Introduction to Financial Accounting - Research Paper Example

Solution: (a) (In the books of Helen) Trading, Profit and Loss Account For the year ending 31 May 2006 Dr. Cr. Particulars Amount Amount Particulars Amount Amount To opening stock To purchases 168220 Less: purchase returns 0 To Assistants wages To Security guard wages 12400 (+)400 To gross profit c/d To Discount Allowed To insurance To telephone and e-mail 5200 (+)200 To light and heat To repairs to premises To rent and rates To sundry expenses To website maintenance expenses 1430 (+)375 To publicity and advertising To depreciation: Freehold premises 3000 Safe 2880 Shop fitting 3400 To net profit transferred to Helen's capital account 34500 168220 33100 12800 102660 351280 1520 5900 5400 6230 3970 17000 3940 1805 9740 9280 38565 103350 By sales 324650 Less: sales return 1250 By closing stock By gross profit b/d By discount received 323400 27880 351280 102660 690 103350 (b) Balance sheet As on 31 may 2006 Liabilities Amount Amount Assets Amount Amount Opening capital 58630 Add: Net profit 38565 Less: drawing (-)24700 Bank overdraft Creditors o/s security guard wages 400 o/s telephone and e-mail 200 o/s website maintenance expenses 375 72495 2380 19670 975 95520 Debtors Cash in hand Freehold premises 60000 Less: depreciation(new) -(3000) Less: depreciation(old) - (18000) Safe 12000 Less: depreciation(new) -(2880) Less: depreciation(old) -(4800) Shop fitting 34000 Less: depreciation(new) -(3400) Less: depreciation(old) -(10200) Closing stock 3400 520 39000 4320 20400 27880 95520 Adjustment entries: (1) O/S Security guard wages 400 should be added in the liabilities side. (2) O/S Telephone and e-mail 200 should be added in the liabilities side. (3) 900*5/12= 375 is O/S of the website maintenance expenses should be added in the liabilities side. (4) 60000/20 years= 3000 for year should be deducted as new depreciation and old depreciation should be Deducted from actual cost, therefore 60000- 18000(old) - 3000(new) = 39000. (5) 12000-4800(old) =7200(new depreciation) 2880= 4320. (7200*40/100=2880) (6) The shop fitting depreciation should be calculated at actual cost 34000*10/100=3400 Therefore shop fitting new depreciation is 34000-10200(old)-3400(new) = 20400 (c) Business Letter Your Address (Address of the respective organization who are answering Helen's questions) Dated 2nd December 2006. Address of Recipient (Helen's address) Reference number :--------------( if any) Dear Madam, Thank you for your letter of 25 November, 2006 concerning about your spent on website maintenance in Profit statement, about the value shown for your premises seems very low, about your drawings for your own Personal consumption in the profit statement and about the distinction between fixed assets and current assets. Starting with your first question about website maintenance in profit statement, the website maintenance comes under Profit and Loss account, which deals with all expenses and income and gives the net profit made or net loss suffered by a business during a particular given period. A Website either is been used for answering Inquiring e-mails about the shop or for advertising and both of them comes under Profit and Loss account on the debit side. As we know advertising expense are been incurred for attracting the customer to the shop and, therefore, they are been taken as selling expenses. Again, the selling expenses do not come under the profit statement, they are the maintenance charges for running the shop in a good manner, and this is why the wed site Maintenances charges cannot come under the profit statement. Coming to the next concern that, the value for your premises seems very low, though you paid more than that of them because the old depreciation are more than the new calculated premises. As we can see it separately below the balance sheet and in the balance sheet, this comes under the Asset side in the balance Sheet and the new calculated and paid depreciation, is very less that the previously calculated and paid one. Therefore, more cost was been paid earlier, which if alone calculated will be very high, that is why the value shown for your premises now are very low. As you have said that, you took 24700 out of the business for your own personal consumption, this comes under the debit side of trading account as owner's drawings and subtracted under the liabilities side in the balance sheet. As we know that the owner's drawing are subtracted from the sum of net profit and opening Capital, and as the amount is not been returned, though it is taken from the profit of the business it is subtracted. In addition, counted as neither a loss or bad dept or a profit and this is why is cannot be written, calculate or charged under the profit statement. The distinction between the fixed asset and the current asset is, fixed asset is been defined as those asset which are been acquired for relatively long periods for carrying on the business of the enterprises. They are not been meant for resale. Land and building, machinery, furniture is some of the important examples of fixed Assets. Sometimes the term "Block Capital" is also been used for these terms. (S.N. Maheshawari, 2000) Current assets are those assets that are been acquire with the intention of converting them into cash during the normal business operations of the company. The term current asset is been used to designate cash and other Assets or resources commonly identified as those, which are been reasonably expected to be realized in cash or sold during the normal operating cycle of the business. Thus, the term current assets includes cash and bank Balance, stocks of raw materials, work in progress and finished goods, debtors, bills receivable, short-term investment, prepaid expenses, etc.The main difference between current asset and fixed asset is that, fixed asset are those asset, which cannot resold and they are used for long term period, and current asset are those which are been acquired for converting them into cash for normal business operations. Yours faithful, Name signed _________________ Name printed with the job title. Reference: Maheshwari, S.N. (2000). 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