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3.5.2 Example continued The example of Liza Dzonzi's market stall is continued, by looking at the consequences of the following transactions in the week to 17 July 20x6. (See paragraph 3.4 for the situation as at the end of 10 July.) (a) Liza Dzonzi realises that she is going to need more money in the business and so she makes the following arrangements. (1) She invests immediately a further k2,500 of her own capital. (it) She persuades her Uncle Henry to lend her K5,000 immediately. Uncle Henry tells her that she can repay the loan whenever she likes, but in the meantime, she must pay him interest of K5 each week at the end of the market day. They agree that it will probably be quite a long time before the loan is eventually repaid. (b) She decides to buy a second hand van to pick up flowers and plants from her supplier and bring them to her stall in the market. She finds a car dealer, Laurie Loader, who agrees to sell her a van on credit for K11,000. Liza agrees to pay for the van after 30 days' trial use. (c) During the week, Liza's Uncle George telephones her to ask whether she would sell him some garden gnomes and furniture for his garden. Liza tells him that she will look for a supplier. After some investigations, she buys what Uncle George has asked for paying K300 in cash to the supplier. Uncle George accepts delivery of the goods and agrees to pay K350, but he asks if she can wait until the end of the month for payment. Liza agrees. BPP LARNING MEDIA Trading on 10 July was again very brisk, and Liza and Ethel sold all their goods for K1,100 cash. Liza paid Ethel her wage of K40 and drew out K200 for herself. Required (a) State the accounting equation before trading began on 10 July.lds.E (b) State the accounting equation at the end of 10 July, after paying Ethel: LE (i) But before drawings are made. (ii) After drawings have been made. a luglio You are reminded that the accounting equation for the business at the end of transactions for 3 July is given in paragraph 3.3. 2 The nominal ledger The idris other the contenere operty is med posted in the The CALAGENS outre morti nummatus the financial states of this Bes 36 36 It contais detalheuw, oboes, capital, com ara expert, wat te probe was under et afferent mett, math centro da sen puroene rane ed un certifierade There may be as subdivision, whether for convenience of haricinde curfionality cont or to me the needs of computer deg for me, the buyer with different cela response for tons r. M and s. This can of we would have to be collusion between the wction Examples of count in the nominale include the following (a) Puant and machinery at costo (b) Motor whicles cost non a) Plant and machinery allowance for depreca d) Motor vehicles, allowance for depreciation Ciability Proprietors capital ability Inventaries - raw materials current Inventories - finished as current th Total trade cevabes (current Total trade tables current ability Wages and sales lesperse tem Rent and local taxes expense) Advertising expenses ferpente tem (m) Bank changes experts item) ind Motor expenses (expensem (6) Telephone expenses lesgenseitem () Sales revenue item (9 Total cash or bank overdraft (current asset or liability When it comes to drawing up the financial statements, the revenue and expense accounts will help to form the statement of profit or less while the asset and liability accounts into the statement financial position 2.1 The format of a ledger account If a lediger account were to be kept in an actual book, rather than as a computer record. It muhok like this ADVERTISING EXPENSES Date Warration Rer KOOO Date Narrative Rel KOOD 20X6 15 April JFK Agency for month PL 348 2.500 ending 31 March For the rest of this chapter, we will assume that a manual system is being used in order to illustrate fully the working of the ledger accounts. However, a computerised system performs the same functions although the actual ledger accounts may be hidden inside the computer! There are two sides to the account and an account reading on top, and so it is convenient to think in Terms of accounts DPP MO Tutorial note. It is very important you should understand the principles described so lal. until you are confident that you understand the solution to this example. 3.5 Payables and receivables 3.5.1 Trade payables and trade receivables I A TRADE PAYABLE is a person to whom a business owes money. A trade payable is a person to whom a business owes money for debts incurred in the course of trading operations. In the accounts of a business, debts still outstanding which arise from the purchase of materials, components or goods for resale are called trade payables, sometimes abbreviated to account payable' or 'payables A business does not always pay immediately for goods or services it buys. It is a common business practice to make purchases on credit with a promise to pay within 30 days, or two months or three months of the date of the involce for the goods. For example, A buys goods costing K2,000 on credit from B, B sends A an invoice for K2,000, dated 1 March, with credit terms that payment must be made within 30 days. If A then delays payment until 31 March, B will be a payable of A between 1 and 31 March for K2,000. From A's point of view, the amount owed to B is a trade payable. A trade account payable is a liability of a business. Just as a business might buy goods on credit, so too mightit sell goods to customers on credit. A customer who buys goods without paying cash for them straight away is a TRADE RECEIVABLE For example, suppose that sells goods on credit to D for K6,000 on terms that the debt must be settled within two months of the invoice date 1 October. If does not pay the K6,000 until 30 November, D will be a receivable of C for K6,000 from 1 October until 30 November. In the accounts of the business, amounts owed by receivables are called trade receivables, sometimes abbreviated to accounts receivable or receivables. A trade receivable is an asset of a business. When the debt is finally paid, the trade receivable disappears as an asset to be replaced by cash at bank and in hand. 3.5.2 Example continued The example of Liza Dzonzi's market stall is continued, by looking at the consequences of the following transactions in the week to 17 July 20x6. (See paragraph 3.4 for the situation as at the end of 10 July (a) Liza Dzonzi realises that she is going to need more money in the business and so she makes the following arrangements. (1) She invests immediately a further K2,500 of her own capital. ( She persuades her Uncle Henry to lend her K5,000 immediately. Uncle Henry tells her that she can repay the loan whenever she likes, but in the meantime, she must pay him Interest of K5 each week at the end of the market day. They agree that it will probably be quite a long time before the loan is eventually repaid. (b) She decides to buy a second hand van to pick up flowers and plants from her supplier and bring thern to her stall in the market. She finds a car dealer, Laurle Loader, who agrees to sell her a van on credit for K11.000. Liza agrees to pay for the van after 30 days trial use. (c) During the week, Liza's Uncle George telephones her to ask whether she would sell him some garden gnomes and furniture for his garden. Liza tells him that she will look for a supplier. After some investigations, she buys what Uncle George has asked for, paying K300 in cash to the supplier. Uncle George accepts delivery of the goods and agrees to pay K350, but he asks if she can wait until the end of the month for payment. Liza agrees. BRA 000 9 LEARNING OBJECTIVES Baptister and its main component parte nominal, cebes and pay she leden) (20) Sate the country equation, including the effects of transactions en CDI es Donatelassification of per accounts including personal and personal accounts, and Describes in account 1207 3 3 0 0 0 0 the function (20) State the destilt entry rules for incomes, assets and abilities (20) Prepare and that ledger count for cash, credit and other transactions (20) Explain the principles at the operation of VAT (20) Calculatoard record the accounting entries involving VAT 120) 1 Why do we need ledger accounts? This section tools at how lectuer actions can facilitate the provision of financial information A business in continually making transactions, buying and selling, and we do not want to prepare statement of profitar lous and a statement of financial position or completion of every individual transaction to do so would be a time-consuming and cumbersome administrative task It is common sense that a business should keep a record of the transactions that it makes the set it acquires and liabilities incun. When the time comes to prepare a statement of profit or loss and a statement of financial position, the relevant information can be taken from those records The records of transactions, assets and liabilities should be kept in the following ways (e) In chronological order, and dated so that transactions can be related to a particular period of time. Built up in cumulative totals Day by day te total sales on Monday, total sales on Tuesday) D Week by weak filo Month by month (iv) Year by year Wenme amady ten the fint step in this process, which to list all the transactions in various books of prime entry. Now we will look at the method used to summarise these records ledger accounting and double entry This system of summarising information speeds up the provision of useful information to managers and to help manager to keep to organisational deadlines te provision of monthly profit figures for management purposes) ***** Ledger accounts summarise all the individual transactions listed in the books of prime entry BPP (d) Liza buys flowers and plants costing K800. Of these purchases K750 are paid in cash, with the remaining K50 on seven days credit. Liza decides to use Ethel's services again as an assistant on market day, at an agreed wage of K40. (e) On 17 July, Liza succeeds in selling all her goods earning revenue of K1,250 (all in cash). She decides to withdraw K240 for her week's work. She also pays Ethel K40 in cash. She decides to make the interest payment to her Uncle Henry the next time she sees him. (f) We shall ignore any van expenses for the week, for the sake of relative simplicity. Required State the accounting equation: (i) After Liza and Uncle Henry have put more money into the business and after the purchase of the van. (ii) (iii) After the sale of goods to Uncle George. After the purchase of goods for the weekly market At the end of the day's trading on 17 July, and after withdrawals have been appropriated out of profit. (iv) line 3.4 Example continued The next market day is on 10 July 20x6 and Liza purchases more flowers and plants for cash, at a cost of K740. She is not feeling well, because of a heavy cold, and so she decides to accept help for the day from her cousin Ethel. Ethel is to be paid a wage of K40 at the end of the day. BPP LEARNING MEDIA Trading on 10 July was again very brisk, and Liza and Ethel sold all their goods for K1,100 cash. Liza paid Ethel her wage of K40 and drew out K200 for herself. Required (a) State the accounting equation before trading began on 10 July. cold (b) State the accounting equation at the end of 10 July, after paying Ethel: LE (i) But before drawings are made. (ii) After drawings have been made. ors buy is You are reminded that the accounting equation for the business at the end of transactions for 3 July is given in paragraph 3.3. 3.5.2 Example continued The example of Liza Dzonzi's market stall is continued, by looking at the consequences of the following transactions in the week to 17 July 20x6. (See paragraph 3.4 for the situation as at the end of 10 July.) (a) Liza Dzonzi realises that she is going to need more money in the business and so she makes the following arrangements. (1) She invests immediately a further k2,500 of her own capital. (it) She persuades her Uncle Henry to lend her K5,000 immediately. Uncle Henry tells her that she can repay the loan whenever she likes, but in the meantime, she must pay him interest of K5 each week at the end of the market day. They agree that it will probably be quite a long time before the loan is eventually repaid. (b) She decides to buy a second hand van to pick up flowers and plants from her supplier and bring them to her stall in the market. She finds a car dealer, Laurie Loader, who agrees to sell her a van on credit for K11,000. Liza agrees to pay for the van after 30 days' trial use. (c) During the week, Liza's Uncle George telephones her to ask whether she would sell him some garden gnomes and furniture for his garden. Liza tells him that she will look for a supplier. After some investigations, she buys what Uncle George has asked for paying K300 in cash to the supplier. Uncle George accepts delivery of the goods and agrees to pay K350, but he asks if she can wait until the end of the month for payment. Liza agrees. BPP LARNING MEDIA Trading on 10 July was again very brisk, and Liza and Ethel sold all their goods for K1,100 cash. Liza paid Ethel her wage of K40 and drew out K200 for herself. Required (a) State the accounting equation before trading began on 10 July.lds.E (b) State the accounting equation at the end of 10 July, after paying Ethel: LE (i) But before drawings are made. (ii) After drawings have been made. a luglio You are reminded that the accounting equation for the business at the end of transactions for 3 July is given in paragraph 3.3. 2 The nominal ledger The idris other the contenere operty is med posted in the The CALAGENS outre morti nummatus the financial states of this Bes 36 36 It contais detalheuw, oboes, capital, com ara expert, wat te probe was under et afferent mett, math centro da sen puroene rane ed un certifierade There may be as subdivision, whether for convenience of haricinde curfionality cont or to me the needs of computer deg for me, the buyer with different cela response for tons r. M and s. This can of we would have to be collusion between the wction Examples of count in the nominale include the following (a) Puant and machinery at costo (b) Motor whicles cost non a) Plant and machinery allowance for depreca d) Motor vehicles, allowance for depreciation Ciability Proprietors capital ability Inventaries - raw materials current Inventories - finished as current th Total trade cevabes (current Total trade tables current ability Wages and sales lesperse tem Rent and local taxes expense) Advertising expenses ferpente tem (m) Bank changes experts item) ind Motor expenses (expensem (6) Telephone expenses lesgenseitem () Sales revenue item (9 Total cash or bank overdraft (current asset or liability When it comes to drawing up the financial statements, the revenue and expense accounts will help to form the statement of profit or less while the asset and liability accounts into the statement financial position 2.1 The format of a ledger account If a lediger account were to be kept in an actual book, rather than as a computer record. It muhok like this ADVERTISING EXPENSES Date Warration Rer KOOO Date Narrative Rel KOOD 20X6 15 April JFK Agency for month PL 348 2.500 ending 31 March For the rest of this chapter, we will assume that a manual system is being used in order to illustrate fully the working of the ledger accounts. However, a computerised system performs the same functions although the actual ledger accounts may be hidden inside the computer! There are two sides to the account and an account reading on top, and so it is convenient to think in Terms of accounts DPP MO Tutorial note. It is very important you should understand the principles described so lal. until you are confident that you understand the solution to this example. 3.5 Payables and receivables 3.5.1 Trade payables and trade receivables I A TRADE PAYABLE is a person to whom a business owes money. A trade payable is a person to whom a business owes money for debts incurred in the course of trading operations. In the accounts of a business, debts still outstanding which arise from the purchase of materials, components or goods for resale are called trade payables, sometimes abbreviated to account payable' or 'payables A business does not always pay immediately for goods or services it buys. It is a common business practice to make purchases on credit with a promise to pay within 30 days, or two months or three months of the date of the involce for the goods. For example, A buys goods costing K2,000 on credit from B, B sends A an invoice for K2,000, dated 1 March, with credit terms that payment must be made within 30 days. If A then delays payment until 31 March, B will be a payable of A between 1 and 31 March for K2,000. From A's point of view, the amount owed to B is a trade payable. A trade account payable is a liability of a business. Just as a business might buy goods on credit, so too mightit sell goods to customers on credit. A customer who buys goods without paying cash for them straight away is a TRADE RECEIVABLE For example, suppose that sells goods on credit to D for K6,000 on terms that the debt must be settled within two months of the invoice date 1 October. If does not pay the K6,000 until 30 November, D will be a receivable of C for K6,000 from 1 October until 30 November. In the accounts of the business, amounts owed by receivables are called trade receivables, sometimes abbreviated to accounts receivable or receivables. A trade receivable is an asset of a business. When the debt is finally paid, the trade receivable disappears as an asset to be replaced by cash at bank and in hand. 3.5.2 Example continued The example of Liza Dzonzi's market stall is continued, by looking at the consequences of the following transactions in the week to 17 July 20x6. (See paragraph 3.4 for the situation as at the end of 10 July (a) Liza Dzonzi realises that she is going to need more money in the business and so she makes the following arrangements. (1) She invests immediately a further K2,500 of her own capital. ( She persuades her Uncle Henry to lend her K5,000 immediately. Uncle Henry tells her that she can repay the loan whenever she likes, but in the meantime, she must pay him Interest of K5 each week at the end of the market day. They agree that it will probably be quite a long time before the loan is eventually repaid. (b) She decides to buy a second hand van to pick up flowers and plants from her supplier and bring thern to her stall in the market. She finds a car dealer, Laurle Loader, who agrees to sell her a van on credit for K11.000. Liza agrees to pay for the van after 30 days trial use. (c) During the week, Liza's Uncle George telephones her to ask whether she would sell him some garden gnomes and furniture for his garden. Liza tells him that she will look for a supplier. After some investigations, she buys what Uncle George has asked for, paying K300 in cash to the supplier. Uncle George accepts delivery of the goods and agrees to pay K350, but he asks if she can wait until the end of the month for payment. Liza agrees. BRA 000 9 LEARNING OBJECTIVES Baptister and its main component parte nominal, cebes and pay she leden) (20) Sate the country equation, including the effects of transactions en CDI es Donatelassification of per accounts including personal and personal accounts, and Describes in account 1207 3 3 0 0 0 0 the function (20) State the destilt entry rules for incomes, assets and abilities (20) Prepare and that ledger count for cash, credit and other transactions (20) Explain the principles at the operation of VAT (20) Calculatoard record the accounting entries involving VAT 120) 1 Why do we need ledger accounts? This section tools at how lectuer actions can facilitate the provision of financial information A business in continually making transactions, buying and selling, and we do not want to prepare statement of profitar lous and a statement of financial position or completion of every individual transaction to do so would be a time-consuming and cumbersome administrative task It is common sense that a business should keep a record of the transactions that it makes the set it acquires and liabilities incun. When the time comes to prepare a statement of profit or loss and a statement of financial position, the relevant information can be taken from those records The records of transactions, assets and liabilities should be kept in the following ways (e) In chronological order, and dated so that transactions can be related to a particular period of time. Built up in cumulative totals Day by day te total sales on Monday, total sales on Tuesday) D Week by weak filo Month by month (iv) Year by year Wenme amady ten the fint step in this process, which to list all the transactions in various books of prime entry. Now we will look at the method used to summarise these records ledger accounting and double entry This system of summarising information speeds up the provision of useful information to managers and to help manager to keep to organisational deadlines te provision of monthly profit figures for management purposes) ***** Ledger accounts summarise all the individual transactions listed in the books of prime entry BPP (d) Liza buys flowers and plants costing K800. Of these purchases K750 are paid in cash, with the remaining K50 on seven days credit. Liza decides to use Ethel's services again as an assistant on market day, at an agreed wage of K40. (e) On 17 July, Liza succeeds in selling all her goods earning revenue of K1,250 (all in cash). She decides to withdraw K240 for her week's work. She also pays Ethel K40 in cash. She decides to make the interest payment to her Uncle Henry the next time she sees him. (f) We shall ignore any van expenses for the week, for the sake of relative simplicity. Required State the accounting equation: (i) After Liza and Uncle Henry have put more money into the business and after the purchase of the van. (ii) (iii) After the sale of goods to Uncle George. After the purchase of goods for the weekly market At the end of the day's trading on 17 July, and after withdrawals have been appropriated out of profit. (iv) line 3.4 Example continued The next market day is on 10 July 20x6 and Liza purchases more flowers and plants for cash, at a cost of K740. She is not feeling well, because of a heavy cold, and so she decides to accept help for the day from her cousin Ethel. Ethel is to be paid a wage of K40 at the end of the day. BPP LEARNING MEDIA Trading on 10 July was again very brisk, and Liza and Ethel sold all their goods for K1,100 cash. Liza paid Ethel her wage of K40 and drew out K200 for herself. Required (a) State the accounting equation before trading began on 10 July. cold (b) State the accounting equation at the end of 10 July, after paying Ethel: LE (i) But before drawings are made. (ii) After drawings have been made. ors buy is You are reminded that the accounting equation for the business at the end of transactions for 3 July is given in paragraph 3.3