Incomplete records

IT IS my hope that all examination candidates sitting the exam in May/June 2018 have already prepared and are being guided by their study/review timetable. As I continue to assist you, a worked example is presented below. Read the question carefully, look at the reasoning and the workings, then try solving the question on your own. At the end, match your answer with the solution given.

QUESTION

M. Lawrence started her business on January 1, 2016, with $40,000, which she deposited in a business bank account. Although full accounting records were not kept, the following information was available about her business as at December 31, 2016:

The bank statement for 2016 showed that Lee had sold some private investments for $8,000, which had been used for business purposes. [>1]

The bank statement also showed that Lawrence had withdrawn $20,000 for her personal use.

She decided at December 31, 2016, that $4,000 should be provided for depreciation on the fixed assets. [>2]

(a) Prepare a statement, in good style of layout of your own choice, clearly showing the profit or loss for the year ended December 31, 2016. [>3]

(b) State THREE ways in which a trading and profit and loss account drawn up from full double-entry records gives the information about a business which the owner needs. REASONING:

[>1] This is additional capital contributed by M. Lawrence to the business.

[>2] Subtract depreciation from the fixed assets when computing the ending capital at December 31, 2016.

[>3] Compute the profit or loss by using the formula:

Net profit = Capital attend - Additional capital + Drawings Capital at beginning

[>4] View the relevant components found in the trading and profit and loss account, which are not found in the statement in (a), and explain briefly their relevance in checking the progress of a business. SOLUTION: (a) M. Lawrence

Statement of computing profit or loss for the year ended December 31, 2016.

(b) A trading and profit and loss account drawn up from double-entry records shows, among others: i. Sales ii. Expenses iii. Gross profit

These data cannot be found in the statement prepared in (a).

SALES DATA

These are important since they enable the owners to see how much sales are made for that year and, hence, be able to compare to other years.

The future of a business depends on its sales volume, so this data is important if owners want to check the progress of their businesses.

EXPENSE

This represents the cost of goods and services used up in the process of obtaining revenue.

It allows owners to see where their money goes and whether any effort is made to control costs and expenses.

It shows that high sales may be offset by high expenses, hence, resulting in low net profit.

It proves that low expenses must be ensured to secure maximum profits.

GROSS PROFIT

Gross profit is used to help to determine whether the products sold are profitable.

It also helps the deciding whether to increase or decrease price, and whether costs could be reduced further.

EXAMINATION PREPARATION TIP

As you get closer to your examination date, to assist with your preparation, I encourage you to:

Review your notes.

Solve at least one question per day.

Identify and start putting together the items you need to take to your examination room.

This is where we end for this week. Join me next week as we continue to complete the syllabus. Grasp the concepts and retain them. You will need them as you progress to excellence. See you next week.