Accounting Questions and Transactions

Small Service Business Accounting Questions

1. Requires only written answers and is based on B124 Book 1, Chapters 1, 2, 3 and 5 and Book 2, Chapters 1 and 2. (As preparation for this question, as well as all other questions in your three TMAs that require application of knowledge of key accounting terms, you should become familiar with using the Accounting Glossary under ‘Resources’ on the B124 21J website. You may use any appropriate search function, but one good way of searching in Books 1–8 is to open the relevant PDF of a book, key in the keyboard shortcut ‘Ctrl + F’, and type in the accounting term or concept you wish to study.

a. To answer all the questions in part (a), you need to think of an example of a small (local) sole trader business which only provides services to its customers. If you know of such a real-life business, use this to answer the questions in this context. If not, do not worry, as you can use any suitable example of such a small service business.

i. To show the relevance of your answers that follow, briefly explain the service business you are going to use in answering all the questions in (a).

ii. Compared to a sole trader that is a retailer or small manufacturer, give an example of a current asset that a service business, such as the one you have identified, would not normally have to account for. Explain your answer.

iii. Because of the matching principle, expenses are recognised when they are incurred or accrued, not when cash is paid. Give an example of two expenses that your identified sole trader would present in the annual income statement, the first of which would normally be a cash expense and would be paid immediately, while the second would normally be classified as an accrued expense. Explain why you have identified your second expense as an accrued expense.

iv. Give an example of three liabilities (one identified as non-current and two as current) that such a service business might owe, and which would be recorded in its balance sheet at its accounting year end. Your answer should also explain the importance of managing any liabilities considering the owner’s unlimited liability and the business entity concept.

b. Below is a list of advantages of using a spreadsheet. For each of these five advantages, describe, specifically, how the owner/manager of a sole trader can benefit from the effective use of a spreadsheet. Your answer will be assessed on how you apply the knowledge below, in a specific example, to explain how the owner/manager can benefit from a spreadsheet.

Use of Spreadsheet in a Small Business

i. Spreadsheets can be used to provide non-financial as well as financial information to the owner/manager.
ii. Updating data is easier in a spreadsheet than doing it manually.

iii. Spreadsheets can be easily used to present complex numerical data visually using graphs.

iv. The accidental amendment or erasure of cell contents can be prevented.

v. If original/raw data changes, the effect on end results may be seen quickly and easily.

2. Is based on B124 Book 2 Chapters 1, 2 (2.2) and 3 (3.1 to 3.5). (Completing Activity 1.2 in Chapter 1 of Book 2 would be excellent preparation for part (a). Completing Activities 3.2–3.4 in Chapter 3 of Book 2 would be very good preparation for parts (b)–(c). Completing the Self-assessed Question 3 (SAQ 3) at the end of Book 2 would be good preparation for part (d).)

a. Demonstrate how each of the following transactions will affect the accounting equation (Assets = Capital + Liabilities). Your answer should include a summary total for each of the Assets, Capital, and Liabilities at the end of the week. (Use a table for your answer similar to that given in Book 2 Chapter 1 Activity 1.2 so that each entry for each transaction shows the relevant amount as well as the relevant account.)

i. On 1 October Carlos started a business selling designer dog leads and collars and put £12,000 of his savings into a business bank account.
ii. On 2 October Carlos bought equipment for long-term use in the business for £3,500, paying by cheque from the business bank account.
iii. On 3 October Carlos bought leads and collars for resale costing £600, paying by cheque from the business bank account.
iv. On 3 October Carlos bought a computer for £475, paying by cheque from the business bank account.
v. On 6 October Carlos bought, on credit, leads and collars for resale costing £1,200.
 vi. On 7 October Carlos took £30 from the business bank account for a personal expense.

b. During the second week of business, the following transactions took place:

i. On 8 October Carlos paid by cheque a quarter of the money owing on his payables account.
ii. On 11 October Carlos paid by cheque £400 for two weeks’ rent for his business premises.
iii. On 11 October Carlos paid by cheque £120 for two weeks’ insurance from the business bank account.
iv. By the end of the day on the 14 October (i.e. after two weeks of trade), Carlos had made sales for £2,800. Fifty per cent of the sales had been in cash and the rest on credit. Carlos had sold all his inventory after these two weeks of trade.

Pet Products Business Transactions

Using the new template below, demonstrate how the transactions in the second week will affect the expanded accounting equation (Assets = Capital + (Income – Cost of Sales – Expenses) + Liabilities. As for part (a) above, each entry for each transaction should show the relevant amount as well as the relevant account. Your answer should include a summary total for each of the Assets, Capital, and Liabilities at the beginning of the second week, i.e. from your answer to part (a), as well as at the end of the same week.

Transactions Week 2	Effect on A = (C + (I - C of S - E)) + L
	Assets =	(Capital + (Income - Cost of Sales - Expenses))	Liabilities
	£	£	£
Balance from Week 1
1
2
3
4
Summary (overall effect)

c. Using the information completed in the column (Capital + (Income – Cost of Sales – Expenses)) in (b), calculate (i) gross profit and (ii) net profit made by Carlos’s business in its first two weeks of trading. You do not need to provide an income statement. (Ignore any depreciation expense.)

d. Based on your answers to (a)–(c) above, prepare the balance sheet for Carlos’s Designer Dog Collars and Leads at 14 October. (The format of the balance sheet should follow SAQ 3 at the end of Book 2.)

3. Part 1 is based on B124 Book 2 Chapters 1, 2 and 3. (Completing Activity 2.1 in Chapter 2 of Book 2 and the Self-assessed Question 1 (SAQ 1) at the end of Book 2 would be excellent preparation for this question.)

a. Sima owns and manages a small business, which sells pet products to various pet outlets. Sima manages all aspects of the business, including delivery and collection of the products. The business accounts are balanced at the end of each month.

On 1 March the balances on her business accounts were as follows:

Account name    Debit (£)    Credit (£)
Capital                28,000
Van                    13,000     
Bank                 11,000     
Receivables     12,000     
Payables           8,000
                       36,000               36,000

During March, the following transactions took place: (Note that all cash payments and receipts are through the business bank account.)

No.    Date    Amount (£)          Transaction
1    2 Mar         195             Sima pays cash for advertising.
2    3 Mar       2,200           Sima pays by bank transfer the amount due to a supplier.
3    7 Mar      1,320           Sima withdraws cash for personal use.
4    9 Mar       2,800          Sima receives payment from a receivable.
5    11 Mar     72              Sima pays by debit card for petrol.
6    15 Mar    2,300          Sima receives payment from a receivable.
7    18 Mar    370            Sima pays insurance by business debit card.
8    20 Mar    1,540         Sima purchases products for resale, agreeing 30 days credit terms.
9    21 Mar    1,395         Sima invoices a new customer on 30 days credit terms.
10    30 Mar    1,650       Sima purchases products for resale and pays by cheque.

Required:

i.  Set out Sima’s general ledger accounts at 1 March.

ii. Continuing on, post to the relevant accounts the ten transactions that took place in March.

iii. Balance off the general ledger accounts.

iv. Present the trial balance at 1 April.

v. Sima keeps the FIFO method of valuing the inventory of her pet products. How does this method compare with the LIFO method, at a time of rising prices, for (i) cost of sales, (ii) closing inventory and (iii) gross profit? Why do you think that LIFO is generally not accepted today by most tax authorities?

b. Set out briefly how you have approached preparing for TMA 01, and explain what you plan to do differently when preparing for TMA 02, and why this is so.