 25% what are cost of sales and gross profit?

$ % Sales 125,000 125 Cost of sales 100,000 (1) 100 Gross profit 25,000 (2) 25 (1) = $125,000/125*100 = $100,000 (2) = $125,000/125*25 = $25,000

Example 6

Mark up 40% Cost of sales $120,000

Calculate the sales and gross profit figures.

$ % Sales 168,000 140 Cost of sales 120,000 100 Gross profit 48,000 40 $120,000 x 40% = $48,000 gross profit $120,000/100 x 140 = $168,000 sales



Activity 6

Mark up 60% Gross profit $90,000 Calculate the sales and cost of sales.

$ % Sales 240,000 160 Cost of sales 150,000 100 Gross profit 90,000 60

Gross profit $90,000 x 160 / 60 = $240,000 sales Gross profit $90,000 x 100/ 60 = $150,000 COS

Margins

Shows in percentage terms the amount of profit generated from sales i.e. what percentage of the sales revenue eventually ends up as gross profit.

E.g. if sales are $150 and the margin is 50% then the gross profit would be $150 x 50% = $75

Using a basic proforma you can calculate any missing item as long as you are given your margin percentage.

$ % Sales X 100 Cost of sales X 100 margin Gross profit X Margin E.g. if cost of sales were $75,000 and there is a margin of 25% what would the sales and the gross profit be

$ % Sales 100,000 (1) 100 Cost of sales 75,000 75 Gross profit 25,000 (2) 25 (1) $75,000/75*100 = $100,000 (2) $75,000/75*25 = $25,000



Example 7

Gross profit margin 30% Sales $180,000

Calculate the cost of sales and gross profit.


$180,000 / 100 x 70 = $126,000 COS $180,000 / 100 x 30 = $54,000 GP

Activity 7

Cost of sales $250,000 Gross profit margin 50%

Calculate the sales and gross profit.


$250,000 / 50 x 100 = $500,000 Sales $250,000 / 50 x 50 = $250,000 GP



Activity 8

Mark Smith operates a business selling engineering products to local manufacturing firms. He has been trading for a few years. The business operates from a converted mill in West Yorkshire. Mark Smith does not keep a double entry bookkeeping system. You are an accounting technician at Yeadon & Jones, the accounting firm that prepares the final accounts for Mark Smith. You are working on the accounts for Mark Smith for the year ended 31 October 2009. The business is not registered for sales tax. You have the following information available to you:

Mark Smith Cash and bank summary for the year ended 31 October 2009

Cash Bank Cash Bank $ $ $ $

Bal b/d 50,000 185,000 Insurance 50,000Bank 40,000 Payroll expenses 20,100Receipts from Trade receivables 39,100

Entertaining expenses 8,000

Payables 35,000 Cleaning expenses 5,600

General office expenses 36,460

Cash 40,000

Light and heat expenses 5,450

Bal c/d 27,840 85,650 90,000 224,100 90,000 224,100



The Statement of Financial Position from last year is also available: Mark Smith: Statement of Financial Position as at 31 October 2008 $ $ $ Cost Accumulated Carrying Depreciation Value Non-current Assets Vehicles 65,000 23,400 41,600 Current assets Inventory 18,400 Trade receivables 60,300 Bank 185,000 Cash 50,000 313,700 Current liabilities Trade payables 44,000 Accruals 2,500 (46,500) Total net assets 308,800 Capital account 308,800 Other information Inventories as at 31 October 2009 are $28,600

The total owed by receivables as at 31 October 2009 is $75,600

The sales for the year are all on credit and amounted to $80,000

The total owed to trade payables as at 31 October 2009 is $58,000. All purchases are made on credit.

The accrual in last years statement of financial position was for Light and Heat

The figure for insurance in the cash and bank summary includes a payment made during June 2009 of $36,000. The $36,000 paid in June 2009 was for the 12 months to 31 May 2010.

During November 2009 a payment was made for gas for $260. This was for gas used in October 2009. Gas is charged to Light and Heat expenses.



Task 1.1

You need to find the figure for discounts allowed.

Prepare the sales ledger control account for the year ended 31 October 2009, showing clearly the figure for discounts allowed. Note: There are no other missing figures

Sales ledger control account

$ $

Bal b/d 60,300 Bank 39,100

Sales on credit 80,000 Discounts allowed 25,600

Bal c/d 75,600

140,300 140,300

Task 1.2 Prepare the purchase ledger control account for the year ended 31 October 2009, showing clearly the credit purchases of supplies

Purchase ledger control account

$ $

Bank 35,000 Bal b/d 44,000

Bal c/d 58,000 Purchases on credit 49,000

93,000 93,000



Task 1.3 The non current asset in the last years Statement of Financial Position is one vehicle owned by the business. The depreciation policy for the vehicle is straight line. The estimated useful economic life of the vehicle is 5 years and the vehicle has an estimated residual value of $6,500. There have been no changes to the cost of the non current asset during the year. (a) Calculate the depreciation charge for the year ended 31 October 2009 65,000 6,500 = 58,500 divided by 5 years =$11,700 per annum

(b) Calculate the revised accumulated depreciation as at 31 October 2009

Accumulated depreciation b/d 23,400

This years charge (1.3 a) 11,700

Total 35,100

Task 1.4 Prepare the Light and Heat account for the year ended 31 October 2009, showing clearly the expense for the year.



Light and heat

$ $

Bank 5,450 Reversal of opening accrual

2,500

Closing Accrual 260 Expense for the year 3,210

5,710 5,710

Task 1.5 (a) Calculate the adjustment necessary as at 31 October 2009 for the

Insurance paid in June 2009. Please state clearly whether this is a prepayment or an accrual.

7/12 x $36,000 = $21,000

Prepayment

(b) Calculate the adjusted insurance expenses for the year ended 31 October

2009.

Bank $50,000 Closing Prepayment $21,000 = $29,000

(NB there is no opening prepayment to reverse)



(c) Name the accounting concept which explains why you have adjusted the insurance expense.

Accruals

Task 1.6 Mark has just received an email to say that one of his customers, Adele Ltd has gone bankrupt and will not be able to pay Mark. Adele Ltd owes Mark $2000, and this figure is included in the closing receivables figure. Prepare the journal entry to account for this Note: You do not need to go back and adjust your answer for task 1.1

JOURNAL

Dr $ Cr $

Irrecoverable debt expense 2,000

Sales Ledger Control Account 2,000



Task 1.7 Complete the trial balance below for the year ended 31 October 2009, taking into account the answers to the above tasks and all other information given

Mark Smith Trial balance as at 31 October 2009

$ $

Trade receivables 75,600 2,000

Sales 80,000

Bank 85,650

Discounts allowed 25,600

Trade payables 58,000

Purchases 49,000

Depreciation charge 11,700

Vehicles accumulated depreciation 35,100

Light and heat expenses 3,210

Accrual 260

Prepayment 21,000

Insurance 29,000

Payroll expenses 20,100

Cleaning expenses 5,600

General office exp 36,460

Entertaining expenses 8,000

Vehicles cost 65,000

Inventory- opening 18,400

Inventory - closing SFP 28,600

Inventory- Closing IS 28,600

Capital 308,800

Cash 27,840

Irrecoverable debt 2,000

Total 512,760 512,760



Task 1.8 After receiving the email regarding the bankruptcy of Adele Ltd, Mark is concerned as to whether he will lose out on collecting any more money from other trade receivables. He tells you he has heard of the terms irrecoverable debts and allowance for receivables but is unsure as to what these are. Draft a memo to Mark and in your memo: (i) State the differences between irrecoverable debt and allowances for

receivables.

(ii) Explain how receivables is adjusted for both irrecoverable debt and allowances for doubtful debt.

(iii) Advise him on how each adjustment will affect reported profits.

(i) Irrecoverable debt is recognised when it is reasonably certain a credit

customer will not pay their debts, e.g. they are liquidating.

Allowances are created when there is some doubt as to whether a credit customer will pay their debts, e.g. they are in dispute with the business or their debt is quite old.

(ii) Irrecoverable debt is written off, i.e. the relevant balances are removed from receivables.

Allowances for doubtful debt are not written off. The individual balances remain in receivables and a separate allowance account is set up that reduces the overall receivables figure in the SFP.

(ii) Irrecoverable debt are expensed to the income statement and therefore reduce profits.

Respectively the increase or decrease in the allowance will either create and expense and reduce profits or will create sundry income and increase profits.

Further reading/activities For more detailed explanations on this topic and for further questions to practice please refer to chapter 3 of the APII textbook.

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