Accounting Fundamentals: Financial Statement Preparation and Analysis

This document presents a comprehensive solution to an accounting fundamentals homework assignment. It begins with an introduction to accounting fundamentals, emphasizing expenditure, income, assets, and liabilities. The assignment is structured into five tasks. Task 1 involves recording, balancing, and closing ledger accounts for Maxim, preparing a trial balance, and generating a profit and loss account along with a statement of financial position. Task 2 repeats this process for Pendo. Task 3 focuses on Mafuta, including ledger accounts, trial balance extraction, and the preparation of an income statement and balance sheet. Task 4 requires preparing ledger accounts and extracting a trial balance for Ricardo, dealing with transactions with customers and suppliers. Finally, Task 5 presents the differences between revenue and capital expenditure, concluding with a discussion of accounting standards. The solution includes detailed journal entries, ledger accounts, trial balances, profit and loss statements, and balance sheets, providing a complete overview of the accounting process.

Accounting fundamentals

Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
a) Recording, balancing and closing ledger accounts for Maxim...............................................1
b) Preparation of list of above accounts......................................................................................3
c) Preparation of P&L account and statement of financial position for Maxim..........................4
TASK 2............................................................................................................................................5
a) Recording, balancing and closing ledger accounts for Pendo.................................................5
b) Preparation of trail balance......................................................................................................7
c) Preparation of Profit and loss A/c and statement of financial position...................................8
TASK 3............................................................................................................................................9
a) Recording and closing ledger accounts for Mafuta.................................................................9
b) Extraction of trial balance at 31 January...............................................................................13
c) Preparation of Income statement and Balance sheet.............................................................13
TASK 4..........................................................................................................................................14
Preparation of ledger accounts and extracting trail balance for Ricardo having transactions
with individual customers and suppliers....................................................................................14
TASK 5..........................................................................................................................................17
Presenting difference between revenue and capital expenditure...............................................17
CONCLUSION..............................................................................................................................20
REFERENCES..............................................................................................................................21

INTRODUCTION
Accounting fundamentals is a term which used for basic concepts of accounting which
involves expenditure, incomes, assets, liabilities and many more (Albritton, 2019). This concept
is related with the purpose of developing various accounting statements which aids in assessing
the financial performance of a business organisation (Basu and et.al., 2015). The main aim of
this report is to build an understanding about the concepts and systems of accounting. This report
includes various tasks which involves development and presentation of various financial
statements.
The first four tasks of this report are related with development of various statements such as
ledger accounts, trial balance, income statements and balance sheets which are based on journal
entries. These statements are prepared using the information about various organisations and
individuals. The last task is related with assessing the difference between revenue expenditure
and capital expenditure. This difference is evaluated with the reference of accounting standards
which are universal accounting norms that are required to be followed by every lawful business
firm despite of the variation in its size or structure.
TASK 1
a) Recording, balancing and closing ledger accounts for Maxim
Journal entries for Maxim:
Date Journal entry Debit (£) Credit(£)
05/04/19 Cash Account Dr 300
To capital Account 300
07/04/19 Purchase Account Dr 200
To cash Account 200
08/04/19 Cash Account Dr 250
To loan Account 250
15/04/19 Motor van Account Dr 150
To cash Account 150
20/04/19 Cash Account Dr 350
To sales Account 350
28/04/19 Rent Account Dr 50
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To Cash Account 50
29/04/19 Loan Account Dr 200
To cash Account 200
30/04/19 Drawing Account Dr 60
To cash Account 60
Total 1560 1560
Cash A/c
Dr. Cr.
Date Particular Amount
(£)
Date Particular Amount (£)
05/04/19 To capital
Account
300 07/04/19 By purchase
Account
200
08/04/19 To loan Account 250 15/04/19 By Motor van
Account
150
20/04/19 To sales
Account
350 28/04/19 By rent Account 50
29/04/19 By loan Account 200
30/04/19 By Drawing
Account
60
30/04/19 By balance c/d 240
900 900
Loan A/c
Dr. Cr.
Date Particular Amount
(£)
Date Particular Amount (£)
29/04/19 To cash Account 200 08/04/19 By cash Account 250
30/04/19 To balance c/d 50
2

250 250
Drawing A/c
Dr. Cr.
Date Particular Amount
(£)
Date Particular Amount (£)
30/04/19 To cash Account 60 30/04/19 By balance c/d 60
60 60
Purchase A/c
Dr. Cr.
Date Particular Amount
(£)
Date Particular Amount (£)
07/04/19 To cash Account 200 30/04/19 By balance c/d 200
200 200
Capital A/c
Dr. Cr.
Date Particular Amount
(£)
Date Particular Amount (£)
30/04/19 To balance c/d 300 05/04/19 By cash account 300
300 300
Rent A/c
Dr. Cr.
Date Particular Amount
(£)
Date Particular Amount (£)
28/04/18 To cash account 50 30/04/18 By balance c/d 50
3

50 50
Motor van A/c
Dr. Cr.
Date Particular Amount
(£)
Date Particular Amount (£)
15/04/19 To cash Account 150 30/04/19 By balance c/d 150
150 150
Sales A/c
Dr. Cr.
Date Particular Amount (£) Date Particular Amount (£)
30/04/19 To balance c/d 350 20/04/19 By cash 350
350 350
b) Preparation of list of above accounts
Trial balance of Maxim as on 30 April 2019
Account Title Debit Credit
Cash Account 240
Purchase Account 200
Loan Account 50
Motor van Account 150
Capital Account 300
Sales Account 350
Drawing Account 60
rent Account 50
Total 700 700
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c) Preparation of P&L account and statement of financial position for Maxim
Profit and Loss for the month ended 30 April
Particular Amount (£)
sales 350
Less: Cost of goods sold 100
Gross profit 250
Less: Rent paid 50
net profit 200
Working notes
Particulars Amount
opening stock 0
Add: Purchases 200
Less: closing stock 100
Cost of goods sold 100
Statement of financial position as on 30 April
Assets Amount Liabilities Amount
Non-current assets capital 300
Motor van 150 Less : Drawings 60
Current assets Add: net profit 200
inventory 100 440
cash 240 loan 250
Less : repaid 200
50
Total 490 Total 490
TASK 2
a) Recording, balancing and closing ledger accounts for Pendo
SALES ACCOUNT
Dr. Cr.
5

6

7

b) Preparation of trail balance
8

c) Preparation of Profit and loss A/c and statement of financial position
9

TASK 3
a) Recording and closing ledger accounts for Mafuta
Sales A/c
Dr. Cr.
Date Particular Amount
(£)
Date Particular Amount
(£)
31/01/19 To balance c/d 412 02/01/19 By Harvey
Account
124
11/01/19 By cash Account 64
21/01/19 By cash Account 110
28/01/19 By cash Account 84
31/01/19 By cash Account 30
412 412
office expense A/c
Dr. Cr.
Date Particular Amount
(£)
Date Particular Amount (£)
10

23/01/19 To cash Account 3 31/01/19 By balance c/d 3
3 3
Cash A/c
Dr. Cr.
Date Particular Amount
(£)
Date Particular Amount
(£)
01/01/19 To balance B/d 343 05/01/19 By wages
Account
12
07/01/19 To smith Account 18 09/01/19 By Max Account 21
11/01/19 To sales Account 64 14/01/19 By wages
Account
14
21/01/19 To sales Account 110 15/01/19 By Rich Account 162
23/01/19 To Harvey
Account
25 20/01/19 By office desk
Account
32
28/01/19 To sales Account 84 21/01/19 By wages
Account
17
31/01/19 To sales Account 30 23/01/19 By office
expense Account
3
28/01/19 By wages
Account
15
14/01/19 By purchase
Account
75
31/01/19 By balance c/d 323
674 674
Wages A/c
Dr. Cr.
Date Particular Amount Date Particular Amount
11

(£) (£)
05/01/19 To cash Account 12 31/01/19 By balance c/d 58
14/01/19 To cash Account 14
21/01/19 To cash Account 17
28/01/19 To cash Account 15
58 58
Office desk A/c
Dr. Cr.
Date Particular Amount
(£)
Date Particular Amount
(£)
20/01/19 To cash Account 32 31/01/19 By balance c/d 32
32 32
Max A/c
Dr. Cr.
Date Particular Amount
(£)
Date Particular Amount
(£)
09/01/19 To cash Account 21 01/01/19 By balance b/d 21
21 21
Harvey A/c
Dr. Cr.
Date Particular Amount
(£)
Date Particular Amount
(£)
01/01/19 To balance B/d 39 23/01/19 By cash Account 25
12

02/01/19 To sales Account 124
31/01/18 By balance c/d 138
163 163
Purchase A/c
Dr. Cr.
Date Particular Amount
(£)
Date Particular Amount
(£)
05/01/18 To Rich 150 31/01/18 By balance c/d 225
14/01/18 To cash 75
225 225
Rich A/c
Dr. Cr.
Date Particular Amount
(£)
Date Particular Amount
(£)
15/01/19 To cash 162 01/01/19 By balance b/d 12
05/01/19 By purchase 150
162 162
Furniture and fitting A/c
Dr. Cr.
Date Particular Amount
(£)
Date Particular Amount
(£)
01/01/19 To balance b/d 198 31/01/19 By balance c/d 198
198 198
inventory A/c
Dr. Cr.
13

Date Particular Amount
(£)
Date Particular Amount
(£)
01/01/18 To balance B/d 458 31/01/18 By Cost of goods
sold
84
31/01/18 By balance c/d 374
458 458
Moon a/c
Dr. Cr.
Date Particular Amount
(£)
Date Particular Amount
(£)
01/01/19 To balance B/d 26 31/01/19 By balance c/d 26
26 26
Smith A/c
Dr. Cr.
Date Particular Amount
(£)
Date Particular Amount
(£)
01/01/19 To balance B/d 18 07/01/19 By cash Account 18
18 18
b) Extraction of trial balance at 31 January
Trial balance for the month ending on 31 January
Account Title Debit credit
Cash Account 323
sales Account 412
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wages Account 58
Office expense Account 3
Office desk Account 32
Harvey Account 138
Purchase Account 225
Inventory Account 374
furniture and fittings Account 198
Moon Account 26
Capital Account(Balancing
figure)
965
Total 1377 1377
c) Preparation of Income statement and Balance sheet
Statement of Profit and Loss for the month ended 31 January
Particular Amount (£)
Sales 412
less: Cost of goods sold 309
Gross profit 103
Expenses
Office expense 3
wages 58
Operating profit /net profit 42
working note
Particulars Amount
opening stock 458
Add: Purchase 225
Less: closing stock 374
Cost of goods sold 309
Statement of financial position as on 31 January
Assets Amount Liabilities Amount
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Noncurrent assets capital 965
furniture and fittings 198 Add: Net profit 42
Office desk 32 bank O/d 84
current assets
cash 323
Inventory 374
Sundry debtors
Harvey 138
Moon 26
1091 1091
TASK 4
Preparation of ledger accounts and extracting trail balance for Ricardo having transactions with
individual customers and suppliers
Sales a/c
Dr. Cr.
Date Particular Amount (£) Date Particular
Amount
(£)
Jun, 27 To Trading a/c 28500 Jun, 2 By Claire – Receivable a/c 8500
Jun, 14
By Hywel – Receivable
a/c 9000
Jun, 20 By Cash a/c 6000
Jun, 24
By Mandy – Receivable
a/c 5000
28500 28500
Sales Returns a/c
Dr. Cr.
Date Particular
Amount
(£) Date Particular
Amount
(£)
16

Jun, 22
To Claire –
Receivables 1000 Jun, 27 By Trading a/c 1000
Purchase a/c
Dr. Cr.
Date Particular
Amount
(£) Date Particular
Amount
(£)
Jun, 13
To Georgina –
Payable a/c 12000 Jun, 27 By Trading a/c 16500
Jun, 21
To Andrew – Payable
a/c 4500
16500 16500
Cash a/c
Dr. Cr.
Date Particular
Amount
(£) Date Particular
Amount
(£)
Jun, 20 To Sales a/c 6000 Jun, 25
By Georgina – Payable
a/c 11160
Jun, 24
To Claire –
Receivable 7125 Jun, 27
By Andrew – Payable
a/c 4410
Jun, 25
To Hywel –
Receivables 9000 Jun, 27 By Balance c/d 6555
22125 22125
To Balance b/d 6555
Discount allowed a/c
Dr. Cr.
Date Particular Amount Date Particular Amount
17

(£) (£)
Jun,24
To Claire –
Receivable 375 Jun, 27 By Profit and loss a/c 375
Discount received a/c
Dr. Cr.
Date Particular
Amount
(£) Date Particular
Amount
(£)
Jun, 27 To Profit & loss a/c 930 Jun, 25
By Georgina – Payable
a/c 840
Jun, 27
By Andrew – Payable
a/c 90
930 930
Claire – receivable a/c
Dr. Cr.
Date Particular
Amount
(£) Date Particular
Amount
(£)
Jun, 2 To Sales a/c 8500 Jun, 22 By Sales return a/c 1000
Jun, 24 By Cash a/c 7125
Jun, 24 By Discount allowed a/c 375
8500 8500
Hywel – receivable a/c
Dr. Cr.
Date Particular
Amount
(£) Date Particular
Amount
(£)
Jun, 14 To Sales a/c 9000 Jun, 25 By Cash a/c 9000
18

Mandy – receivables a/c
Dr. Cr.
Date Particular
Amount
(£) Date Particular
Amount
(£)
Jun, 24 To Sales a/c 5000 Jun, 27 By Balance c/d 5000
To Balance b/d 5000
Georgina – payable a/c
Dr. Cr.
Date Particular
Amount
(£) Date Particular
Amount
(£)
Jun, 25 To Cash a/c 11160 Jun, 13 By Purchase a/c 12000
Jun, 25
To Discount received
a/c 840
12000 12000
Andrew – payable a/c
Dr. Cr.
Date Particular
Amount
(£) Date Particular
Amount
(£)
Jun, 27 To Cash a/c 4410 Jun, 21 By Purchase a/c 4500
Jun, 27
To Discount received
a/c 90
4500 4500
Trial balance at 27 June
Particulars Debit Credit
Sales a/c 28500
Purchase a/c 16500
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Cash a/c 6555
Sales return a/c 1000
Mandy – Receivable 5000
Discount allowed a/c 930
Discount Received a/c 375
29430 29430
TASK 5
Presenting difference between revenue and capital expenditure
Capital expenditure:
This is a broad category of expenses which includes all the expenditures which are incurred
against the assets which can help in improving the capital of an organisation (Capital budgeting,
2018). These expenses are based upon productive assets which usually are used for long period
of time and has long term life. Capital expenditure is done in order to acquire an asset and on the
improvement of that asset. This type of asset is often known as fixed asset or capital asset as it
has impact upon capital of the business organisation and is also result in enhancing capital
(Bushman, 2016).
Capital expense is not only incurred to purchase an asset; it also incurs to enhance the
capacity of that asset. For example, a machinery is purchased worth 6800 is a part of capital
expense. That repair cost of 500 incurred on that machinery is also a part of capital expenditure.
Revenue expenditure:
Revenue expenditure are the costs which are incurred by an organisation in order to
complete their operational activities. This expense is related with the day to day regular
operations of a business due to which they can operate smoothly. This cost can be known as cost
of goods sold in many cases. These expenditures include costs such as maintenance expense
(Ecer, Magro and Sarpça, 2017).
This expense is a short term expense and is recurring as well. These expenses are
necessary for an organisation to meet the regular operating costs which are usually fully tax
deducted in the same year in which expenses has been occurred (Henderson and et.al., 2015).
This is a common phenomenon that these expenses are not related with any assets but ordinary
20

expenses regarding these assets are included in revenue expenses. As far as accounting treatment
of these expenses are concerned, they are recorded in income statement under the head of cost
and other deductions. These expenses do not provide any additional value in the useful life of an
asset as they are only incurred due to an asset but are not directly related with an asset (Hutton,
2017).
Difference between capital and revenue expenditure with reference to International
Accounting Standards:
Accounting standards are the rules and regulations which are imposed upon every business
organisation in order to bring consistency and uniformity in financial statements of all the
businesses. These standards are a set of rules which are known as IFRS (Luxemburg, 2015).
International financial reporting standards are the rules which are given by International
Accounting Standards Board. These standards have special provisions and rules for capital and
revenue expenses. Differences between these two expenses on the basis of International
accounting standards are mentioned below:
Basis of Difference Capital expenditure Revenue expenditure
Capitalisation This expenditure is done to acquire
fixed assets. According to
International accounting standards,
these types of assets are capitalised
which must either be depreciated or
amortised in order to ascertain the
usefulness of the spent amount.
Revenue expenses are not
capitalised at all as they are done
for short time periods, usually for
one year.
Accounting
treatment
According to the IFRS, capital
expenses are first recorded in
income statements and then are
transacted in balance sheet under
the head of fixed assets (McVay,
Kennedy and Fullerton, 2016).
As per the standards of IFRS,
revenue expenses are only to be
recorded under income statements
under head of costs expenses.
Earning capacity Earning capacity can be referred as
an ability of expenses to improve
capability of an asset so that more
On the other hand, revenue
expenses does not enhance the
ability of an asset to earn more but
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