5. Final Accounts Preparation

Question 1

How do we progress from the trial balance to the P&L and BS?

Answer 1

1. Class all income and expense accounts in one place to calculate profit/loss.
2. Preparation of the balance sheet; not part of the double entry system as it is not an account. It is derived from double entry system; summary of balances carried down the T accounts, representing assets and liabilities.

Question 2

In what order are current assets listed on the balance sheet?

Answer 2

Least liquid items first (e.g. stock) top, most liquid (e.g. cash) bottom

Question 3

Where do we charge revenue expenditure to?

Answer 3

P&L account

Question 4

What constitutes revenue expensditure?

Answer 4

-acquisition of assets for conversion to cash (e.g. goods for resale)
-manufacturing, selling and distribution of goods and the day-to-day administration of business
-maintenance of revenue earning capacity of fixed assets (e.g. repairs)

Question 5

What is the accruals basis?

Answer 5

A method of recording accounting transactions for revenue when earned and expenses when incurred

Question 6

What does the accruals basis mean for revenue expenditure?

Answer 6

The amount incurred for the period (irrespective of whether cash has been paid or not) is charged against profits for the year.

Question 7

What does the accruals basis mean for sales

Answer 7

All sales made during periods under review will be included in the trading account even though the cash may not have been received.

Question 8

Where is capital expenditure held?

Answer 8

It is held in the balance sheet e.g. purchase of a motor car

Question 9

What expenditure constitutes capital expenditure?

Answer 9

-the initial setting up of the business
-acquisition of fixed assets required for use in the business and not resale
-alteration/improvement of assets for the purpose of increasing revenue earning capacity