HCMC UNIVERSITY OF TECHNOLOGY

AND EDUCATION

RECORDING AND FEEDING BACK ON LEARNER ACHIEVEMENT

Course / Award BTEC HND Business Management
Unit 10 Financial Accounting_A1
Student Name Nguyen Thi Hoai Thuong_MC72152
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 INTERNATIONAL EXCHANGE EDUCATION CENTER
HO CHI MINH UNIVERSITY OF TECHNOLOGY AND EDUCATION

ASSIGNMENT 1:
½ RECORD BUSINESS TRANSACTIONS AND
PREPARE FINAL ACCOUNT FOR D&G

LECTURER: MR. SUMIT

STUDENT: NGUYEN THI HOAI THUONG
CLASS: FINANCIAL ACCOUNTING

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 Table of Contents
Introduction.........................................................................................................4

LO1: Record business transactions using Double entry book-keeping, and be

able to extract a Trial Balance............................................................................5

Task 1: Apply the double entry book-keeping system of debits and credits. Record
sales and purchases transactions in a general ledger........................................................5
I. The Accounting Cycle..................................................................................................................5

II. Prepare Journal Entries using Assignment scenario..............................................................10

III. Prepare T-account using assignment scenario....................................................................12

Task 2: Produce a trial balance applying the use of the balance off rule to complete
the ledger.............................................................................................................................18
1. Why do the company need to prepare the Trial Balance?.....................................................18

2. Preparing the Trial balance using assignment scenario.........................................................18

LO2: Prepare final accounts for sole-traders, partnerships and limited

companies in accordance with appropriate principles, conventions and
standards............................................................................................................20

Task 3: Prepare final accounts from given trial balance figures adjusting for accruals,
depreciation and prepayments..........................................................................................20
I. What are Accrual, Prepayment, and Depreciation?...............................................................20

II. The calculation of Accruals, Prepayment, and Depreciation using assignment scenario. .21

Task 4: Produce final accounts for a range of examples that include sole-traders,
partnerships or limited companies...................................................................................23
I. What is Final accounts with Adjustments?.............................................................................23

II. Preparing the Final Accounts with adjustment using assignment scenario.........................24

Conclusion.........................................................................................................29

Bibliography......................................................................................................30

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 Introduction
Besides Management Accounting for internal users in the organization to manage and operate
the company, there is Financial Accounting for external users who are not related to the
company. It helps external users understand the financial position of the company through
financial statements such as income statements, balance sheets. To help readers understand what
Financial Accounting is, the author who is the assistant accountant of D&G company is going to
talk about the processes in financial accounting, known as Accounting Cycle. Moreover, in order
for the reader to visualize the process, the author will have examples such as preparing Journal
Entries, Ledger, Trial Balance, Adjustment, and Financial Statements in this report.

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 LO1: Record business transactions using Double entry book-
keeping, and be able to extract a Trial Balance.
Task 1: Apply the double entry book-keeping system of debits and credits.
Record sales and purchases transactions in a general ledger.
I. The Accounting Cycle
1. Definition
The accounting cycle is a series of actions including identifying, analyzing, and recording the
financial transactions of a company. The steps of the cycle begins when accounting events
happen. Then, it finishes by planning the financial statements. Additional accounting records that
are used in the accounting cycle include the General ledger and Trial Balance. [ CITATION
Wil19 \l 1066 ]
2. Five steps of the Accounting Cycle
According to Dhull S.(2020), in terms of Financial Accounting, it is the process of preparing
accounts by using the Accounting Cycle. And about that, there are five simple steps in the
Accounting Cycle to prepare accounts of a company including Source Document, Journals,
Ledger, Trial Balance, and Financial Accounts.

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 Source: [ CITATION Sum201 \l 1066 ]

2.1 Source Document

As Dhull S. (2020) said, Source Document is any kinds of information, or transactions.
Moreover, book-keepers and accountants have to record and keep source documents for each
transaction. And every transaction need to contain the date, the description, and the value of this
transaction [ CITATION Acc201 \l 1066 ].
2.2 Journals
Journals, also known as Book of Prime Entry, are the first step to entry information in company
account using Debit and Credit. And, to complete the Journal, there are four steps [ CITATION
Sum201 \l 1066 ].
Step 1: Find Accounts
First of all, the accountants identify transactions from Source Document and classify which types
of accounts they belong to. In terms of Accounts, there are five types of Accounts: Assets,
Liabilities, Equity, Income/Profit, and Expense/Loss.
Assets: Everything that a company owns [ CITATION And19 \l 1066 ], which is classified into
two kinds: Current Assets and Fixed Assets (that divided into Tangible and Intangible)
[ CITATION Sum201 \l 1066 ].
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 Liabilities: They are debts that the company is obligated to pay to the creditor or other outside
persons the company lends money [ CITATION And19 \l 1066 ]. Liabilities are divided into two
categories: Current liabilities and Fixed liabilities [ CITATION Sum201 \l 1066 ]
Equity: The equity account is the amount of interest left in the company after paying all debts
and spending, which reflects the company's current value. [ CITATION And19 \l 1066 ]
Income/Profit: including money that the company earns. [ CITATION And19 \l 1066 ]
Expense/Loss: The amounts paid by the company for purchase or entry as well as payments for
its activities. [ CITATION And19 \l 1066 ]

Source: [ CITATION Sum201 \l 1066 ]

Step 2: Find Accounts increase or decrease

Then, the accountant determines whether the account increases or decreases to be able to classify
Debit or Credit.
Step 3: Convert “Increase” and “Decrease” into Debit (Dr) and Credit (Cr)
After determining the account type and the increase or decrease of the account, the accountants
will rely on the increase and decrease of the account to convert into Debit (Dr) and Credit (Cr).
Each account type has its own Debit (Dr) and Credit (Cr) identification through an increase or
decrease of that account type. The picture below shows the rules for Debit and Credit:

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 Source: [ CITATION top19 \l 1066 ]
Step 4: Comple the Journal Entry
After all the data is complete, the accountants will complete the Journal Entry of the transactions.
[ CITATION Sum201 \l 1066 ]

2.3 Ledger (T-Account)

T-Account is a graphic representation of a ledger in the form of a "T", which records the
accounting transactions of the company. It includes:
 The account type name is in the top row of the T
 Debit side on the left
 Credit side on the right
[ CITATION Dan19 \l 1066 ]

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 Source: [ CITATION Dou19 \l 1066 ]
Also, the total balance of Debit and Credit amounts recorded in a ledger must match.
[ CITATION Dan19 \l 1066 ]
2.4 Trial Balance
The combination of all ledger balances into the equal number of debit and credit accounts in an
accounting worksheet is called Trial Balance. It is periodically planned, usually at the end of
each reporting period, with the aim of ensuring the mathematical accuracy of the company's
bookkeeping system. [ CITATION Wil20 \l 1066 ]
2.5 Final Accounts
After having the Trial Balance, the final accounts are prepared to identify the result of operating
and the situation of a company's financial position. They include the Profit & Loss Account and
Balance Sheet. [ CITATION MSh19 \l 1066 ]

2.5.1 The Profit & Loss Account

Profit and Loss Account (or Income Statement) is prepared with the purpose of providing the
company's net profit/ loss in a particular period of time [ CITATION Ken19 \l 1066 ]. Besides,
according to Dhull S.(2020), it is calculated by following this format:

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 Sales
−CoGS
Gross Profit ( Loss )
−Nonmanufacturing costs
Net Profit before (Operating profit )
−Interest
−Tax
−Dividend (Preference Shareholders)
Net Profit after ( Net income )
−Dividend (CommonShareholders)
Retained Earnings
In which:
Cost of Goods Sold ( CoGS )=Opening stock+ Purchase−Closing stock
Non-manufacturing costs consist of some expenses such as: Marketing, Advertising,
Administration, Distribution, etc. [ CITATION Sum203 \l 1066 ]

2.5.2 Balance Sheet

A balance sheet shows the company's assets, liabilities and shareholders' equity in a specific
period of time. Besides, it provides an overview of everything that the company owns and owes.
Moreover, Balance Sheet also has a formula as follow [ CITATION Ada19 \l 1066 ]:

Source:Investopedia [ CITATION Ada19 \l 1066 ]

II. Prepare Journal Entries using Assignment scenario.

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 As an assistant accountant with the responsibility of helping the accounts department verify
some source documents, which occurred and listed in the assignment scenario [ CITATION
Sum202 \l 1066 ], the author prepared a Journal for the transactions of D&G company during the
year as follow:
Journal Entries
No. Description of Business transactions Debit (£) Credit (£)
1. Raw material A/c Dr 5,000
Mr. X A/c Cr 5,000
Purchased raw material from Mr. X on credit
2. Account receivable A/c Dr 2,000
Sales A/c Cr 2,000
Received income on account by selling product/material
3. Cash A/c Dr 5,000
Bank loan A/c Cr 5,000
Borrow money from bank
4. Cash A/c Dr 2,000
Share Capital A/c Cr 2,000
Issued share to investor
5. Bad debts A/c Dr 10,000
Cash A/c Dr 10,000
Account receivable A/c Cr 20,000
50% of £20,000 received by cash, 50% did not receive
6. Income tax A/c Dr 500
Cash A/c Cr 500
Paid income tax to Goverment
7. Salary A/c Dr 3,000
Cash A/c Cr 3,000
Paid salary to employees
8. Insurance expense A/c Dr 1,000
Cash A/c Cr 1,000
Paid Insurance expense

No. Description of Business transactions Debit (£) Credit (£)

9. Plant & Machine A/c Dr 1,500
Cash A/c Cr 1,500
Purchased new plant and machinery
10. Cash A/c Dr 200
Sales A/c Cr 200
Received income by selling machinery
11. Dividend A/c Dr 200
Cash A/c Cr 200
Paid dividend to shareholder
12. Depreciation A/c Dr 1,000
Equipment A/c Cr 1,000
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 10% Depreciation of equipment
13. Interest on bank loan A/c Dr 2,000
Cash A/c Cr 2,000
Paid interest to bank
14. Gas bill A/c Dr 280
Cash A/c Cr 280
Paid gas bill
15. Cash A/c Dr 300
Dividend income A/c Cr 300
Received dividend from Company B
16. Cash A/c Dr 900
Account receivable A/c Dr 2,100
Sales A/c Cr 3,000
Received income 70% on credit and 30% cash from product
17. Bank loan A/c Dr 5,000
Cash A/c Cr 5,000
Returned borrowed money to bank
18. Loss on sales A/c Dr 300
Machine A/c Cr 300
Sold machine and got loss

III. Prepare T-account using assignment scenario

Raw Material account

① Mr. X 5,000

5,000

In transaction 1, D&G company bought the raw material of £5,000 from Mr. X, so Raw material
increased. From that, it was recorded in the Debit side of Raw Material account.
Mr. X account

① Raw material 5,000

5,000

Because the company has not yet paid for the purchase of raw materials for Mr. X in the transaction
1, liabilities increased. Therefore, there are £ 5,000 on the Credit side of Mr. X account.
Account Receivable account

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 ② Sales 2,000 ⑤ Bad Debts 10,000

⑯ Sales 2,100 ⑤ Cash 10,000

4,100 20,000

15,900

On the Debit side of the Account receivable account, there are £2,000 and £2,100 from selling
product/material to the customer on credit in transactions 2 and 16. In particular, in transaction
16, revenue postpaid accounts for 70%. Therefore, add them together, there are £4,100 on the
Debit side. On the other hand, as indicated by the transaction 5, there is £20,000 on the Credit
side, while 50% of organizations received cash, the rest were not received due to Bad debts.
Take £20,000 minus £4,100 and the remaining is £15,900 Credit of Account receivable account.

Sales account

② Account receivable
2,000

⑩ Cash 200

⑯ Cash 900

⑯ Account receivable
2,100

5,200

Thanks to selling product/material and machinery to customers, the sales of the organization
increased £2,000 in transaction 2, £200 in transaction 10, and £3,000 in transaction 16.
Therefore, there is 5,200 on the Credit side of the Sales account.
Bank Loan account

⑰ Cash 5,000 ③ Cash

5,000

0
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 As indicated by the transaction 3, the organization recorded £5,000 borrowed from the bank in
the Credit side of Bank Loan account because the liabilities increased. However, in transaction
17, the company returned £5,000 to the bank, and it was recorded on the Debit side. Therefore,
the company is not owing to the bank now.
Share Capital account

④ Cash
2,000

2,000

In transaction 4, D&G company issued shares to shareholders with £2,000. Shareholders' equity
increased, so £2,000 was recorded on the Credit side of the Share Capital account.
Bad Debts account

⑤ Account receivable 10,000

10,000

In Bad Debts account, there is £10,000 presented in the transaction 5. It is the amount that D&G
company did not receive because of bad debts. Therefore, it was on the Debit side.

Cash account

③ Bank loan 5,000 ⑥ Income tax

500

④ Share capital 2,000 ⑦ Salary

3,000

⑤ Account receivable 10,000 ⑧ Insurance

1,000

⑩ Sales of machine 200 ⑨ New Plant and Machine

1,500

⑮ Dividend income 300 ⑪ Dividend 200

⑯ Sales 900 ⑬ Interest Bank loan

2,000

⑭ Gas bill 280

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 ⑰ Bank loan
5,000

18,400 13,480

4,920

In Cash account, with transaction 3, the £5,000 borrowed money from the bank was recorded on
the Credit side because the cash increased. Then, this bank loan was paid by cash in transaction
17, which was recorded on the Credit side because cash decreased. Besides, according to the
figure in transaction 4, after issuing the shares, the company's cash increased by £2,000 and was
credited to Debit. Also, on the Debit side, there are £10,000 which the company received in the
transaction 5, £200 from the sales of machinery in transaction 10, the £300 dividend received
from Company B in transaction 15, and 30% of £3,000 (= £900) from selling the product to the
customer in transaction 16. On the contrast, on the Credit side was recorded some items such as
payment for income tax the amount of £500 in transaction 6, paid £500 salary to employees in
transaction 7, paid insurance expense by £1,000 cash in transaction 8, bought £1,500 for new
plant and machinery in transaction 9, paid £200 to dividend for shareholders in transaction 11,
paid £2,000 interest to the bank in transaction 13, and £280 gas bill in transaction 14. Total Debit
is £18,400 and Credit is £13,480. Therefore, the company has £4,920 Debit remaining in the
Cash account.

Income Tax account

⑥ Cash 500
500

In transaction 6, the company paid £500 of Income tax to the government which is a kind of
expense. Therefore, when the income tax increases, it is recorded on the Debit side of its
account.
Salary account
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 ⑦ Cash 3,000

3,000

In the Salary account which took figure in transaction 7, there is £3,000 that the organization
paid to employees for their salary, which was recoreded on the Debit side because it is an
expense.
Insurance Expense account

⑧ Cash 1,000
1,000

In Insurance Expense account, the Debit side shows the amout of £1,000 that the company paid
for insurance comes from transaction 8.
New Plant and Machine account

⑨ Cash 1,500
1,500

From transaction 9, new plants and machines were bought by £1,500 cash, so the company’s
asset increased. Therefore, they were recorded on the Debit side.
Dividend account

⑪ Cash 200 ⑮ Cash 300

100

As indicated by the transaction 11, the £200 dividend was paid to the shareholders by D&G
company, which belongs to expense, From that, it is on the Debit side. On the other hand, the
company received dividend from company B in transaction 15, which is a type of income, so it
was recorded on the Credit. Therefore, there is £100 Credit left in the Dividend account.

Depreciation account

⑫ Equipment 1,000
1,000

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 In transaction 12, the Depreciation on Equipment accounted for 10% of £10,000 (= £1,000)
that is an expense the company loses over time using the device. Because Depreciation is an
expense, it is written on Debit.
Equipment account

⑫ Depreciation
1,000 1,000

Because of Depreciation in transaction 12, the value of equipment decrease over time, the
number of assets decreased, so it was recorded £1,000 on the Credit side.

Interest Bank Loan account

⑬ Cash 2,000
2,000

In Interest Bank Loan account, there is £2,000 from transaction 13, which D&G company
paid 10% interest of £20,000 borrowed money from the bank. Liabilities decreased, so it was
recorded on the Debit side.

Gas bill account

⑭ Cash 280

280

From transaction 14, Gas Bill account has £280 on the Debit side. That was the amount the
company paid to gas expense.

Machine account

⑱ Loss on sales machine 300

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 300

On the Credit side of Machine account, there is £300 which comes from transaction 18. The
company sold machine, so the number of machine decreased. Therefore, £300 was on the Credit.
Loss on sales Machine account

⑱ Machine 300
300

In Loss on Sales Machine account, there is £300 that D&G company lost while selling machine.
Because of a loss, it was recorded on the Debit side.

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 Task 2: Produce a trial balance applying the use of the balance off rule to
complete the ledger.
1. Why do the company need to prepare the Trial Balance?
Preparing a Trial Balance is the fourth step in the Accounting cycle after finishing the Ledger (T-
account). It is a worksheet including the Debit and Credit column for accounts in a specific
period of time like assets, expenses, liabilities, and revenue, which makes sure an organization's
bookkeeping, especially D&G company, is correct mathematically. Moreover, Debits and
Credits must be equal in Trial Balance. [ CITATION Wil201 \l 1066 ]
2. Preparing the Trial balance using assignment scenario
Based on the calculated data of the T-account accounts above, the accountant of the D&G
company prepared the Trial Balance as follows:
D&G Ltd.
Trial Balance
Particulars Debit (£) Credit (£)
Raw material 5,000
Mr. X account 5,000
Account receivable 15,900
Sales 5,200
Cash 4,920
Bank loan - -
Share capital 2,000
Bad debts 10,000
Income tax 500
Salary 3,000
Insurance 1,000
New Plant and Machinery 1,500
Dividend 100
Depreciation 1,000
Equipment 1,000
Interest bank loan 2,000
Gas bill 280
Machine 300
Loss on Sales machine 300
Total 29,500 29,500

Explanation:
It can be seen that Debit has Raw material, Cash, Bad Debts, Income tax, Salary, Insurance,
New Plant and Machinery, Depreciation, Interest Bank loan, Gas bill, and Loss on sales
Machine with the total of £29,500. The Credit column includes Mr. X account, Account
receivable, Sales, Share Capital, Dividend, Equipment, and Machine with the total is
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£29,500. Therefore, the Debits and Credits are equal in the Trial Balance.
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 LO2: Prepare final accounts for sole-traders, partnerships and
limited companies in accordance with appropriate principles,
conventions and standards.
Task 3: Prepare final accounts from given trial balance figures adjusting for
accruals, depreciation and prepayments.
I. What are Accrual, Prepayment, and Depreciation?
1. Accrual
Accruals are expenses incurred that affect the company's net income on the income statement
despite not yet having changed the cash which is related to the transaction. Also, they impact the
balance sheet because they involve non-cash and liabilities [ CITATION Ali19 \l 1066 ].
2. Prepayment
Prepayment is an accounting term for handling debts or installments before maturity.
Prepayments include such as bill payments, operational or non-operating expenses to settle an
account before it becomes due, which are taken by an individual, an agency or an organization
[ CITATION Car19 \l 1066 ]
3. Depreciation
Depreciation is a method in accounting to allocate the cost of a tangible or physical asset over its
life expectancy. It shows the value of the asset has been used up. Moreover, depreciation of
assets assist companies to earn revenue from the asset by expensing its cost each year in use.
And, the companies have to calculate this account because it can impact profits. [ CITATION
Ali201 \l 1066 ]

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 II. The calculation of Accruals, Prepayment, and Depreciation using
assignment scenario
1. Accrual
According to the assignmnet scenario [ CITATION Sum202 \l 1066 ], the accountant is going to
calculate the accrual of electricity as follows:

Electricity Paid (Quarter to 31 August 2015) £309

Electricity Paid (Quarter to 30 November 2015) 320
Electricity Paid (Quarter to 28 February 2016) 340
Electricity Paid (Quarter to 31 May 2016) 321
Closing Balance 107
Opening Balance (80)
Accrual of electricity £1,317

Explanation:
As required in the scenario, to calculate the accrual of electricity for the year ended 30 June
2016, we find a total of four quarters. In particular, the whole year payable is £1,290 (= £309+
£320+ £340 + £321), that is, the company will pay £107 each month (= 1,290 / 12). However,
the next due that the company has to pay is on 31 August while the year ends on 30 June. Owing
to that reason, the accountant just use one month to calculate which is from 1 June to 30 July.
That is the closing balance, so we add this number. Then, we subtract the opening balance (=
£80). Therefore, the accrual is £1,317.
2. Prepayment
In Prepayment part, the accountant finds the prepayment of insurance expense. Here is the
amount of insurance prepayment:

Insurance Paid (to December) £1,000

Less: Prepayment (450)
Prepayment of Insurance £550
Explanation:

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 As mentioned in the scenario, £450 is the amount that the company will pay in this year, and it
will be recorded on Debit side in the Profit/Loss account. Therfore, £550 left is for the payment
next year, and it will be treated as Current assets in Balance Sheet.

3. Depreciation

Total Depreciation of machine = Cost of machine – Salvage Value

= £45,000 – £5,000 = £40,000
3 , 000
Year 1: Depreciation = £ 40 ,000 × =£ 15 , 000
8 , 000
1 , 500
Year 2: Depreciation = £ 40 ,000 × =£ 7 , 500
8 , 000
2 , 500
Year 3: Depreciation = £ 40 ,000 × =£ 12 , 500
8 , 000
1 , 000
Year 4: Depreciation = £ 40 ,000 × =£ 5 , 000
8 , 000
Net book value:
Year Book Value Depreciation
1 £30,000 £15,000
2 £22,500 £7,500
3 £10,000 £12,500
4 £5,000 £5,000
Explanation:
According to the information in the scenario, the cost of machine is £45,000 with the useful life
is 8,000 hours, and the salvage value is £5,000. Therefore, based on the fomula below to
calculate the depreciable cost of each year respectively £15,000, £7,500 , £12,500 , and £5,000:

Source: [ CITATION Edu19 \l 1066 ]

With the Net Book Value, which is “the amount at which an organization records an asset in its
accounting records” [ CITATION Ste20 \l 1066 ], and it is found by the fomula:
Net book value=Original cost− Accumulated depreciation
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 [ CITATION Dou191 \l 1066 ]

Task 4: Produce final accounts for a range of examples that include sole-
traders, partnerships or limited companies.
I. What is Final accounts with Adjustments?
Adjustments are some transactions or items occurred after preparing Trial Balance. Adjustments
must be adjusted while preparing Final Accounts because they can affect net profit or financial
position of the organization [ CITATION Kul19 \l 1066 ]
According to Dhull S. (2020), there are some transactions need to be adjusted in Final Accounts:
[Link]. Transactions Effect on Final Accounts Treatment in Final Accounts
Dr Closing stock A/c Balance Sheet (current assets)
1 Closing Stock
Cr Profit/Loss account A/c Profit/Loss account (minus in CoGs)
Outstanding Dr Expense A/c Balance Sheet (current liabilities)
2 Cr Outstanding expense A/c Profit/Loss account (as an expense)
expense
Dr Prepaid expense A/c Balance Sheet (current assets)
3 Prepaid expense Profit/Loss account ( minus from
Cr Expense A/c
expense)
Dr Accured income A/c Balance Sheet (current assets)
4 Accured income
Cr Income A/c Profit/Loss acc. (revenue ⇧ or cost⇩)
Dr Income A/c Balance Sheet (current liabilities)
5 Income received
Cr Income received A/c Profit/Loss account (minus from sales)
Dr Depreciation A/c Balance Sheet (minus from assets)
6 Depreciation
Cr Asset A/c Profit/Loss account (as an expense)
Balance Sheet (minus from account
Dr Bad Debts A/c
7 Bad Debts receivable)
Cr Account receivable A/c Profit/Loss account (as an expense)
Balance Sheet (minus from account
Dr Profit/Loss A/c
Provision for receivable)
8
doubtful Debts Cr Provision for doubtful Profit/Loss account (treated as an
Debts A/c expense)
Balance Sheet (minus from account
Dr Profit/Loss A/c
Provision discount receivable)
9
on Debtors Cr Provision for discount onProfit/Loss account (treated as an
Debtors A/c expense)

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 II. Preparing the Final Accounts with adjustment using assignment
scenario
1. The treatment of all Adjustment
Transaction 1: Stock was counted and valued at 30 June 2016 at £6,000

Closing stock

Income Statement: The fomula is used to calculate the net Balance Sheet:
profit/loss is: Closing stock belongs
Sales to Current Assets in
−CoGS
the Balance Sheet.
Gross Profit ( Loss )
−Nonmanufacturing costs
Net Profit before (Operating profit )
−Interest
−Tax
−Dividend( Preference Shareholders)
Net Profit after ( Net income )
−Dividend( CommonShareholders)
Retained Earnings
But:
CoGs = Opening stock+ Purchase+ Carrier inward – Closing stock
= £5,000 + £154,000 + £5,000 – £6,000
= £158,000

Transaction 2: Insurance includes £1,000 of cover that relates to the year to 30 June 2017

Income Statement: This insurance will

be subtracted from the Insurance.
Insurance = £6,700 – £1,000 = £5,700

Prepaid Insurance

Balance Sheet: This insurance will be a

part of Current Assets.

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 Transaction 3: Bad debts of £1,000, included in debtors in the trial balance is to be written off.

Income Statement: It is treated as an

expense. Therefore,
Total Bad Debts = £1,200 + £1,000
Bad Debts
= £2,200

Balance Sheet: It affects Account

Receivable

Transaction 4: Wages owing at the 30 June 2016 amounted to £5,000

Income Statement: It is an expense, and will

be added with Wages & Salaries, which is
from Trial Balance.
Total Wages & Salaries = £90,000 + £5,000
= £95,000
Outstanding Wages

Balance Sheet: Because of not being paid,

outstanding wages will be in Current
Liabilities.

Transaction 5: Provision for bad debts is to be maintained at a level of 3 per cent of

debtors after all bad debts are written off.

Provision for Bad Debts

Income Statement: It is treated as an expense. Balance Sheet: It belongs to Account

Provision for Bad Debts = (25,000 - 1,000) ×3% Receivable, which equals:
= £720 Account receivable = (25,00 – 1,000) –720
Bad Debts in Income Statement = 720 – 300 =£420 = £23,280
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(Because there is £300 Bad Debts credited in Trial
Downloaded from
Balance, [Link]
that means £300 already cover bad debts)
 Transaction 6: It is the policy of the company to depreciate furniture and equipment at 10
per cent annual straight line method and motor vehicles at 20 per cent annual straight line
method. There is no depreciation on premises

Income Statement: Depreciation is one of Expenses. The company

use straight line to calculate depreciation, so:
Depreciation = Furniture’s depreciation + Vehicles’ Depreciation
= (60,500 × 10%) + (40,000 × 20%) = £14,050

Depreciation

Balance Sheet: It will be subtracted from the Motor vehicles, and

Furniture & Equipment.
Motor vehicles = 40,000 – 3,200 – 8,000 = £28,800
Furniture & Equipment = 60,500 – 4,000 – 6,050 = £50,450
(In which, £3,200 and £4,000 are respectively the Depreciation of
Vehicles and Furniture & Equipment in Trial Balance)

Transaction 7: Interest on the loan is charged at £6,000 for the year. This had not been
paid by 30 June 2016.
Income Statement: Interest is an expense because it
makes profit reduce, which is £6,000.

Outstanding Interest

Balance Sheet: It is a kind of Current Liabilities

because it is not yet paid.

Transaction 8: Discount received £1000

Income Statement: It creases £1,000 for the sales of

the D&G company

Discount received
Balance Sheet: Because this discount impacts on the
27 Sales, it also has effect on the net profit. Therefore,
Downloaded from [Link] it increases the Equity.
 2. Preparing the Income Statement and Balance Sheet using all Adjustments
D&G Ltd.
Income Statement
For the year to 30 June 2016

Revenue £ 350,000
Discount received 1,000
Total revenues 351,000
Cost of Goods sold (158,000)
Gross Profit 193,000
Non-manufacturing costs
Bad debts £ 2,200
Marketing & Sell expenses 10,420
Office expense 5,600
Insurance 5,700
Discount allowed 900
Wages & Salaries 95,000
Motor expenses 5,600
Light & heat 4,678
Provision for bad debts 420
Total depriciation 14,050
Rates 4,600
Total Non-manufacturing costs (149,168)
Operating profit 43,832
Less:
Interest (6,000)
Net Profit after £ 37,832

28
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 D&G Ltd.
Balance Sheet
For the year to 30 June 2016
ASSETS
Current assets
Cash £ 4,200
Inventory 6,000
Prepaid Insurance 1,000
Account receivable 23,280
Total Current Assets 34,480
Non-current assets
Premises £154,000
Furniture & Equipment 50,450
Verhicles 28,800
Total Non-current Assets 233,250

Total assets 267,730

LIABILITIES & EQUITIES

LIABILITIES
Current Liabilities
£ 30,000
Account Payable
5,000
Outstanding wages
6,000
Outstanding interest
Total Current Liabilities 41,000

Non-current Liabilities
Bank Loan 120,000
Total Liabilities 161,000
EQUITIES
Share capital £ 91,398
Net profit 37,832
Drawing (22,500)
106,730
29
267,730
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 Total Equities
Total Liabilities & Equities

Conclusion

In conclusion, through this report, readers can understand the

Accounting Cycle, the processes to get financial statements. In addition,
readers can understand how to make Journal Entries, T-accounts, Trial
Balance, as well as how to calculate Adjustments that occur after Trial
Balance, and finally how to prepare financial statements.

30
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