BA10_C28.

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Chapter 28 l Accruals and prepayments and other adjustments for financial statements

28.7A The owner of a small business selling and repairing cars which you patronise has just
received a copy of his accounts for the current year.
He is rather baffled by some of the items and as he regards you as a financial expert, he has
asked you to explain certain points of difficulty to him. This you have readily agreed to do. His
questions are as follows:

(a) ‘What is meant by the term “assets”? My mechanical knowledge and skill is an asset to the
business but it does not seem to have been included.’
(b) ‘The house I live in cost £30,000 five years ago and is now worth £60,000, but that is not
included either.’
(c) ‘What is the difference between “fixed assets” and “current assets”?’
(d) ‘Why do amounts for “vehicles” appear under both fixed asset and current asset headings?’
(e) ‘Why is the “bank and cash” figure in the balance sheet different from the profit for the year
shown in the profit and loss account?’
(f ) ‘I see the profit and loss account has been charged with depreciation on equipment etc.
I bought all these things several years ago and paid for them in cash. Does this mean that I am
being charged for them again?’

Required:
Answer each of his questions in terms which he will be able to understand.

(Association of Chartered Certified Accountants)

28.8 The following trial balance was extracted from the books of R Giggs at the close of business
on 28 February 20X7.

Dr Cr
£ £
Purchases and sales 92,800 157,165
Cash at bank 4,100
Cash in hand 324
Capital account 1 March 20X6 11,400
Drawings 17,100
Office furniture 2,900
Rent 3,400
Wages and salaries 31,400
Discounts 820 160
Debtors and creditors 12,316 5,245
Stock 1 March 20X6 4,120
Provision for doubtful debts 1 March 20X6 405
Delivery van 3,750
Van running costs 615
Bad debts written off 730
174,375 174,375

Notes:
(a) Stock 28 February 20X7 £2,400.
(b) Wages and salaries accrued at 28 February 20X7 £340.
(c) Rent prepaid at 28 February 20X7 £230.
(d) Van running costs owing at 28 February 20X7 £72.
(e) Increase the provision for doubtful debts by £91.
(f ) Provide for depreciation as follows: Office furniture £380; Delivery van £1,250.

Required:
Draw up the trading and profit and loss account for the year ending 28 February 20X7 together
with a balance sheet as on 28 February 20X7. ‘

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