Semester 1 Week 1 PP (Basics)

Question 1

What is Income?

Answer 1

Economic benefits (usually cash) flowing into the business.

Question 2

What are Expenses?

Answer 2

Economic benefits (usually cash) flowing out of the business.

Question 3

What are Assets?

Answer 3

Something controlled by the business as a result of which benefits are expected to flow into the business.

Question 4

What are Liabilities?

Answer 4

Obligations to pay economic benefits to others as a result of past events.

Question 5

What is Equity?

Answer 5

The amount of money invested into the business by its owner(s) plus any profits re-invested back in.

Question 6

What does the Profit and Loss Statement show?

Answer 6

Shows the profit or loss the business earned over a period of time, it finds this figure by doing the income less the expenses.

Question 7

What does the Balance Sheet show?

Answer 7

The balance sheet shows a “snap-shot” of the company’s financial position on a certain date. It does this by showing the total assets and total equity and liabilities of the company at that date.

Question 8

What is the accounting equation?

Answer 8

Capital = assets - liabilities
or
Assets = capital + liabilities

Question 9

What side should these be on, Debit or Credit (Dr/Cr)?
Assets, Expenses, Liabilities, Capital and Increases.

Answer 9

Dr Assets
Dr Expenses
Cr Liabilities
Cr Capital

Dr Increase/Decrease
Cr Decrease/Increase
Therefore increases in debits (assets and expenses) are debits
Decreases in debits (assets and expenses) are credits

The other way round for credits
Increases in credits (liabilities and capital) are credits
Decreases in credits (liabilities and capital) are debits

Question 10

What is Double Entry?

Answer 10

Bookkeeping. Double entry means that every transaction has to have two sides. Debit entries must have equal and opposite credit entries and vice versa.

Question 11

A business takes out a cash loan of £1,000. What is the journal entry(s)?

Answer 11

Dr Bank £1,000
Cr Loan Liability £1,000
Being receipt of loan

Question 12

A business buys a car for £20,000. £5,000 is to be paid cash with the remaining £15,000 being funded through a loan.
What is the journal entry(s)?

Answer 12

Dr Motor vehicle – cost
£20,000
Cr Bank £5,000
Cr Loan liability £15,000
Being purchase of vehicle

Question 13

What are accruals?

Answer 13

Accruals are expenses incurred but not yet paid (current liabilities).
Remember that these have to be reversed at the opening of the following year.

Question 14

Corsi makes a credit sale to a customer on the 15th December 20X4, delivering the goods on the same day.
The customer pays cash for the sale on 9th January 20X5.
Corsi has a year end of 31 December – in which year should the sale be recognised?

Answer 14

The sale should be recognised in the year it was earned – the year ended 31 December 20X4. The fact that cash has not yet been received is irrelevant.

Question 15

What is the accrual basis?

Answer 15

Expenses should be recognised when incurred and income recognised when earned. Not when cash changes hands.

Question 16

What are prepayments?

Answer 16

Payments are expenses paid but not yet incurred (current assets).
Remember that these have to be reversed at the opening of the following year.

Question 17

Thompson Ltd. (‘Thompson’) has a 31 March year end, on 09 May 20X3 they receive a phone bill for £720 covering the three months ended 30 April 20X3.
Prepare any adjustment required as at 31 March 20X3 and show the journal(s).

Answer 17

The phone bill is for three months, two of which fall into the March 20X3 year end.
Therefore 2 out of 3 months should be accrued for:
2/3 x £720 = £480

Dr P/L – Telephone expense £480
Cr Accruals £480
Being telephone accrual

Question 18

The Sacher Partnership (‘Sacher’) rents a warehouse and office unit. They pay £9,000 a quarter in rent, paying in advance.
Sacher has a 30 June year end, on 1 May 20X5 they pay the rent for the coming quarter.
Prepare any adjustment required as at 30 June 20X5 and the journal(s).

Answer 18

Although the rent is paid in the year ended 30 June 20X5 one of the months (July 20X5) falls into the next year. Accordingly it requires to be prepaid,
1/3 x £9,000 = £3,000

Dr Prepayments £3,000
Cr P/L rental expense £3,000
Being rent prepaid

Question 19

What is the Trial Balance?

Answer 19

The trial balance is a table that shows all the final balances from each account sorted into 2 columns, Dr and Cr. The trial balance should balance with the same Dr and Cr figure since the transactions should be equal and opposite.