Unit 3 Chapter 2

  • calculating cash losses
  • calculating goods lost/theft
  • preparing final accounts from incomplete records
  • gross profit mark up / margin
  • statement of affairs and calculations
  • comments on finaicial statements prepared
  • Created by: Melonball
  • Created on: 28-05-14 11:46

Statement of affairs

Assets - liabilities = capital

Assets                                         £                                   £
shop fittings                                                                  8,000
Inventory                                                                      25,600
Trade receivables                                                          29,200
Bank balance                                                                5,000
Less liabilities  
Trade payables                        20,800
expenses owing                           200
Capital at 1st jan                                                            46,800 

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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. 

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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. 

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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 

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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

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calculating inventory

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
+purchases                          970
-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.

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Inventory theft

We need to find the supposed figure and compare that with the actual figure. We start off with opening inventory.
                                                      £                           £
Opening inventory                                                    15,000
Purchases                                                              310,000
Cost of inventory available for sale                             325,000
sales                                           500,000
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 

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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 
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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.
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