The profit for the period is the amount by which income exceeds expenses during the reporting period. For a sole trader it is transferred to the statement of financial position as an addition to the owner's capital. A loss for the period, whereby expenses exceed revenue, would be transferred as a deduction from capital in the statement of financial position.
Drawings are appropriations of profit and not expenses. They must not be included in the statement of profit or loss. The payments that Jock Heiss makes to himself (£900) are shown as deductions from capital in the statement of financial position.
The cost of sales is £6,200, even though £700 of the costs have not yet been paid for. The £700 owed to Floors Co will be shown in the balance sheet as a trade payable. This is an example of the accruals concept.
Interactive question 6: Preparing a statement of financial position 2
Prepare a statement of financial position as at 31 August 20X5 for Jock Heiss, using the information from the Worked example above.
See Answer at the end of this chapter.
C H A P T E R 2
Summary and Self-test
Summary
Statement of profit or loss Sales Purchases
Credit transactions Assets
Business entity concept Capital
Assets Liabilities
Capital Liabilities
Accruals concept
Accounting equation
Payables Receivables
Statement of financial position
Profit for the period X Profit for the period X
Non-current assets
• Land and building
• Vehicle
• Plant and machinery
• Fixtures and fittings Non-current liabilities
• Loans Current assets
• Cash
• Inventory
• Receivables Current liabilities
• Overdraft
• Payables
• Tax
Capital introduced + Profits
– Losses – Drawings
Revenue X
Cost of sales (X) Gross profit X Expenses (X) Other income X
Non-current assets X Current assets X
Total assets X
Opening capital X Capital introduced X
Drawings (X) Closing capital X Non-current liabilities X Current liabilities X Total capital and
liabilities X
Self-test
Answer the following questions.
1 Which of the following is an asset?
A A trade payable B A loan
C Drawings D A prepayment
2 Which of the following is a liability?
A Depreciation B An accrual C Cash at bank
D Plant and machinery 3 Capital is the amount:
A The entity's owners owe to it B The entity's customers owe to it C The entity owes to its creditors D The entity 'owes' to its owners
4 Which of the following are assets of an entity?
A Trade payables B Trade receivables C Bank overdraft D Cash in hand
E Funds introduced by the owner
5 Which of the following best describes the accruals concept?
A Assets are matched with liabilities B Income is matched with expenses C Expenses are matched with assets D Income is matched with liabilities
6 Which of the following is a non-current liability?
A A bank overdraft
B A bank loan repayable within a year C A mortgage repayable in five years' time D A trade payable
7 The statement of financial position sets out the entity's:
A Financial position over a period of time B Financial performance over a period of time C Financial position at one point in time D Financial performance at one point in time
8 Which of the following expenses is included in cost of sales?
A Sales people's salaries B Management salaries C Overdraft interest D Cost of raw material
C H A P T E R 2
9 A business has sales of £100,000, cost of sales of £60,000 and expenses of £20,000. The gross profit margin is:
A 60%
B 40%
C 20%
D 80%
10 Which figure from a sole trader's statement of profit or loss would appear in its statement of financial position?
A Gross profit B Drawings C Revenue D Net profit
Now, go back to the Learning outcomes in the Introduction. If you are satisfied you have achieved the objectives, please tick them off.
Technical references
Basic format of the statement of financial position and statement of profit or loss
IAS 1 IG
Elements of financial statements
Conceptual Framework paras 4.1 to 4.2
Definition of asset
Conceptual Framework para 4.3 to 4.4
Definition of liability
Conceptual Framework para 4.26 to
4.27
Definition of equity
Conceptual Framework
para 4.63
Definition of income, expense
Conceptual Framework para 4.68 to
4.69
Current/non-current distinction in the statement of financial position IAS 1 paras 60/61
Definition of current asset IAS 1
para 66
Definition of current liability IAS 1
para 69
C H A P T E R 2
Answers to Interactive questions
Answer to Interactive question 1
Assets = capital + liabilities. Therefore, capital = assets – liabilities
Answer to Interactive question 2
(a) Increase in liabilities (payables) £800
Increase in assets (inventory) £800
(b) Decrease in assets (cash) £25
Decrease in capital (an expense reduces profit) £25 (c) Decrease in assets (inventory) £450
Increase in assets (cash) £650
Increase in capital (profit) £200
(d) Decrease in liabilities (payables) £800
Decrease in assets (cash) £800
Answer to Interactive question 3
The point in this case is that the car has a residual value of £3,400. It would be inappropriate to account for depreciation in such a way as to write off the asset completely over three years; the aim should be to account only for its loss of value (£10,000 – £3,400 = £6,600), which suggests depreciation of £2,200 per year.
Answer to Interactive question 4
Asset Business Current or non-current
Van Delivery firm Non-current
Machine Manufacturing company Non-current
Car Car trader Current
Investment Any Either*
* The classification of the investment will depend on the purpose for which it is held. If the intention is to make a non-current investment it will be a non-current asset, but if it is a short- term way of investing spare cash it will be a current asset.
Answer to Interactive question 5 Liza Doolittle
Statement of financial position as at 31 July 20X6
£ £
ASSETS
Non-current assets
Stall 1,800
Van 700
2,500 Current assets
Inventories 1,250
Trade receivables 890
Cash in hand 20
Cash at bank 1,475
3,635
Total assets 6,135
CAPITAL AND LIABILITIES Capital
Opening capital 2,500
Additional capital introduced 250
2,750
Profit for month 3,620
Less drawings (960)
2,660 5,410 Non-current liabilities
Loan 50
Current liabilities
Trade payables 675
Total capital and liabilities 6,135
Answer to Interactive question 6 Jock Heiss
Statement of financial position as at 31 August 20X5
£ ASSETS
Current assets
Trade receivables (1,100 – 250) 850
Cash at bank and in hand
(2,000 + 8,900 – (6,200 – 700) – 300 – 1,000 – 900 – 150 – 75 – 900) 2,075
Total assets 2,925
CAPITAL AND LIABILITIES Capital
Opening capital 0
Profit for the period 1,125
Drawings (900)
Closing capital 225
Non-current liabilities
Loan 2,000
Current liabilities
Trade payables 700
Total capital and liabilities 2,925
C H A P T E R 2
Answers to Self-test
1 D A and B are liabilities; C is an appropriation of profit.
2 B C and D are assets, depreciation is an expense and a reduction in the value of an asset.
3 D B is an asset while C is a liability; A is the wrong way round. A better way of thinking of capital is that it is the owners' residual interest in the entity's net assets.
4 B and D. A and C are current liabilities; E is capital.
5 B The accruals concept is best described as the matching of income with expenses.
6 C The mortgage is repayable in over a year's time and, therefore, is a non-current liability. The bank overdraft is repayable on demand, a trade payable is usually paid within a year and the bank loan is repayable within one year, so these are all current liabilities.
7 C B describes the statement of profit or loss accurately.
8 D The others are examples of selling expenses (A), administration expenses (B) and finance cost (C).
9 B Gross profit margin = Gross profit (100,000 – 60,000)
× 100% = × 100% = 40%
Sales 100,000
10 D Gross profit (A) and revenue (C) are included in the calculation of net profit; drawings are appropriations of net profit that appear in the statement of financial position only.
Recording financial transactions
Introduction
Examination context TOPIC LIST
1 Computerised accounting systems
2 Source documents for recording financial transactions 3 Recording bank transactions
4 Petty cash book 5 The payroll Summary and Self-test
Answers to Interactive questions Answers to Self-test
CHAPTER 3
Introduction
Learning outcomes Tick off
Identify the sources of information for the preparation of accounting records and financial statements
Record transactions and events resulting in income, expenses, assets, liabilities and equity in accordance with the appropriate basis of accounting and the laws,
regulations and accounting standards applicable to the financial statements Specific syllabus learning outcomes are: 1c, d
Syllabus links
The material in this chapter will be developed further in this exam, and then in the Professional Level module Financial Accounting and Reporting.
Examination context
Questions on the topics in this chapter will be set as multiple choice, multi-part multiple choice or multiple-response questions, some of which may involve calculations so that the correct answer can be selected.
In the exam you may be required to:
specify source documents for the accounting system
specify how bank transactions are recorded
identify an accurate description of the petty cash imprest system
calculate net or gross pay, or the amounts owed to HMRC
calculate VAT and discounts
C H A P T E R 3
1 Computerised accounting systems
Section overview
Accounting software packages (computerised accounting systems) are common place in most businesses.
Computerised accounting systems range from simple, off-the-shelf programmes used by small businesses for recording day-to-day transactions, to bespoke, fully integrated systems in place in large and complex businesses.
The development of cloud accounting software in recent years has changed how computerised accounting systems are used and accessed.