Statement of affairs
Assets - liabilities = capital
Assets £ £
shop fittings 8,000
Trade receivables 29,200
Bank balance 5,000
Trade payables 20,800
expenses owing 200
Capital at 1st jan 46,800
Statement of affairs
From this we can work out capital at the start of the year and capital at the end of the year. From these two figures we can find out the difference to be retained earnings.
if: capital at the start of the year = 46,800
and capital at the end of the year= 49,000
retained profit for year after drawings 2,200
from this, if we knew the drawings figure for example £12,500, we can add drawings to retaines profit to calculate profit for the year,
£2200+£12,500= £14,700 profit for the year.
If the capital at the end of the year is lower than capital at the start; this means the business has made a loss.
Cash book summary
This helps us to find out the cash and bank balances at the end of the year.
Be careful to notice is the balance b/f is positive or not. If the balance is overdrawn this would place it on the credit side.
If a credit balance is brought forward, it is an overdraft.
cash and bank columns can be used for questions if they are needed.
purchases and sales
Purchase ledger control accounts and sales ledger control accounts are needed. We can calculate from the PLCA trade payables if we need to or more commonly the purchases figure. In the SLCA we can calculate trade receivables or more commonly sales.
Remember the control accounts only consider credit transactions , if a total sales figure needs to be calculated for example, we would take the calculated sales figure from the SLCA and add cash sales with it to get a total sales figure. The same goes for purchases.
Other than adding trade receivables.payables int he control accounts , remember to add any other bits of information like; bad debts/recovered, cash discounts etc
The control accounts will be needed to be used before filling in figures in the final accounts.
For the top of the income statement remember: The cost of sales calculation can be used to help fill in any missing figures, opening + purchases- closing inventory = COS
it can be re arranged for example: closing inventory =opening +purchases - COS
expenses, mark up and margin
To calculate any missing expense figures we need to construct an expense account.
This T account will consist of expenses we already know about and the missing figures will be calculated.
Mark up: % £
Cost of sales 100 1000
mark up 30 300
Sales 130 1300
Margin: % £
sales 100 1000
margin 20 200
Cost of sales 80 800
If a question asks for the closing inventory at the end of the year but they only kniow what the inventory value was say 5 days later....
Valued at £22,350 at 5th january, need to know what it was at 31 december.
We need to consider all transactions that have happened during that period and work backwards. If given also in the info that mark up is 40% then we know anything valued at cost must have 40% added to it and vice versa. We need to value inventory at COST not sales.
Inventory valued at 31 dec = £?
- sales at cost 1200
+sales returns 125
-purchase returns 55
-drawings at cost 30
-goods stolen at cost 110
---------- We need to do the opposite signs and work from the
= Inventory valued at 5th Jan 22,350 bottom, up.
We need to find the supposed figure and compare that with the actual figure. We start off with opening inventory.
Opening inventory 15,000
Cost of inventory available for sale 325,000
Less the gross profit margin (40%) 200,000
Cost of sales 300,000
Estimated closing inventory 25,000
Less actual closing inventory 22,000
Value of lost inventory 3,000
Inventory losses prevention and cash losses
- Keeping record of all inventory receipts and issued documents
- Keeping records for the disposal of damaged inventory
- Carrying out inventory counts and stock checks regularly
- security cameras placed to see if it is being stolen
- Security cameras
- bank cash regularly
- restrict access to the safe
- collect cash from tills regularly
- check references for new emolyees
- put excess cash in the safe
Drawbacks of incomplete records
- Cost- time consuming means the accountants costs go up as they need to spend time with the accounts
- Details aren't readily available - because of the lack of up to date management, details of how much trade receivables owe for example aren't going to be available when we need them.
- Statements of accounts may not be accurate
- Dangers of loss/theft - may be hard to verify if records are not up to date.
- lack of accuracy- missing figures need to be calculated, if other items should have been in the calculation but not clearly stated then the accounts will not be accurate
- Reliability of calculated figures will be questioned.
- Items can be easily missed from the final accounts.