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Introductory Accounting and Finance

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Page 1 of 6

Contents Page

Page 3 ~ Section A - Trading, Profit and loss account for Mr. Stanley

Page 4 ~ Section B - Balance Sheet for Mr. Stanley

Page 5 ~ Section C

Page 6 ~ Section D

Page 7 ~ Section E

Page 8 ~ Section F

Page 9 ~ Section G

Page 10 ~ Section H

Page 11 ~ Bibliography

Trading, Profit & Loss account

for Mr. Stanley relating to trading during January 1st 2002 to December 31st 2002


Sales 125000

Less Cost of Sales

Opening Stock 10430

Add Purchases 67634


Less returns outward 48 78016

Add Carriage Inward 2120


Less Closing Stock 11250 68886


Less Expenses

Salaries 28400

Postage & Stationary 98

Rent & Rates (2900-860) 2040

Packaging 3217

Bad debt 126

Provision for Bad Debt 60

Insurance 1220

Electricity (953+263) 1216

Depreciation (3000 + 1680) 4680 41057

Carriage Outward 2850 43907


This is a balance sheet for Mr. Stanley as at 31st December 2002.


Fixed Assets

Fixtures & Fittings (15,000 + 8,400) 23,400

Less Depreciation (3,000 + 1,680) 4,680


Current Assets

Stock 11,250

Debtors 3,200

Less Prov.for bad debt 150 3,050

Bank 590

Add Prepayments 860 1,450

Cash 165


Less Current Liabilities

Creditors 6,765

Accruals 263

Working Capital 7,028 8,887


Financed By

Capital 25,000

Add Net Profit 12,027

Less Drawings 9,600


C. Give an explanation of the accounting treatment for invoices that have been unpaid and unrecorded at the date of the preparation of the final accounts.

This is known as an accrual of expenses, an accrual occurs when expenses that have occurred during an accounting period are not included in the trial balance, they are unpaid and unrecorded. When this occurs the accounting treatment in the profit and loss account would be to add the outstanding amount to the expense in question showing the full amount of expense used up in that accounting period.

In the balance sheet however an accrual is classed as a current liability. This is because the firm owes the outstanding amount and is expected to pay this debt in the short term. The outstanding amount will therefore appear under current liabilities in the Balance Sheet under the heading ACCRUALS. The reasons for making these adjustments is to ensure that the profit and loss account records the cost that has been incurred for that particular accounting period instead of simply the amount that has been paid.

An example of an accrual ~ during the accounting period of January 1st 2002 and December 31st 2002 a phone bill is incurred for the months June to September however it goes unpaid and is not incorporated into the telephone account. This means that adjustments have to be made so that it can be included in the final accounts for that accounting period.

D. Mr. Stanley had paid a proportion of the rates for the following accounting period. Explain how this impacted on the preparation of the accounts for the current accounting period.

A prepayment is when an amount is paid in advance of the accounting period in which it is actually due. It means that the company has made an overpayment, in this particular case Mr. Stanley has overpaid on his rates. When this occurs within a companies account the amount in question is deducted from the expense account on the trial balance.

The treatment for a prepayment in the profit and loss account would be to deduct the overpayment from the expense in question to show only the amount of that expense used up in the current accounting period.

With the balance sheet aspect of the accounts the overpayment becomes a current asset as the money belongs to the firm. The overpayment will therefore appear within the current assets in the balance sheet under the heading PREPAYMENTS.

An example of a prepayment ~ insurance is paid for



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