Financial Accounting Sample Paper 1

Financial Accounting

Sample Paper 1 Questions & Suggested solutions

Financial Accounting Sample Paper 1

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NOTES TO USERS ABOUT SAMPLE PAPERS

Sample papers are published by Accounting Technicians Ireland. They are intended to provide guidance to students and their teachers regarding the style and type of question, and their suggested solutions, in our examinations. They are not intended to provide an exhaustive list of all possible questions that may be asked and both students and teachers alike are reminded to consult our published syllabus (see www.AccountingTechniciansIreland.ie) for a comprehensive list of examinable topics.

There are often many possible approaches to the solution of questions in professional examinations. It should not be assumed that the approach adopted in these solutions is the only correct approach, particularly with discursive answers. Alternative answers will be marked on their own merits. This publication is copyright 2013 and may not be reproduced without permission of Accounting Technicians Ireland.

© Accounting Technicians Ireland, 2013.


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Accounting Technicians Ireland

Year 1

FINANCIAL ACCOUNTING Sample Paper 1 EXAM DURATION THREE HOURS

INSTRUCTION TO CANDIDATES PLEASE READ CAREFULLY In this examination paper the £/€ symbol may be understood and used by candidates in Northern Ireland to indicate the UK pound sterling and by candidates in the Republic of Ireland to indicate the Euro. Answer ALL THREE questions from Section A. Answer ANY TWO of the three questions from Section B. If more than TWO questions are answered in section B, then only the first two questions, in the order filed, will be corrected. Candidates should allocate their time carefully. All workings should be shown. All figures should be labelled as appropriate e.g. €s, units etc. Answers should be illustrated with examples, where appropriate.


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SECTION A Answer ALL THREE QUESTIONS (Compulsory) in this Section QUESTION 1 (compulsory) The following trial balance was extracted from the books of M. Doherty, a sole trader, on 31 December 2009: Fixtures & fittings at cost Accumulated depreciation on fixtures & fittings Motor vehicles Accumulated depreciation on motor vehicles Inventories as at 1/1/2009 Receivables and payables Bank Prepayments 31/12/09 Accruals 31/12/09 Term loan Purchases and sales Sales and purchases returns Discounts allowed and received Carriage outwards Insurance Rent Interest Wages and salaries Allowances for receivables 1/1/09 Irrecoverable debts Drawings Capital

€ 420,000 112,560 74,450 98,030 7,800 546,500 21,400 18,400 21,000 33,700 55,000 15,520 74,200 7,210 36,540 1,542,310

€ 58,800 47,900 101,200 17,800 14,200 210,000 879,000 11,650 19,640

4,900 177,220 1,542,310

The following information, which has not been accounted for above, is also available: 1. Inventory as at 31 December 2009 was valued at cost at €83,500. This figure includes inventory items that cost €12,800. Post year end these inventory items were sold for €10,650 after incurring costs to sell of €970. 2. An item of fixtures & fittings was sold during the year for €16,980. The cost of the fixtures & fittings sold was €32,450 and depreciation of €19,460 had been charged as at 1/1/2009. 3. Depreciation is to be provided for as follows: i. Fixtures & fittings 4% straight line ii. Motor vehicles 15% reducing balance The depreciation policy is to charge a full year’s depreciation in the year of acquisition and none in the year of sale. 4. A review of receivables balances as at the year end identified €11,500 of receivables that should be written off as irrecoverable. 5. The allowance for receivables is to be adjusted for 7% of the remaining receivable balances.


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You are required to prepare: i. ii.

The Statement of Profit & Loss for the year ended 31 December 2009; 12 Marks The statement of financial position as at that date. 8 Marks Total 20 Marks


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Question 2 (compulsory) a) Outline the situations were incomplete record techniques will be required to produce a set of financial statements. 3 Marks b) On 1 January 2009, P. Jones a sole trader owned a business, that had the following assets and liabilities: Motor vehicles Accumulated depreciation on motor vehicles Premises Receivables Allowances for receivables Payables Accruals Inventory Prepayments Bank overdraft Cash on hand Term loan

€ 124,125 21,030 450,000 119,250 2,100 96,000 9,750 33,400 780 11,415 110 210,000

You are required to: i. Calculate the proprietor’s capital as at 1 January 2009. 7 Marks ii.

In brief, outline your understanding of why the incomplete record technique used in part (i) will give the proprietors opening capital. 2 Marks

c) Despite being advised on the importance of maintaining proper books and records P. Jones failed to do so in the year to 31 December 2009. He is able to provide you with the following information: Opening receivables debit balance Closing receivables debit balance Closing receivables credit balance Amounts received from customers Discounts allowed to customers Irrecoverable debts written off Interest charged to receivables payment

for

slow

€ 119,250 224,320 1,560 754,100 12,450 2,970 4,110

Based upon the information provided, you are required to calculate P. Jones’s credit sales for the year to 31 December 2009. P. Jones is able to tell you that all goods are sold on credit. 8 Marks Total 20 Marks


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QUESTION 3 (compulsory) – Complete Any Four Parts

Part A W. Willow is a sole trader. His business has decreased in recent years and as a result he rents out two floors in his building that are excess to his current requirements. Details for the year ended 31 December 2013 are as follows:

Rent paid in advance

31 December 2013 €/£ ?

1 January 2013 €/£ 8,000

Rent is paid to W. Willow bi monthly in advance. Rent for the year ended 30 September 2013 was charged at €/£4,000 per month, due to economic pressure rent was reduced to €/£3,200 per month from 1 October 2013 thereafter. €/£44,000 was received from the tenant during 2013. You are required to prepare the rent T account for W. Willow for the year ended 31 December 2013. 5 Marks

Part B Outline your understanding of the concepts of mark-up and margin. 3 Marks A. Ash is a sole trader who sells one product. The selling price of the product is €/£15. A. Ash currently enjoys a margin of 15% on the product. Calculate the cost price of the product at the current margin of 15%. 2 Marks

Part C Outline your understanding of the imprest system as it relates to petty cash. 2 Marks Given the following information, calculate the cash replenishment required for the month of December 2013. Imprest cash float Sundry postage Taxi receipts Stationary Retirement gift Depreciation on motor vehicles posted to the journal Sundry cleaning costs


€/£ 475 40 41 53 100 1,120 110 3 Marks

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Part D The following information is available for L. Lawn a Not-for Profit tennis club.

Subscriptions in arrears Subscriptions in advance

31 December 2013 €/£ 10,580 6,305

1 January 2013 €/£ 12,540 7,100

During the year subscriptions of €/£95,620 were received from members. You are required to prepare the subscriptions T account for L. Lawn for the year ended 31 December 2013. 5 Marks

Part E B. Birch is a sole trader with the following information in relation his load account: Loan balance 1/1/13 Loan draw down on 1/5/13 Loan repayment 1/10/13

€ 54,500 12,000 8,000

Interest on the loan was constant throughout the year at 5%. During the year to 31 December 2013 loan interest of €2,500 was paid. There was no opening prepayment or accrual in relation to loan interest. You are required to: Prepare the interest account of B. Birch as it would appear in the nominal ledger for the year ended 31 December 2013. Show clearly your workings on the calculation of the interest charge for the year to 31 December 2013. 5 Marks

Part F Outline your understanding of the accruals concept. With the aid of a relevant example outline how the accruals concept impacts upon the preparation of a set of financial statements. 5 Marks Total 20 Marks


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SECTION B Answer TWO of the THREE Questions in Section B QUESTION 4 Mr A Mathews, a client of your firm, has provided you with the following bank statement and bank account details in respect of the month ended 31 December 2009. STATEMENT OF ACCOUNT - YOUR BANK LTD Statement date - 31 December 2009. Account No 123456 Date Particulars 01-Dec-09 Balance forward 01-Dec-09 Cheque 1233 01-Dec-09 Lodgement 03-Dec-09 Cheque 1234 05-Dec-09 Direct Debit ESB 06-Dec-09 Credit Transfer VAT Refund 07-Dec-09 Cheque 1235 10-Dec-09 Lodgement 15-Dec-09 Cheque 1236 18-Dec-09 Credit Transfer Receivables Payment 20-Dec-09 Bank Charges for qtr ended Sept 09 21-Dec-09 Cheque 1237 21-Dec-09 Cheque 1238 22-Dec-09 Lodgement 23-Dec-09 Standing Order Leasing

Debit 5,000 6,600 1,350 2,820 25,488 660 3,885 9,645 4,500

Credit

Balance 61,526 Cr 56,526 Cr 6,000 62,526 Cr 55,926 Cr 54,576 Cr 4,800 59,376 Cr 56,556 Cr 5,550 62,106 Cr 36,618 Cr 11,550 48,168 Cr 47,508 Cr 43,623 Cr 33,978 Cr 1,500 35,478 Cr 30,978 Cr

The books and records of A Mathews show the followings transactions through the bank account for the month of December 2009: Date

Receipts

2/12/09

Balance

9/12/09

Lodgement

23/12/09 Lodgement 28/12/09 Lodgement

€

Date

Payments

62,526 1/12/09 2/12/09 5,400 5/12/09 12/12/09 14/12/09 19/12/09 20/12/09 1,500 24/12/09 24/12/09 12,900 28/12/09 31/12/09

Direct debit ESB Cheque 1234 Cheque 1235 Cheque 1236 Bank charges Cheque 1237 Cheque 1238 Cheque 1239 Cheque 1240 Cheque 1242 Balance

82,326 1/1/2010 Balance

€ 1,350 6,060 2,820 14,688 660 3,885 9,645 12,921 4,233 6,291 19,773 82,326

19,773


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You are required to: a) Outline in brief why the regular preparation of bank reconciliations is important. 3 Marks b) Write up the adjustments that are necessary to correct the bank account in A Mathew’s books. 10 Marks c) Prepare the bank reconciliation statement for A Mathews as at 31 December 2009. 7 Marks Total 20 Marks


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QUESTION 5 a) When an individual decides to start a business, that business can be organised in one of three ways. Provide a definition of each of these business types. 6 Marks b) Outline your understanding of the term limited liability.

2 Marks

c) Each business type, referred to in part a, has associated advantages and disadvantages. For each of these business types provide two advantage and two disadvantages. 12 Marks Total 20 Marks


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QUESTION 6 A former colleague, B. Malone, recently started a business. While the first few months of trading have proved successful, B Malone now realises that she knows very little about financial accounting and has approached you for advice in relation to the accounting issues outlined below: a) An brief explanation of the function of the following books of prime entry and how the books of prime entry fit into the overall accounting process: I ii iii

Sales day book; The cheque payments book; The journal.

5 Marks

b) With the aid of appropriate examples, explain the difference between capital and revenue expenditure and how such expenditure is treated in the financial statements of a business. 5 Marks c) An explanation of carriage inwards and why it is added to purchases in the Statement of Profit & Loss. 3 Marks d) B. Malone has provided you with the following information in relation to VAT for the period since she began trading. She is unclear how much her VAT liability is at present. You decide to prepare the VAT account in order to calculate the VAT liability. i ii iii iv

VAT VAT VAT VAT

on on on on

sales €48,750; sales returns €1,200; purchases €26,700; purchases returns €120.


7 Marks Total 20Marks

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Financial Accounting Sample Paper 1 – Suggested Solutions


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Solution One M. Doherty Statement of Profit & Loss for the year ended 31 December 2009 €

€ 879,000 (21,400) 857,600

Sales Sales returns Net sales Cost of sales Opening inventory Purchases Purchases returns

74,450 546,500 (11,650) 609,300 (80,380)

Less closing inventory Cost of sales

(528,920) 328,680

Gross Profit

19,640

Discount received Less Expenses Carriage outwards Rent Insurance Interest Wages and salaries Discount allowed Depreciation of fixtures & fittings Depreciation of motor vehicles Irrecoverable debts Increase in the allowances for receivables Profit on sale of FA Total expenses

21,000 55,000 33,700 15,520 74,200 18,400 15,502 9,699 18,710 1,157 (3,990) (258,898) 89,422

Net Profit


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M. Doherty Statement of Financial Position as at 31 December 2009 2009 € Non-current assets Fixtures and fittings Motor Vehicles

387,550 112,560

Current assets Closing inventory Receivables Prepayments

2009 € (54,842) (57,599)

80,380 80,473 7,800

Total Assets Equity and Liabilities Capital Capital Profit for 2009 Accumulated profits

2009 € 332,708 54,961 387,669

168,653 556,322

177,220 89,422 266,642

Drawings

(36,540)

Non-current liabilities Term Loan

230,102 210,000

Current liabilities Payables Bank overdraft Accruals

101,200 820 14,200

116,220 556,322

Total Equity and Liabilities

Workings 1 € 83,500 (3,120) 80,380

Closing inventory as per question: Less write down of inventory

Write down of inventory Cost Sales value Costs to sell NRV of inventory Difference between cost and NRV

12,800 10,650 (970) 9,680 3,120


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Workings 2 € 32,450 (19,460) 12,990 16,980 3,990

Cost of F&F sold NBV Sales proceeds Profit on sale

Workings 3 € 420,000 (32,450) 387,550 15,502

Cost of F&F as at 1/1/09 Disposals Depreciation 4% SL

€ 112,560 (47,900) 64,660 9,699

Cost of MV as at 1/1/09 Accumulated depreciation Depreciation 15% RBM

Workings 4 € 7,210 11,500 18,710

Irrecoverable debts as per TB Additional ID as per notes

Workings 5 € 98,030 (11,500) 86,530 6,057 (4,900) 1,157

Receivables as per TB Irrecoverable debts as per W4 Allowances for receivables 7% Opening allowances for receivables Increase allowances for receivables


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Solution Two Part A Incomplete records techniques will be required to produce a set of financial statements when a sole trader, for whatever reason, has not maintained proper books and records. Also in some cases a sole trader will maintain proper books and records but these have been destroyed due to a fire, flood or computer virus etc. In such situations some figures are likely to be missing and incomplete record techniques will be required to arrive at the missing figures.

Part B i. 2009 € Assets Motor Vehicles Accumulated depreciation motor vehicles Premises Receivables Allowances for receivables Inventories Prepayments Cash on hand

2009 €

124,125 (21,030) 450,000 119,250 (2,100) 33,400 780 110 704,535

Liabilities Payables Accruals Bank overdraft Term loan

96,000 9,750 11,415 210,000

Proprietors capital

327,165 377,370

ii. The incomplete records technique used above relies upon the statement of financial position balancing. The statement of financial position will always balance because the debit entries will always equal the credit entries. This is the case due to the dual aspect concept. The dual aspect concept states that every transaction should have a two sided effect, one debit, one credit and these must have the same value. The dual aspect concepts ensures that at any point in time the assets of an entity equal the owner’s capital and outsider’s liabilities. In the question above all the assets of the sole trader were known and all of the liabilities with the exception of the proprietor’s capital were known. Therefore the difference between the total assets and the total liabilities must equal the proprietor’s capital.


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Part C Details

Receivables Control Account € Details

Opening Balance Interest charged Credit sales

Amounts received from 119,250 receivables 4,110 Discounts allowed 868,920 Irrecoverable debts

Closing balance

1,560 Closing balance 993,840

Opening Balance

224,320 Closing balance


€

754,100 12,450 2,970 224,320 993,840 1,560

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Solution Three Part A

2013 31/12/2013

Rent Receivable Account €/£ Income Statement 45,600 01/01/13 Balance c/d 6,400 2013

Balance b/d Bank

€/£ 8,000 44,000

Balance b/d

52,000 6,400

52,000 01/01/14

Part B Mark-up and margin are measures that businesses use to set and manage prices to maximise profitability. Mark-up is the amount added to the cost of a product or service to arrive at a price, thus the mark-up percentage is the margin divided by the cost price and expressed as a percentage. The gross margin is the difference between cost and the selling price, thus the gross margin percentage is the margin divided by the sales price and expressed as a percentage. €/£ 15 (2.25) 12.75

Sales price with 15% margin Margin at 15% Cost of product

Part C Under the imprest system a cash float is set for pretty cash – say €/£475. As cash is paid out of petty cash it is replaced with receipts for the items purchased. At all times remaining petty cash plus receipts in the petty cash tin will equal the cash float. At the end of the month funds from the bank account are transferred into petty cash to bring the balance of cash back up to the float. At this point the expenses associated with the receipts are posted to the ledgers of the business. Cash replenishment required for the month of December 2013: €/£ Imprest cash float

475

Sundry postage Taxi receipts Stationary Retirement gift Sundry cleaning costs Cash balance at month end Cash replenishment required

(40) (41) (53) (100) (110) 131 344


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Part D

01/01/13 2013 31/12/2013 01/01/14

Subscriptions Account €/£ Balance b/d (arrears) 12,540 01/01/13 Inc & Exp Account 94,455 2013 Balance c/d 6,305 31/12/2013 113,300 Balance b/d (arrears) 10,580 01/01/14

€/£ 7,100 95,620 10,580 113,300 6,305

Balance b/d (advance) Bank Balance c/d Balance b/d (advance)

Part E Loan Balance € 54,500 * 5% = = 66,500 * 5% = 58,500 * 5% Statement of Profit & Loss Charge

2013 31/12/13

Bank Balance c/d

€ 2,725 3,325 2,925

* * *

Interest Account € 2,500 31/12/13 524

4/12 5/12 3/12

= = =

€ 908 1,385 731 3,024

€ 3,024

I/S charge

3,024

3,024 1/1/14

Balance b/d

524

Part E Income is recognised in the financial statements as it is earned, not when the cash is received. Expenditure is recognised as it is incurred, not when it is paid for. When income is incurred over time (e.g. rental/interest income) or expenditures are time-based (e.g. rent payments), the income and expenditure recognised in the Statement of Profit and Loss should relate to the time period, not to the receipts and payments of cash. The accruals concept gives rise to accruals and prepayment in the accounts of businesses. A practical application of the accruals concept is outlined below where expenses are matched to the revenues that they helped to generate. For example in the calculating the gross profit figure. Gross profit is equal to sales minus cost of sales. In calculating the cost of sales figure we are interested only in the cost of the inventory sold during the accounting year. This is calculated by adding the inventory the business had at the beginning of the accounting period (opening inventory) to the net purchases of inventory made during the year, minus the inventory the business did not sell during the accounting period (closing inventory). Closing inventory is not included in the calculation of gross profit as it is still unsold at the end of the accounting period, it did not contribute to the sales revenue generated during the accounting period in question. Only the cost of inventory sold during the year is matched to the sales revenue generated during the year. Closing inventory in included as a current asset in the Statement of Financial Position.


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Solution Four Part A The regular preparation of bank reconciliations is important for the following reasons: i. ii.

Identification of errors, such errors may have been made either by the bank, the company or both; Items such as bank interest, charges, standing orders, direct debits and dishonoured cheques. These will be known by the bank but not identified by a business until it receives the bank statement and prepares the bank reconciliation.

Part B

31/12/09 6/12/09

Bank Account € Balance

18/12/09

31/12/09

Balance b/d

10/12/09

4,800

15/12/09

150

23/12/09

11,550

31/12/09

Balance c/d

19,773

Vat Refund Omitted Short Count in Lodgment CT from Receivables Omitted

€ Cheque 1234 under posted Cheque 1236 under posted Standing Order Omitted

3/12/09

36,273 20,433

540 10,800 4,500 20,433 36,273

Part C Bank Reconciliation as at 31 December 2009 € Balance per bank 30,978 Add outstanding Lodgment Less O/S Cheques 1239 1240 1242

12,900

12,921 4,233 6,291

Balance

(23,445) 20,433


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Solution Five Part A A business can be organised as a sole trader, partnership or company. A sole trader business is the simplest business type, it is a business that is owned and operated by one person. However a sole trader business may employ more than one person. In the eyes of the law the sole trader personally and the sole trader’s business are one and the same and therefore a sole trader is fully personally responsible for any losses that the business might incur. A partnership business is one that is owned and controlled by at least two people. Most partnerships have between two and twenty partners but there are examples of partnerships, for example partnerships of accountants that have up to 50 partners. The operations of a partnership business tend to be more formalised and most partnership businesses will operate under partnership agreements. These agreements set down how important areas within the business are to be run and managed. For example, the duties of each partner and the ratio in which they share profits. In the absence of such an agreement the provisions of the Partnership Act 1890 apply. A limited company is a business that is owned by its shareholders, run by its directors and enjoys limited liability. Limited companies can either be private or public. A private limited company does not sell shares to the public whereas a public limited company does. Due to the large membership of limited companies they tend to be large and in many cases have a multinational aspect. Part B Limited liability applies when a business and its owners are considered to be separate and distinct in the eyes of the law. This means that an investor in a business with limited liability can only lose the money that they have invested in the business and no more. Limited companies enjoy limited liability, in the main sole traders and partners in a partnership do not. Limited liability encourages investor to invest money in a business as it limits the down side potential to a certain level. This may be one of the reasons why limited companies tend to be larger than sole trader and partnership businesses. Part C For a sole trader business the advantage and disadvantages are as follows:

Advantages • •

The sole trader has total control over the business and enjoys all of the profits; A sole trader business is cheap and easy to set up. There are very few forms to fill out and the sole trader generally will only need to open a bank account and inform the tax authorities.

Disadvantages • • •

A sole trader has unlimited liability and therefore will be personally responsible for any debts that the business generates; Sole traders can find it difficult to raise long term finance as banks tend not to want to lend them large sums and there are no other investors in the business who can invest capital; Sole traders tend to be small in size and therefore the business will usually not grow to a sufficient size where it will enjoy economies of scale.

For a partnership business the advantage and disadvantages are as follows: Advantages • •

Spreads the risk across more people than a sole trader business. Therefore if the business was to get into financial difficulty there are more people to spread the debt between; Additional partners can bring resources, customers and skills into the business, allowing partnership businesses to grow larger than sole trader businesses.

Disadvantages • •

Profits have to be shared among the various partners; There can be disagreement over the direction of the business. Any partner within a partnership has less control over the running of the business than a sole trader.

For a limited company the advantage and disadvantages are as follows: Advantages •

Limited companies due to their size tend to find it easier than sole traders and partnerships to raise finance and as a result tend to be large. Many enjoy economies of scale as a result of this;

23

•

The shareholders in a limited company enjoy limited liability. This means that they are not personally responsible for any debts that the company may generate. If a limited company runs into financial difficulty the shareholders may lose their original investment but no more.

Disadvantages • Limited companies can be costly and complicated to set up as there is significantly more documentation to prepare than is the case for either a sole trader or partnership business; • Certain financial information must be made available to all users of financial information. That is, it must be public information. This could potentially affect the competitiveness of the company as potential sensitive information has to be released to the public and is freely available to competitors. (Other relevant advantages and disadvantages exist for each business type and marks will be awarded for all relevant answers).

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Solution Six Part A i. ii. iii.

The sales day book records credit sales. The cheque payments book is part of the cash book which records all transactions through the bank. The cheque payments book as the name suggests records payments made by cheque. The journal records all transactions that are not recorded in any other book of prime entry. Examples included non regular transactions for example the month end depreciation and accruals journals.

The primary purpose of financial accounting is to record, summarise and classify information that arises from the transactions that a business enters into. However if the ledgers were updated each time a transaction occurred, the ledgers would quickly become cluttered and errors may be made. Therefore when a transaction occurs it is entered into the books of prime entry. Entry of a transaction into the books of prime entry does not record the double entry required for that transaction. However the books of prime entry do form the source for double entries for the ledger accounts. From the ledgers the trial balance and finally the financial statements are prepared.

Part B Revenue expenditure is expenditure that is incurred for the purpose of running the business. That is, this expenditure is on items which are short term in nature, (will last for less than one year). Such items of expenditure are recorded in the Statement of Profit & Loss and therefore impact on the profitability of a business. Examples include: wages, purchases of inventory for resale and light and heat. Capital expenditure is expenditure on items that tend not to be purchased for resale but are used within the business to help generate profits. Such expenditure tends to be long term in nature, that is, the item purchased tends to last for longer than one year. Such items are recorded on the statement of financial position. Examples of such expenditure are the acquisition of non current assets and the repayment of loans.

Part C Carriage inwards is the term commonly given to the transportation costs associated with the purchase of goods. Such costs cover the cost to transport goods from the supplier’s premises to the business’s own premises.

25

In some situations the supplier will bear these costs and as such the cost is part of the purchase price charged to the business. In order situations the transport cost will not be included in the purchase price but will be quoted separately. In order to ensure that cost of sales and hence gross profit are consistently calculated in both of the above scenarios carriage inwards when separately quoted is added to the cost of purchases in the cost of sales section in the Statement of Profit & Loss.

Part D Vat Control Account VAT on purchases VAT on sales returns Balance c/d

€ 26,700 1,200

VAT on sales VAT on purchases returns

20,970 48,870 Balance b/d

B. Malone has a VAT liability of €20,970

26

€ 48,750 120

48,870 20,970

Financial Accounting Sample Paper 1

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