Theory of double entry

WORKED EXAMPLE QUESTION

Janice provided the following information on May 1, 2012: You are required to: a. Prepare an opening journal entry at May1, 2012, to show the capital at that date. The following payments were made during the year: i. Insurance. $1,680, including $600 for the quarter ended June 30, 2013.

ii. Rent. $22,700, not including $2,000 for the month of April 2013. You are required to: a. Prepare the insurance account for the year ended April 30, 2013. Balance the account and bring down the balance at May 1, 2013.

b. Prepare the rent account for the year ended April 30, 2013. Balance the account and bring down the balance on May 1, 2013.

c. State the accounting principle applied in (a) and (b).

d. Explain the difference between capital receipts and revenue receipts.

e. Indicate by placing a (>) indicating which transactions are capital and which are revenue.

REASONING

1. Use the accounting equation to calculate capital. Capital = Assets – Liabilities 2. Loan from the bank is employed in the business to buy fixed assets.

WORKINGS

1. $600 for quarter – prepaid for 2 months =$400.

SOLUTION

a) Journal b) Insurance account c) Rent account d) Accrual concept OR matching principle. e) Capital receipts and proceeds received when fixed assets are sold.

f) Below are fivd multiple-choice questions and four possible responses. Choose the most appropriate response. 1.Which of the following is not a capital expenditure? A. Purchase of land.

B. Interest paid on loan taken for land.

C. Cost of registration of land.

D. Brokerage paid on the purchase of land. 2. Capital revenue is obtained by A. Receiving commission income.

B. Rent received.

C. Selling stock of goods.

D. Cash received from sale of equipment. 3. Which of the following is a revenue expenditure? A. Auditor’s fee.

B. Purchase of premises.

C. Acquisition of another business.

D. Legal expenses on purchase of property.

4. A bookkeeper mistakenly treats a revenue expenditure item as capital expenditure. What is the effect of this error?

A. Gross profit is understated.

B. Total assets are not charged.

C. Net profit is overstated.

D. Total assets are understated.

5. A business pays rent for premises. How is this rent classified?

A. Capital expenditure.

B. Revenue expenditure.

C. Capital income.

D. Revenue income. Recommended multiple-choice question response.

1. B

2. D

3. A

4. C

5. B

This is all we have time for this week. Visit again next week, when the presentations will continue. Remember, IF IT IS TO BE, IT IS UP TO ME. 10 simple two-letter words.