Chapter 5-Final Accounts Prep

Question 1

What is the first step in our final accounts prep?

Answer 1

• transferring all of the balances on the income and expense ledger accounts to a new ledger account called the profit and loss account

Question 2

How do we account for closing stock on our prep of the P&L?

Answer 2

• debited as an asset in the stock account
• credited as a decrease in expenses in the P&L

Question 3

What follows the construction of the P&L?

Answer 3

• construction of the b/s
• not an account, not part of the double entry system
• summary of balances carried down on the T accounts representing assets and liabilities

Question 4

When is revenue expenditure incurred and where is it recorded?

Answer 4

Incurred in
- the acquisition of assets required for conversion into cash (i.e goods for resale)
- manufacturing, selling and distribution of goods and the day to day admin of the business
- maintenance of the revenue earning capacity of the fixed assets (i.e repairs)

Question 5

When is capital expenditure incurred and where is it recorded?

Answer 5

• held in the b/s
  Incurred in
• the initial setting up of the business s
• the acquisition of fixed assets required for use in the business and not for resale
• the alteration of improvement of assets for the purpose of increasing their revenue earning capacity

Question 6

Why is capital expenditure not charged to the P& L when it is acquired?

Answer 6

• benefit of the asset is spread over a considerable period of time
• instead the cost will be charged over the periods in which the assets will be used via depreciation

Question 7

What is the gross profit margin?

Answer 7

Gross profit/Sales X 100

• expressed as a %

Question 8

What is the markup

Answer 8

Gross profit/COS X 100

• expressed as %

Question 9

Why are gross profit margin and markup calculations useful?

Answer 9

• comparison across industry sectors or within an instant can give user some helpful information as to whether business is successful

Question 10

In practice why do HMRC check the profit declared by businesses which do not keep full records?

Answer 10

• businesses operating in the same sector will have roughly the same gross profit margin and this can be used to establish the consistency of declared profits with other factors

Question 11

What are trade discounts?

Answer 11

• offered to special customer or for bulk buying and they are reflected on the reduced selling price at the point the sale is made

Question 12

What are settlement discounts?

Answer 12

• offered to credit customers to encourage them to pay promptly

Question 13

Describe discounts allowed and how they are recorded?

Answer 13

• discounts allowed are offered to customers
• if customer pays promptly discounts allowed recorded as an expense (debit) on the P&L

Question 14

Describe discounts received and how they are recorded?

Answer 14

• suppliers offering discounts to businesses who pay promptly
• if you buy goods on credit and pay promptly discounts received recorded as an income (credit) in the P&L

Question 15

Summarise the accounts prepared process

Answer 15

• at the end of the year we balance off the ledger accounts
• thereafter we extract the a trial balance
• we close all of the income and expense ledger accounts to a profit and loss account ledger
• balance sheet is essentially a list of all the remaining balances on the ledger accounts