Sole trader and its adjustments
IT IS quite understandable that many candidates will feel anxious and nervous about examinations. However, I want to remind you that it is important to try very hard and overcome those feelings. There is no secret that thorough preparation for your examination, and remaining calm before you enter and while you are in the examination room are key components to your retaining and being able to reproduce what you have learnt over the study period. Therefore, I encourage you to prepare and be confident that you have completed your syllabus, worked several questions and are now ready to reproduce. This week, I will present a worked example. Pay keen attention to the principles applied.
WORKED EXAMPLE
The following balances were taken from the books of Paul Petro on September 30, 2016:
The following transactions took place during the week ended September 30, 2016.
You are required to prepare the following ledger accounts. 1. Make ANY necessary transfers to the profit and loss account and, where necessary, bring down the final balances.
a. Rent received account b. Saul petal account c. Bad debts account
2. Explain why Paul Petro wrote off the balance on John Strawn account as a bad debt on September 27, 2014. State which accounting concept was applied.
3. Explain why Paul Petro did NOT include all the rent received on September 29, 2016, in his profit and loss for the year ended September 30, 2016. State which accounting concept he applied.
SOLUTION QUESTION 1A
Rent received A/c
QUESTION 1B
John Strawn A/c
QUESTION 1C
Bad debts A/c
QUESTION 2
John Strawn was unable to pay Paul Petro. However, according to the accounting concept, all losses should be accounted for.
Bad debt is a loss for Paul Petro since he will not receive the amount unpaid.
The accounting concept applied here is: prudence concept.
QUESTION 3
Rent received on September 29 totalling $1,440 which is income of the next month and not the current month.
Only the current month’s income is transferred to the profit and loss account.
The accounting concept applied here is: Accrual concept or matching principle.
Below are TWO multiple-choice questions: Choose the most appropriate response.
1. Which statement is correct? a) An asset is always a credit entry. b) An expense is always a credit entry. c) An expense is always a debit entry. d) A liability is always a debit entry.
REASONING
i. An asset is always a debit entry. ii. Liability is always a credit entry. iii. Expense is always a debit entry.
Most appropriate response: C
2. Tyler Wilson, a trader, discovered an error in his accounting records. The following entry was made in his general journal to correct the error:
a) Goods purchased for resale had been credited to the stationery account.
b) Goods purchased for resale had been debited to the stationery account.
c) Stationery purchased for office use had been credited to the purchase account.
d) Stationery purchased for office use had been debited to the purchase account.
REASONING
i. Purchases has been credited; it had been incorrectly debited. ii. Stationery is debited which means it has been increased.
Most appropriate response: D
Examination preparation tip:
As you get closer to your examination, to assist with your preparation, I encourage you to:
Try to develop you own technique for revision.
Try not to see the exam as anything other than a normal schoolday on which you are doing an exam.
Think that at least after the exam, you will be able to relax and won’t have to do much more revision.
This is where we end for this school year/examination period. As you sit your examination, I hope you will reap the success you worked for. Be confident and reproduce what you have learnt as you were completing the syllabus. Best wishes.