(a) In accounting practice a distinction is drawn between the terms ‘reserves’ and ‘provisions’ and between ‘accrued expenses’ and ‘creditors’.

Required:

Briefly define each of the four terms quoted and explain the effect of each on the preparation of accounts.

(b) While preparing the final accounts for year ended 30 September 19X7, the accountant of Lanep Lighting Ltd had to deal with the following matters:

(i) the exterior of the company’s premises was being repaired. The contractors had started work in August but were unlikely to finish before the end of November 19X7. The total cost would not be known until after completion. Cost of work carried out to 30 September 19X7 was estimated at £21,000;

(ii) the company rented a sales showroom from Commercial Properties plc at a rental of

£6,000 per annum payable half yearly in arrears on 1 August and 1 February;

(iii) on 3 October 19X7 an invoice was received for £2,500, less a trade discount of 30 per cent, from Lucifer Ltd for goods for resale supplied during September 19X7;

(iv) the directors of Lanep Lighting Ltd have decided that an annual amount of £5,000 should be set aside, starting with year ended 30 Sept 19X7, for the purpose of plant replacement.

Required:

State the accounting treatment which should be accorded to each of the above matters in the Lanep Lighting Ltd profit and loss account for year ended 30 September 19X7 and balance sheet at that date.