Lecture 1 - Seminar Questions Capital and Revenue expenditure: Capital Expenditure is expenditure that results in the acquisition of non-current

assets This means this expenditure is not an expense in the Income Statement. Of course the depreciation charge will write off the capital expenditure over time. Depreciation charges are expenses in the Income Statement. Capital Expenditure on non-current assets results in the appearance of a non-current the balance sheet of the company. This is an acquisition of a new asset. Capital transactions are transactions which: a) Add to cash assets of the business, which creates a corresponding liability (capital or loan and b) When a loan is repaid, will reduce the liabilities (loan) and the assets of the company. Revenue Expenditure results from the purchase of goods and services that will a) be used in the accounting period in which they are purchased, and be a cost or an expenses in the Income Statement b) result in a current asset at the end of the period. The current asset would be shown shown as a current asset in the balance sheet. Revenue Expenditure is expenditure incurred for the purpose of trade OR to maintain non-current assets Revenue expenditure is expenditure incurred for either of the following: For the purpose of the trade of the business - expenditure classified as selling and distribution expenses, administration expenses and finance charges. And also to maintain the existing earning capacity of non-current assets Why is this distinction so important? Revenue expenditure results from the purchase of goods and services that will be used fully in the accounting period in which they are purchased, and so they are a cost in the Income Statement for just one accounting period. Capital Expenditure is different as it results in the purchase or improvement or noncurrent assets which will provide benefits to the business for more than one accounting period.

Question One A business purchases a small building for 30,000 and then adds an extension to the building which cost 10,000. The building has several broken windows that need repairing and the floors need polishing and some roof tiles need replacing. The maintenance jobs cost the company 900. How would you classify these costs?

Balance Sheet and Income Statement

The balance sheet is simply a list of all the assets owned by the business and the liabilities owed by the business as at a particular date. It is a snapshot of the financial position of the business at any particular moment.

Both the Balance Sheet and the Income Statement are summaries of accumulated data.

Question Two XYZ Company has this list of assets on 1st October 2011. Motor vehicles Inventories (stocks) Freehold Building Premises Trade Creditors (owed to Suppliers) Trade Debtors (owed by customers) Fixtures and Fittings Cash Bank overdraft Equity Long term loan 9,000 16,000 50,000 5,300 500 8,000 400 2,000 56,600 20,000 167,800

You should set out a grid showing the Assets, the Liabilities and the Equity so you are using the Accounting Equation Prepare a statement of financial position for the XYZ Company at 1st October 2011. This is the same as preparing a Balance Sheet for XYZ Company as at 1st October, 2011 Question Three Nemen Company has a list of assets and liabilities as at 25th October 2011 10,000 8,100 25,000 3,000 4,000 16,500 3,400 6,000 76,000

Owners equity in the company Bank loan Plant and Machinery Inventory (Stock) Equipment Long Term Loan Trade Creditors Trade Debtors

Set out a grid showing the Accounting Equation and then prepare a Balance Sheet to show the financial position of the company as at 25th October 2011

Question Four Dobson Company has a list of assets and liabilities as at 30 June 2011 30,000 6,800 17,700 13,100 9,400 13,000 8,300 31,800 2,000 4,500 136,600 Set out a grid showing the Accounting Equation and prepare a Balance Sheet to show the financial position of the company as at 30 June 2011 Equity Leasehold Office Trucks Office Equipment Closing Stock Cash Trade Debtor Trade Creditors Sundry Creditors Taxation (liability)

This is an example showing the format of an Income Statement

Income Statement The Income Statement shows a figure for income earned from selling goods to customers. This shows the total amount of income earned from all individual sales made during the accounting period. The Balance Sheet and the Income Statement form the basis for the financial statements for most businesses. For limited companies other information, using statements and notes may be required by legislation and/or by the relevant accounting standards. Some companies are required to include a Cash Flow Statement. We will be looking at Cash Flow Statements later in this course. This is an example of a very simple Income Statement. Income Statement for the year ending 31st December, 2011. Sales Opening stock figure Plus purchases for the period Less Closing stock figure Cost of Goods Sold Gross profit for the period Less expenses for the period: Utility costs (Electricity and gas) Stationery and postage Irrecoverable debts written off Provision for Doubtful debts (2% of 6,000) Telephone charges Interest and bank charges 24,000 19,600 43,600 (20,800) (22,800) 32,200 2,500 1,000 500 120 400 80 (4,600) 55,000

Net Profit for the period

27,600

The Dual Effect (the Duality Concept) Central to this process is the idea that every transaction has two effects, the Dual Effect The company ledger accounts with their debit and credit sides a\re kept in a way that allows the two sided nature of business transactions to be recorded. Increase an asset decrease a liability increase an expense decrease an asset increase a liability increase income

A debit entry will

A credit entry will

Question Five Complete the following table relating to the transactions taking place at a bookshop a) Purchase of books on credit i) Creditors increase ii) Purchase expense increases b) Purchase of cash register ii) Own a Cash register ii) Cash at bank decreases c) Payment received from a debtor i) Debtors decrease ii) Cash at bank increases d) Purchase of a van i) Own a van ii) Cash at Bank decreases DEBIT CREDIT Cash register (an increase in asset) Cash at bank (decrease in asset) CREDIT Creditors (increase in liability) DEBIT Purchases (item of expense)

Question Six - Raven Raven started business on 1 Jan 2012 buying and selling bird seed and during the financial year had the following transactions 1 Paid 15,000 into his business bank account, 5,000 of this amount he had borrowed from Mr Owl. 2. Purchased leasehold shop premises for 8,000 which was paid in cash

3. The shop was fitted out which cost 3,000. Raven paid 1,500 of this in cash, having agreed to pay the balance later. 4. Raven bought for cash his inventory of 2,000 packets of birdseed which cost him 4 each. 5. He sold 1,500 packets for 8 each for cash, and he sold 250 packets on credit for 10 each. 6, Business expenses were paid as follows: Rates 500, Rent 800, Staff wages 500, Electricity bills 200, Telephone 400 and other Admin Expenses 150. 7, Towards the end of the year Raven received proceeds from three quarters of his credit sales which were banked. 8. He paid off 30% of the balance owing on the shop fixtures with cash. 9. He repaid Mr Owl 3,000 of the money he had borrowed. 10. Raven paid business expenses from his bank accounts as follows: Rates 300, Rent 200, Staff Wages 800, Electricity 150, Telephone 300 and other Admin Expenses 250 Required: State how each transaction is entered into the nominal ledger accounts of Raven.