Financial Accounting. Sample Paper 3 Questions & Suggested Solutions. Page 1 of 31

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1 Financial Accounting Sample Paper 3 Questions & Suggested Solutions Page 1 of 31

2 NOTES TO USERS ABOUT SAMPLE PAPERS Sample papers are published by Accounting Technicians Ireland. They are intended to provide guidance to students and their teachers regarding the style and type of question, and their suggested solutions, in our examinations. They are not intended to provide an exhaustive list of all possible questions that may be asked and both students and teachers alike are reminded to consult our published syllabus (see for a comprehensive list of examinable topics. There are often many possible approaches to the solution of questions in professional examinations. It should not be assumed that the approach adopted in these solutions is the only correct approach, particularly with discursive answers. Alternative answers will be marked on their own merits. This publication is copyright 2016 and may not be reproduced without permission of Accounting Technicians Ireland. Accounting Technicians Ireland, 2016 Financial Accounting Sample Paper 3 Page 2 of 31

3 Accounting Technicians Ireland Year 1 FINANCIAL ACCOUNTING Sample Paper 3 EXAM DURATION: THREE HOURS INSTRUCTION TO CANDIDATES PLEASE READ CAREFULLY In this examination paper the / symbol may be understood and used by candidates in Northern Ireland to indicate the UK pound sterling and by candidates in the Republic of Ireland to indicate the Euro. Answer ALL THREE questions from Section A. Answer ANY TWO of the three questions from Section B. If more than TWO questions are answered in section B, then only the first two questions, in the order filed, will be corrected. Candidates should allocate their time carefully. All workings should be shown. All figures should be labelled as appropriate e.g. s, units etc. Answers should be illustrated with examples, where appropriate. Financial Accounting Sample Paper 3 Page 3 of 31

4 SECTION A Answer ALL THREE QUESTIONS (Compulsory) in this Section QUESTION 1 (compulsory) The following trial balance is available for P Xavier a sole trader for the year ended 31 December Proprietor s capital 688,000 Land at cost 140,000 Office buildings at cost 634,000 Accumulated depreciation office building to 31/12/08 53,128 Delivery vans at cost 46,500 Accumulated depreciation delivery vans to 31/12/08 17,100 Inventory at 31/12/08 28,621 Purchases 156,607 Sales 389,061 Wages and salaries 59,000 Long term loan (interest rate 9%) 40,000 Interest on long term loan 1,600 Bank 33,662 Allowance for receivables 31/12/08 6,500 Receivables and Payables 43,359 23,491 General expenses 19,018 Carriage inwards 4,100 Carriage outwards 14,000 Drawings 4,800 Building maintenance 4,200 Light and heat 12,900 Irrecoverable debts 3,451 Accounting charges 4,000 Insurance 7,462 1,217,280 1,217,280 The following additional information has not been accounted for and should be taken into consideration: PTO Financial Accounting Sample Paper 3 Page 4 of 31

5 1. Inventory items were physically counted on the 31 December 2009 and were valued at 32, The following information relates to non current assets: a. The estimated useful economic life of office buildings is estimated at 40 years. Depreciation is to be provided using the straight-line method assuming a zero residual value. b. Delivery vans are depreciated at 20% using the reducing balance method. c. Land is not depreciated. 3. Additional irrecoverable debts of 1,700 should be written off. The allowance for receivables should be set at 5% of net receivables. 4. 4,100 of insurance is prepaid for 2010 and light and heat of 1,100 should be accrued for Discounts of 1,050 were received from payables during These discounts have not been accounted for in the above trial balance. You are required to prepare: i. The Income Statement for the year ended 31 December Marks ii. The Statement of Financial Position as at that date. 7 Marks Total 20 Marks Financial Accounting Sample Paper 3 Page 5 of 31

6 Question 2 (compulsory) The following Trial Balance was extracted from the books of J. Burke as at 1 December Trial Balance as at 1 December 2009 Debit Credit Bank 78,000 Payables 71,600 Non current assets 52,500 Receivables 43,150 Capital account 85,000 Bank loan 17, , ,650 The following transactions took place during the month of December 2009: 1. On 2 December purchased goods on credit for resale for 18,000; 2. On 4 December sold goods on credit for 31,000; 3. On 5 December purchased goods on credit for resale for 23,400; 4. On 8 December received 41,250 from receivables; 5. On 11 December returned faulty goods valued at cost of 1,550; 6. On 14 December purchased an item of non current asset, paid for in total by cheque for 11,000; 7. On 16 December purchased goods for resale by cheque for 48,900; 8. On 17 December transferred 2,000 from the bank account to the loan account; 9. On 20 December cash sales of 55,000 were lodged to the bank account; 10. On 21 December paid ESB by cheque 1,500; 11. On 28 December paid payables 51,000 by cheque; 12. On 30 December paid wages by cheque 7,500. (Ignore depreciation, VAT and interest on loan) You are required to prepare: i. Enter the trial balance figures as at 1 December 2009 in the relevant ledger accounts. 3 Marks ii. Write up the original books of entry for December 2009 and post the balances to the ledger accounts. 10 Marks iii. Balance the ledger accounts at 31 December Marks iv. Extract the Trial Balance at 31 December Marks Total 20 Marks Financial Accounting Sample Paper 3 Page 6 of 31

7 Question 3 (compulsory) - Complete Any Four Parts Part A The following information is available for sole trader M. Maple for the year ended 31 December 2013: / Draft receivables debit balances as at 31 December ,150 Draft irrecoverable debts written off during the year 9,120 Allowances for receivables as at 1 January ,550 As at 31 December 2013 M. Maple reviewed their receivables listing and decided the following (none of these adjustments have been reflected in the draft figures above): An additional / 3,700 of debts should be written off as irrecoverable; M. Maple considers that / 4,190 of debts should be made the subject of a specific allowance; The general allowance for receivables should be set at 4% of the remaining receivable balances (round to the nearest whole number). Prepare the allowance for receivables T account for M. Maple for the year ended 31 December Marks Part B The following information relates to the payroll costs for O. Oaks, a sole trader for the month of December Gross wages and salaries / 30,400; Employers PRSI/Social Insurance / 3,240; Net wages and salaries / 24,450; Note: The difference between gross and net wages and salaries relates only to salary taxes and employees PRSI/social insurance. Prepare appropriate journal entries to record the: i) Wages expense in the books and records of O. Oaks ii) Payment of wages through the bank. 3 Marks 2 Marks Financial Accounting Sample Paper 3 Page 7 of 31

8 Part C The following information relating to the motor vehicles of E. Elm is available for the year ended 30 June Vehicle Number Cost Date of Purchase Date of Disposal Motor vehicle 1 / 26,400 1 June March 2014 Motor vehicle 2 / 33,600 1 May 2012 Not applicable Motor vehicle 3 / 18,000 1 November 2013 Not applicable The deprecation policy of E. Elm is to charge depreciation on motor vehicles from the month of purchase to the month of sale on a proportional basis. Depreciation is charged at 10% straight line basis. Opening depreciation as at 1 July 2013 was / 14,700. Prepare the motor vehicle depreciation T account for E. Elm for the year ended 30 June Marks Part D Below is a sample of error types: Error of omission Error of commission Error of principle Compensating errors Error of original entry For each of the error types outlined above provide an example of the error and state whether the error would leave the trial balance in balance or not. 5 Marks Part E S. Spruce manufactures and sells three products: Products Delta, Epsilon and Zeta. The following information is available for the year ended 31 December 2013 (on a per unit basis): Inventory Item Costs Incurred Cost to Complete Sales Price Costs to Sell Units in Inventory / / / / Delta Nil 1,500 Epsilon 16.2 Nil ,000 Zeta ,500 Calculate the total value of inventory for inclusion in the financial statements of S. Spruce for the year ended 31 December Marks Financial Accounting Sample Paper 3 Page 8 of 31

9 Part F L. Limes does not maintain proper books and records. However he is in a position to provide you with the following information for the year ended 31 December December January 2013 / / Assets 95,250 81,200 Liabilities 24,540 29,780 During the year L. Limes introduced capital of / 26,500 and took drawings of / 11,200. From the information above calculate the profit or loss for the year ended 31 December Marks Total 20 Marks Financial Accounting Sample Paper 3 Page 9 of 31

10 SECTION B Answer TWO of the THREE Questions in Section B Question 4 M. Edwards, a sole trader, has the following balances in his payable s ledger as at 1 December 2009: Payable Name Nature of Balance A. Andrews Credit balance 15,110 B. Martin Credit balance 23,750 C. Williams Debit balance 2,660 D. Devit Credit balance 58,150 The following transactions took place in the month of December 2009: 1. On 2 December 2009 goods valued at 7,600 net of VAT ( 9,234 gross) were purchased from A. Andrews; 2. On 6 December 2009 goods valued at 17,200 net of VAT ( 20,898 gross) were purchased from D. Devit; 3. On 10 December 2009 goods valued at 3,935 net of VAT ( 4,781 gross) were returned to A. Andrews; 4. On 14 December 2009 goods valued at 30,000 net of VAT ( 36,450 gross) were purchased from B. Martin; 5. On 15 December 2009 C. Williams paid the balance owed by him; 6. On 17 December 2009 goods valued at 1,600 net of VAT ( 1,944 gross) were returned to B. Martin; 7. On 28 December 2009 the following balances were paid to payables: a. A. Andrews: 13,000 b. B. Martin: 30,050 c. D. Devit: 47,400 You are required to: i. Prepare the following books of original entry to record the above transactions: a. The purchases day book b. The purchases returns day book c. The cheque payments book d. The cash book 7 Marks Financial Accounting Sample Paper 3 Page 10 of 31

11 ii. iii. iv. From the books of original entry prepared in part i above and any other relevant information, prepare the payable s control account for the month ended 31 December Marks Prepare the individual T accounts for each payable for the month of December 2009 and extract a payable s listing as at 31 December Marks Reconcile the payable s listing as per part iii to the payable s control account prepared in part ii. 2 Marks Total 20 Marks [Note to Students: The Examiner has advised that questions similar to Question 2 and Question 4 above are unlikely to be examined on the same Examination Paper.] Financial Accounting Sample Paper 3 Page 11 of 31

12 Question 5 Draft a letter to a client of your firm, explaining briefly the following: i. FIFO 4 Marks ii. The going concern concept 4 Marks iii. The main differences between the financial statements of a not for profit organisation and the financial statements of a sole trader 4 Marks iv. Ethical behaviour in accounting 4 Marks v. Capital and revenue expenditure 4 Marks Total 20 Marks Financial Accounting Sample Paper 3 Page 12 of 31

13 Question 6 O. Higgins received his bank statement on 2 January 2010 that showed a credit balance of 231,500. This did not agree with the balance on the nominal ledger account for the year ended 31 December On investigation the following errors were noted: 1. Cash of 12,450 received from a customer had been entered twice to the bank account in O. Higgins s books. 2. A lodgement recorded in the bank on the 31 July 2009 for 14,500 was not accounted for in the books of O. Higgins. 3. Bank charges of 1,030 for 2009 had not been accounted for in the books of O. Higgins. 4. Cheques received from customers on the 24 December 2009 were entered into the books of O. Higgins and lodged on the 28 December 2009 but not recorded by the bank until the 3 January The value of these cheques was 80, A cheque drawn for 145 was debited in error in the books of O. Higgins as 415 in March Mr Higgins had raised capital from private sources and had lodged it to the bank on 6 June 2009 but no record had been made in the books of O. Higgins. The capital raised was 33, Cheques drawn by the company that had not been cashed by the bank as at 31 December Cheque No Date Drawn Amount /05/2008 5, /02/ , /12/ , /12/2009 1, /12/ /12/ You are required to: i. Prepare a bank reconciliation statement as at 31 December Marks ii. iii. Correct the books of O. Higgins and determine the original nominal ledger balance, prior to the correction of the above. 10 Marks Write a short note to O. Higgins advising him on two issues uncovered during this reconciliation. 4 Marks Total 20 Marks Financial Accounting Sample Paper 3 Page 13 of 31

14 Financial Accounting Sample Paper 3 Suggested Solutions Financial Accounting Sample Paper 3 Page 14 of 31

15 Solution One P. Xavier Income Statement for the year ended 31 December 2009 Sales 389,061 Cost of sales Opening inventory 28,621 Purchases 156,607 Carriage inwards 4, ,328 Less closing inventory (32,670) Cost of sales (156,658) Gross Profit 232,403 Discount received 1,050 Less Expenses Carriage outwards 14,000 General expenses 19,018 Building maintenance 4,200 Insurance 3,362 Interest 3,600 Wages and salaries 59,000 Accounting charges 4,000 Depreciation of office buildings 15,850 Depreciation of motor vehicles 5,880 Irrecoverable debts 5,151 Decrease in allowance for receivables (4,417) Light and heat 14,000 Total expenses (143,644) Net Profit 89,809 Financial Accounting Sample Paper 3 Page 15 of 31

16 P. Xavier Statement of Financial Position as at 31 December Non current assets Land 140, ,000 Office buildings 634,000 (68,978) 565,022 Motor Vehicles 46,500 (22,980) 23, ,542 Current assets Closing inventory 32,670 Receivables 39,576 Prepayments 4,100 Bank 33, ,008 Total Assets 838,550 Equity and Liabilities Capital Capital 688,000 Profit for ,809 Accumulated profits 777,809 Drawings (4,800) 773,009 Non current liabilities Term loan 40,000 Current liabilities Payables 22,441 Accruals 3,100 25,541 Total Equity and Liabilities 838,550 Workings 1 Cost of office buildings 634,000 Useful economic life 40 Depreciation 15,850 Cost of delivery vans 46,500 Financial Accounting Sample Paper 3 Page 16 of 31

17 Accumulated depreciation (17,100) 29,400 Depreciation 20% reducing balance method 5,880 Workings 2 Receivables as per TB 43,359 Irrecoverable debts as per note 3 (1,700) Restated receivables 41,659 Allowance for receivables 5% 2,083 Opening allowance for receivables (6,500) Decrease in allowance for receivables 4,417 Irrecoverable debts as per trial balance 3,451 Irrecoverable debts as per note 3 1,700 5,151 Workings 3 Insurance as per trial balance 7,462 Insurance prepaid (4,100) 3,362 Light and heat as per trial balance 12,900 Light and heat accrual (1,100) 14,000 Workings 4 Payables as per trial balance 23,491 Discounts received (1,050) Restated payables 22,441 Workings 5 Loan 40,000 Interest per annum 9% 3,600 Interest paid 1,600 Interest Accrual 2,000 Financial Accounting Sample Paper 3 Page 17 of 31

18 Solution Two Part ii Purchases Book Date Analysis Total Net VAT 02-Dec Goods for resale 18,000 18, Dec Goods for resale 23,400 23,400-41,400 41,400 - Purchase Returns Book Date Analysis Total Net VAT 11-Dec Goods for resale 1,550 1,550-1,550 1,550 - Sales Book Date Analysis Total Net VAT 4-Dec Sale of goods 31,000 31,000-31,000 31,000 - Cheque Payments Book Date Analysis Total Expenses Non current Purchases Payables Wages Assets 14-Dec Non current Asset 11,000 11, Dec Goods for resale 48,900 48, Dec ESB 1,500 1, Dec Payables 51,000 51, Dec Wages 7,500 7, ,900 1,500 11,000 48,900 51,000 7,500 Financial Accounting Sample Paper 3 Page 18 of 31

19 Cash Receipts & Lodgements book Date Analysis Total Receivables Sales VAT 8-Dec Receivables 41,250 41, Dec Sales 55,000 55,000-96,250 41,250 55,000 - Part i and Part iii Bank A/C Balance b/d 78,000 Chq Payments Book 119,900 Cash Receipts Book 96,250 Loan Repayment 2,000 Balance c/d 52, , ,250 Balance b/d 52,350. Payables A/C Cheque Book 51,000 Balance b/d 71,600 Purchase Returns Book 1,550 Purchases Book 41,400 Balance c/d 60, , ,000 Balance b/d 60,450 Receivables A/C Balance b/d 43,150 Cash receipts books 41,250 Sales 31,000 Balance c/d 32,900 74,150 74,150 Balance b/d 32,900 Capital A/C Balance 85,000 Financial Accounting Sample Paper 3 Page 19 of 31

20 Loan A/C Repayment bank 2,000 Balance b/d 17,050 Balance c/d 15,050 17,050 17,050 Balance b/d 15,050 Expenses Cheque Payments Book 1,500 Wages Cheque Payments Book 7,500 Sales Account Balance c/d 86,000 Cash Receipt Book 55,000 Sales book 31,000 86,000 86,000 Balance b/d 86,000 Purchases Account Purchases Book 41,400 Balance c/d 90,300 Cheque payments book 48,900 90,300 90,300 Balance b/d 90,300 Purchases Returns Balance c/d 1,550 Purchases Returns Book 1,550 1,550 1,550 Balance b/d 1,550 Financial Accounting Sample Paper 3 Page 20 of 31

21 Non Current Assets Balance b/d 52,500 Balance c/d 63,500 Cheque Payments Book 11,000 63,500 63,500 Balance B/D 63,500 Part iv J. Burke Trial Balance at 31 December 2009 Debit Credit Bank 52,350 Payables 60,450 Receivables 32,900 Non Current Assets 63,500 Capital 85,000 Loan 15,050 Sales 86,000 Purchases 90,300 Purchases returns 1,550 Wages 7,500 Expenses 1, , ,050 Financial Accounting Sample Paper 3 Page 21 of 31

22 Solution Three Part A / Receivables 210,150 Additional irrecoverable debts written off (3,700) 206,450 Specific allowance (4,190) 202,260 General allowance 4% 4% 8,090 Specific allowance 4,190 Closing allowance 12,280 Opening allowance 11,550 Increase in allowance 730 Allowance for receivables T Account Details / Details / Balance b/d 11,550 Balance c/d 12,280 Statement of PL ,280 12,280 Balance c/d 12,280 Part B / / Dr Wages and salaries income statement 30,400 Dr Employers PRSI 3,240 Cr Paye/prsi 9,190 Cr Net wages 24,450 Being the posting of wages and salaries Dr Net wages 24,450 Cr Bank 24,450 Being the payment of wages and salaries Part C Allowance for Motor Vehicles Depreciation Details / Details / Disposal 12,540 Balance b/d 14,700 Balance c/d 8,480 Statement of PL 6,320 21,020 21,020 Balance b/d 8,480 Motor Vehicle 1: / Financial Accounting Sample Paper 3 Page 22 of 31

23 Cost 26,400 Annual depreciation 10% Annual depreciation 2,640 Depreciation for 2009 / 2,640/12*1 220 Depreciation ,640 Depreciation ,640 Depreciation ,640 Depreciation ,640 Depreciation 2014 / 2,640/12*8 1,760 Motor Vehicle 2: / Cost 33,600 Annual depreciation 10% Annual depreciation 3,360 Motor Vehicle 3: / Cost 18,000 Annual depreciation 10% Annual depreciation 1,800 Depreciation for 2014 / 1,800/12*8 1,200 Part D Error of omission this is when an entry is completely omitted from the books and records. There is no debit entry and no credit entry. The error type will leave the trial balance still in balance. Error of commission - this is when an entry is recorded in the correct category of account but in the wrong account. For example light and heat expenses being recorded as a wages and salaries expense. The error type will leave the trial balance still in balance. Error of principle this is when an entry is recorded in the wrong category of account. For example repairs to buildings being recorded as an addition to buildings. The error type will leave the trial balance still in balance. Compensating errors this is when two complete unrelated errors, by chance, compensate each for other and therefore this error type will leave the trial balance still in balance. Error of original entry this error type is when the error was made in the books of original entry and therefore the error has been carried through to the nominal ledgers. For example: a sale of / 1,000 being recorded in the books of prime entry as / 900, in error. The error type will leave the trial balance still in balance. Financial Accounting Sample Paper 3 Page 23 of 31

24 Part E Inventory Item Sales Cost to Costs to NRV Price Complete Sell / / / / Delta Nil = Epsilon Nil = Zeta = 9.50 Inventory Item Total Cost NRV Valuation Units of Valuation / / / Inventory / Delta * 1,500 81,000 Epsilon * 2,000 32,400 Zeta * 3,500 33, ,650 Part F / Net assets at the end of the year 70,710 Less net assets at the start of the year (51,420) Change in net assets during the year 19,290 Less capital introduced in the year (26,500) Add drawings for the year 11,200 Profit/loss for the year 3,990 Financial Accounting Sample Paper 3 Page 24 of 31

25 Solution Four Part i Purchases Book Date Analysis Total Net VAT 02-Dec Goods Andrews 9,234 7,600 1, Dec Goods Devit 20,898 17,200 3, Dec Goods Martin 36,450 30,000 6,450 66,582 54,800 11,782 Purchase Returns Book Date Analysis Total Net VAT 10-Dec Goods Andrews 4,781 3, Dec Goods Martin 1,944 1, ,725 5,535 1,190 Cheque Payments Book Date Analysis Total Payables 28-Dec Payables - Andrews 13,000 13, Dec Payables - Martin 30,050 30, Dec Payables - Devit 47,400 47,400 90,450 90,450 Cash Receipts & Lodgements book Date Analysis Total Payables 15-Dec Williams 2,660 2,660 2,660 2,660 Part ii Payables A/C Opening balance b/d 2,660 Balance b/d 97,010 Cheque payments book 90,450 Purchases Book 66,582 Purchase Returns Book 6,725 Cash receipts book 2,660 Balance c/d 66, , ,252 Balance b/d 66,417 Part iii Financial Accounting Sample Paper 3 Page 25 of 31

26 Andrews A/C Cheque payments book 13,000 Balance b/d 15,110 Purchase Returns Book 4,781 Purchases Book 9,234 Balance c/d 6,563 24,344 24,344 Balance b/d 6,563 Martin A/C Cheque payments book 30,050 Balance b/d 23,750 Purchase Returns Book 1,944 Purchases Book 36,450 Balance c/d 28,206 60,200 60,200 Balance b/d 28,206 Williams A/C Balance b/d 2,660 Cash receipts books 2,660 2,660 2,660 Devit A/C Cheque payments book 47,400 Balance b/d 58,150 Balance c/d 31,648 Purchases Book 20,898 79,048 79,048 Balance b/d 31,648 Payable s Listing Andrews 6,563 Martin 28,206 Williams - Devit 31,648 Total 66,417 Financial Accounting Sample Paper 3 Page 26 of 31

27 Part iv Balance as per payable s control account 66,417 Balance as per payable s listing 66,417 Difference - The balance as per the payable s control account and the payable s listing should always be the same. Financial Accounting Sample Paper 3 Page 27 of 31

28 Solution Five An Accounting Technician Auditors & Accountants The Square Dublin Client Client Road The Road Date: 31 December 2009 Dear Mr. Client As previously discussed please find below a brief explanation of the terms requested by you. FIFO First In First Out method of valuing inventory This means that from a valuation perspective it is assumed that the goods purchased first are sold first. Every time a sale is made, the cost of goods sold is identified as representing the cost of the oldest goods remaining in inventory. This is the most common way of valuing inventories as it gives inventory a value based on most recent goods purchased. The Going Concern Concept Accountants assume, unless there is evidence to the contrary, that a business is not going to break up and that it will continue in operational existence for the foreseeable future (this is taken as one year from the date the financial statements are signed) and there is no intention to put the business into liquidation. This has important implications for the valuation of assets and liabilities. One does not use this concept when one is aware of circumstances, which would cause the business to be closed down or substantially wound up. Differences between the Financial Statements of a Not for Profit Organisation and the Financial Statements of a Sole Trader Not for profit organisations are organisations such as charities and clubs. These organisations are established to promote an activity or a group of activities or to promote the interests of the members. They are not run with the objective of making a profit, like a sole trader business. Not for profit organisations do conduct business to earn revenue but this revenue is invested back into organisation for the purpose of furthering the goals of the organisation as opposed to for the benefit of members personally. Not for profit organisations do not need to prepare a set of complex financial statements and the accounts tend to include a statement of income and expenditure and an accumulated fund statement as at the end of the year. Financial Accounting Sample Paper 3 Page 28 of 31

29 Ethical Behaviour in Accounting Ethics in accounting is of utmost importance to accounting professional and those who rely on their services. Accounting professionals know that people who use their services, especially decision makers using financial statements, expect them to be highly competent, reliable and objective. Those who work in the field of accounting must not only be well qualified but must also possess a high degree of professional integrity. The general ethical standards of society apply to people in professions such as medicine and accounting just as much as to anyone else. However, society places even higher expectations on accountants. People need to have confidence in the quality of the complex services provided by accountants. Because of these high expectations, accountants have adopted a code of ethics, also known as codes of professional conduct. These ethical codes call for their members to maintain a level of self-discipline that goes beyond the requirements of laws and regulations. Capital and Revenue Expenditure Capital Expenditure: this is expenditure on goods that will last for more than one year and are not bought for resale but to be used by the business to help generate sales. Examples include premises, equipment, delivery vans etc. Items of capital expenditure are recorded in the statement of financial position of a business and depreciated over the useful economic life of the asset. Revenue (Current) Expenditure: this is expenditure on goods that will be used up within one year and are not bought for resale. They are incurred in the day-to-day running of the business. Examples include wages, rent, rates, telephone etc. Current expenditure is recorded in the Income Statement of a business and reduces profit. I trust the above explanations clarify the matters for you. Yours sincerely An Accounting Technician Financial Accounting Sample Paper 3 Page 29 of 31

30 Solution Six Part i O. Higgins Bank Reconciliation as at 31 December 2009 Balance per bank 231,500 Add outstanding Lodgement 80,750 Less O/S Cheques , , (15,610) Restated Balance 296,640 Part ii O. Higgins Corrected bank accounted Bank Account 31/12/09 Balance 246,394 31/12/09 Error 1 12,450 31/7/09 Error 2 14,500 31/12/09 Error 3 Bank charges 1,030 6/6/09 Error 6 Capital raised 33,200 31/3/09 Error 5 ( ) /12/09 Error 7 - Backdated cheques 16,586 31/12/09 Balance c/d 296, , ,680 31/12/09 Balance b/d 296,640 Financial Accounting Sample Paper 3 Page 30 of 31

31 Part iii To: O. Higgins From: An Accounting Technician Subject: Matters regarding bank reconciliations Date: 31/12/2009 We have completed the bank reconciliation as at 31 December During this process some matters arose that we would like to bring to your attention. Issue 1 Bank reconciliations should be prepared on a regular basis. This is normally taken as every month or in some cases every week. From the errors that came to our attention it would appear that this is currently not the case within your business. Preparing regular bank reconciliations helps to ensure the accuracy of the books and records of the business by helping to identify errors, for example, on a timely basis. This in turn helps to ensure the quality of information generated for you from the accounting function. Issue 2 Cheques raised have six months to be presented to the bank for payment. If they are presented after this period of time the cheque will be returned by the bank un-cashed to the payee. On the outstanding cheque list there are two cheques that were written more than six month prior to the year end. These cheques should be written back to the bank account (thereby increasing it) and increasing your liabilities/payables. The cheques can then be reissued or the balances held until the business is contacted by the payable requesting payment. Should you require any further information in this regard please feel free to contact me. An Accounting Technician Financial Accounting Sample Paper 3 Page 31 of 31