Question

1. On 1 January 2014 Tom Sirocco, a friend of yours, commenced in business. Tom is having trouble nding the accounting process and has asked you for advice. You examine his books. During the year ended 31 December 2014 the following transactions occurred: Lodgement by Tom on 1 January 2014 of €120,000 of his savings into the business bank account. Purchase of equipment by cheque €80,000. Purchases of stock on credit €200,000. Sales on credit €370,000. Payments to creditors for stock €165,000. Payments to employees €140,000. Rent paid €45,000. Insurance paid €17,000 Payments to owner (drawings) €40,000. Cash received from debtors €310,000. Amount borrowed from bank €200,000. Loan repayments €45,000 (including interest of €16,000). Notes: (1) All money received is lodged. (2) All payments are made by cheque. (3) Closing stock was valued at £70,000. (4) Depreciation is calculated at a rate of 20% per annum on cost. Required: (a) Prepare the trading profit and loss account for the year ended 31 December 2014. (b) Prepare the ledger accounts for the bank, loan, debtors and creditors. (c) Prepare the balance sheet as at 31 December 2014. (d) Explain to Tom, in plain English, the purpose and process of accounting. (10 marks) (10 marks) (10 marks) (10 marks)

Answer 1

a)  

Trading and profit andloss a/c for the year ended 31.12.2014
particulars	amount($)	particulars	amount($)
to purchase	200000	by sale	370000
to gross profit	240000	by closing stock	70000
total	440000	total	440000
		by gross profit	240000
toemployees	140000
to rent	45000
to insurance	17000
to interest on loan	16000
to depreciation(20%*80000)	16000
to net profit	6000
total	240000	total	240000

b)

bank a/c
to capital	120000	by creditors	165000
to cash(debtors)	310000	by equipment	80000
to loan a/c	200000	by employees	140000
		by rent	45000
		by insurance	17000
		by drawingsa/c	40000
		by loan a/c	45000
		by balance c/d	98000
total	630000	total	630000
loan a/c
to bank a/c(loan repayment)	45000	by banka/c(loan transfer)	200000
to balance c/d	171000	by interest	16000
total	216000	total	216000
creditors a/c
to bank	165000	by purchase	200000
to balance c/d	35000
total	200000	total	200000
debtors a/c
to sale	370000	by bank	310000
		by balance	60000
total	370000	total	370000

c)

BALANCE SHEET AS AT 31.12.2014
liabilities	amount	asset	amount
capital a/c:		equipment(80000-16000)	64000
capital a/c-120000	86000	debtors	60000
less:drawings:40000		bank a/c	98000
add:net profit:6000		closing stock	70000
creditors	35000
loan	171000
total	292000	total	292000

d)in order to obtain the detailed understanding the position of the business,say whether it is going in loss or profit,or to timely capturing of due date of amount payable to supplier or collectable from debtors a proper accounting should maintain.and also to comply somany statutory compliences proper accounting is required.