Accounting Principles TMA 02: VAT, Depreciation, and Ledgers

This accounting assignment solution covers several key areas of accounting principles. It begins with a VAT account preparation, detailing transactions and obligations. The solution then assesses an extended trial balance, including accrual adjustments and prepaid expenses. Further, it explains the treatment of wages in business accounts, emphasizing the separate entity principle. The assignment also addresses depreciation calculations for various assets (buildings, plant & equipment, lorries), profit/loss on disposal, and allowance for irrecoverable receivables. It also covers non-current assets balance, figures of receivables, inventory accounting systems (AVCO and FIFO), and the profitability equation. The solution includes receivable and payment ledgers, trial balance preparation, and explanations for recording business transactions, purchase day books, and VAT registration. Finally, it provides a bank reconciliation statement, detailing adjustments and balances.

Accounting

Table of Contents
TMA 02...........................................................................................................................................4
QUESTION 1..................................................................................................................................4
a. Preparation of Vat account.......................................................................................................4
b. Assessing amount for extended trial balance..........................................................................5
C. Explanation for the treatment of wages in business accounts.................................................6
QUESTION 2..................................................................................................................................6
A. Calculation of depreciation, loss/profit on disposal an allowance for irrecoverable
receivables...................................................................................................................................6
B. Non-current assets balance on 30th June 2016........................................................................9
C. Figures of receivables on balance sheet................................................................................10
D. Inventory accounting system, AVCO and FIFO..................................................................11
E. Explaining profitability equation..........................................................................................11
QUESTION 3................................................................................................................................11
a. Setting out receivable and payment ledgers account.............................................................11
b. Balance off general, receivable and payment ledger account................................................12
c. Presenting a trial balance.......................................................................................................12
QUESTION 4................................................................................................................................13
a. Explaining the reasons due to which Peter needs to record all the business transactions.....13
b. Assessing the importance of purchase day book in record keeping......................................13
c. Giving advice in relation to registering VAT immediately...................................................14
d. Preparing a bank reconciliation statement.............................................................................14

TMA 02
QUESTION 1
On the basis of cited case situation Carol owns and operates night club and it is registered
for Vat. Hence, in this, Carol wants to know his obligations in relation to Vat. Thus, Vat account
of Carol for the month ended at 30th November 2016 is as follows:
a. Preparation of Vat account
VAT account
Date
Particular
s
Debit
(in £) Date Particulars
Credit
(in £)
7-Nov-
2016 To bank 2400 1st November 2016
By balance
b/d 11200
8-Nov-
2016 to bank 11200 14-November-2016 By creditors 384
17-
Nov-
2016 To debtors 1920 15-November-2016 By bank a/c 450
30-November-2016
By balance
c/d 3486
15520 15520
The above mentioned table clearly presents that Vat obligations of Carol are related to the
amount of £3486. Moreover, Carol received £15520 from customers through the means of sales.
On the other side, individual paid £12034 for making purchase. Hence, by taking into
consideration such aspects it can be said that Carol has liability to pay £3486 to the government.
Date Transaction Assumptions
2 November Bars and restaurant takings Entry is no needed because vat
is not charged or calculated on
services.
4 November Payment of wages Wages are not the subject of
vat.

7 November Receiving invoice Sales of £12000 have been
made for bottled drinks.
8 November Payment of vat Vat of October has been paid.
14 November Purchase of computer Vat is charged by the seller on
computer worth of £1920.
15 November Making payment for painting Vat worth of £450 has been
paid by carol for money
invested in painting.
16 November Payment of license fees License fees are not the part of
vat.
17 November Bank receipts for sales done
through credit card
Vat is charged from customers
for the services offered by
carol.
21 November Payment for servicing the
music equipment
Services charges do not come
under the category of vat.
22 November Drawing Money withdrawal for
personal use is not the subject
of Vat payment.
24 November Cash refund from customer No vat obligations
26 November Money received from
subscription
No vat obligations
29 November Making payment for
advertising leaflets
No vat obligations
b. Assessing amount for extended trial balance
In accordance with the scenario, following accrual adjustments should be made for the
next quarter ending on 31st December, 2016, mentioned below:
1. Accrual Adjustment
Telephone expenditures a/c Dr. £1,500

To Outstanding telephone expense a/c £1,500
2. Advance or prepaid adjustment
Prepaid rent a/c Dr. £4,800
To cash a/c £4,800
3. VAT
Advance VAT a/c Dr. £14,333.33
To VAT a/c £14,333.33
(Working note: 500*4/12*86)
C. Explanation for the treatment of wages in business accounts
Wages is a type of direct expenditures, henceforth; it must be reported as direct
expenditures in the profitability statement and result in less net earnings. This treatment is
recorded through following separate entity principle which indicates that business and entity are
different, therefore, each and every payment made to the entity must be clearly reported in the
business accounts. Moreover, in the balance sheet, it will be subtracted from the cash or bank
balance to the extent of wages paid to Carlos.
QUESTION 2
As per the scenario, Pat owns a transport and warehouse business and prepare their financial
statement at the end of every 30th June.
A. Calculation of depreciation, loss/profit on disposal an allowance for irrecoverable receivables
Transport and warehouse business
Assets depreciation rate
Building 2% per annum
Plant and equipment 10% per annum straight line basis

lorries 20% reducing balance
Calculation of depreciation on Building (£)
Accumulated depreciation 112400
Add: Depreciation for the current year@ 2% depreciation per annum
On old building (560,000-64,000) 9920
New warehouse purchased worth 170000 for whole year 3400
Total depreciation for the current year 13320
Total accumulated depreciation 125720
Calculation of depreciation on plant and equipment (£)
Accumulated depreciation 140000
Add: Depreciation for the current year@ 10% depreciation per annum
On the P&E sold for 7 months 4083.333333
On rest of the P&E 27200
Total depreciation for the current year 31283.33333
Total accumulated depreciation 171283.3333

Calculation of depreciation on lorries (£)
Balance as on 1st July 2015 470000
Less: Accumulated depreciation 188000
Written down value (WDV) 282000
Depreciation for the current year @ 20% 56400
Accumulated depreciation on 30th June 2016 244400
Calculation of profit/loss on disposal of warehouse (£)
Net book value at the date of disposal (120000-56000) 64000
Sales proceed 50000
Profit/(loss) -14000
Cost of new obtained warehouse (£)
Cost of warehouse 220000
Less: Part exchange allowance 50000
Cost of new warehouse purchased on 1st July 2015 170000
Profit and loss on disposal of Plant & equipment (£)
Disposal value of P&E 24000
Less: cost of P&E 70000.00

Accumulated depreciation 42000.00
Less: Depreciation for the current year for 7 months till 1st Feb 4083.33
Net book value of the assets 23916.67
Profit/(loss) 83.33
Allowance for irrecoverable receivables
Existing receivable on 1st July 2015 930000
Less: bad debts 6300.00
Remaining balance on 30th June 2016 923700.00
Allowance for receivables 27711.00
Less: Existing allowance 25501
Net increase in allowance 2210.00
B. Non-current assets balance on 30th June 2016
Calculation of balance of Building (£)
Building 560000
Add: Purchase of new warehouse 170000
Less: Cost of warehouse disposed off 64000

Balance on 1st July 2015 666000
Less: accumulated depreciation 125720
Balance on 30th June 2016 540280
Calculation of non-current assets
Plant and equipment 300000
Less: Cost of plant & equipment disposed on 1st July 2015 23916.67
Less: Accumulated depreciation 171283.3333
Balance on 30th June 2016 128716.67
Calculation of depreciation on lorries
Balance as on 1st July 2015 470000
Less: Accumulated depreciation on 30th June 2016 244400
Reduced balance of lorries 225600
C. Figures of receivables on balance sheet
Total receivables as on 1st July 2015: £930,000
Less: Bad debts: £6300
Balance: £923,700

Less: Allowance for receivables: £27,711
Balance on 30th June, 2016: £895,989
D. Inventory accounting system, AVCO and FIFO
It is important for Pat to record their inventory items properly so that any manipulation
and embezzlement activities by the workers can be eliminated. As per the scenario, it has been
stated that on 30th June 2016, Pat has 600 gallons of diesel and some spare parts of lorries in
closing stock. In order to record the inventory, it can either use AVCO (average cost method) and
FIFO (first-in-first out) method. First method measures both the cost of sale and value closing
goods at the weighted average cost each unit. Thus, it takes into account all the receipts of stock.
Unlike this, FIFO method assumes that first inventory items will be disposed prior before others,
henceforth, ending stock must be valued at the price of last price at which goods has been
purchased by Pat. In the statement of financial position (SOFP), inventory is recorded under the
head current assets because in a period of twelve month, it is being converted into cash through
disposal to customers.
E. Explaining profitability equation
Profitability is the surplus or excess of total turnover or revenues generated by Pat over
sum of incurred expenditures. Thus, its accounting equation will be as follows:
Net profit/loss = Total revenues (TR) – Total cost (TC)
QUESTION 3
a. Setting out receivable and payment ledgers account
Receivable ledger account
Date Particulars
Amoun
t Date Particulars
Amoun
t
1-Mar
To bal b/d Jeans
gallery 246 6-Mar
By cash a/c (Dina's
design) 80

1-Mar
To bal b/d Dina's
design 80 12-Mar
By cash a/c (Juliette
Lebelle) 514
1-Mar
To bal b/d Shraddha
Ltd 175 14-Mar
By cash a/c (Jeans
gallery) 220
1-Mar
To bal b/d Juliette
Lebelle 1147 20-Mar
By cash a/c (Shraddha
ltd) 175
22-Mar To sales a/c 90 31-Mar By bal c/d 785
24-Mar To sales a/c 36
1774 1774
Payable Ledger account
Date Particulars
Amoun
t Date Particulars
Amoun
t
8-
Mar
To cash a/c (Payment made to
Armin supplies) 36
1-
Mar
By bal b/d Armin
supplies 36
28-
Mar
To cash a/c (Payment made to
Seamus o. Byrne) 600
1-
Mar By bal b/d Jayden Ltd 144
31-
Mar By bal c/d 312
1-
Mar
By bal b/d Seamus o'
Byrne 600
21-
Mar
By purchase a/c
(Armin supplies) 168
948 948
b. Balance off general, receivable and payment ledger account
By preparing receivable and payable ledger peter can assess the actual balance of
debtors and creditors. On the basis of this aspect balance of receivable ledger account is £785.
On the other side, balance of payable ledger account is £312. Hence, by considering such aspect
business unit can prepare suitable trial balance.
c. Presenting a trial balance
Trial balance at 1st April
Particulars Deb
it
(in
Cred
it (in
£)

£)
Capital 1596
Equipment 120
0
Bank 472
Receivable 785
Payable 312
Cash 626
sales 516
Discount
allowed 8
Miscellaneo
us expenses
277
Total
289
6 2896
QUESTION 4
a. Explaining the reasons due to which Peter needs to record all the business transactions
On the basis of cited case situation Peter has started the business of painting and
decorating. In this regard, Peter is required to record all the business transactions in a highly
structured way. Moreover, business entity can assess the profit margin only when they have
proper record about the income or expenses. By recording all the transactions Peter can assess
the areas in which money is spent by him. In this way, such transaction presents the fair view or
picture of financial aspects. Further, daily records also provide assistance to the business entity in
monitoring and making control on financial activities.
b. Assessing the importance of purchase day book in record keeping
Purchase day book: In this, all the transactions are recorded by the business entity which is
related to purchase. Thus, it clearly provides deeper insight about credit purchase which is made
by the firm during the accounting period or month. Such book does not include information
regarding the cash purchase made by the owner of firm. Purchase book has five columns such as
date, suppliers name, quantity, rate and description. In this, purchase book provides entrepreneur

with the detailed information about the goods or product purchased during the month. Hence, by
summing up all the amount business entity can assess the total purchase made during the month
on credit basis. By considering all such aspects it can be said that by developing and maintaining
purchase day book Peter can get information about credit purchase.
c. Giving advice in relation to registering VAT immediately
According to the rules and regulations Peter must register for VAT if his taxable
turnover exceeds threshold of Vat registration. The current VAT registration threshold is £81000
and it varies in each accounting year. On the basis of this aspect, Peter needs to make registration
for VAT if his taxable turnover is more than £81000 for any consecutive 12 months period.
Hence, by taking into account the aspects of such taxable turnover and threshold limit
entrepreneur needs to make focus on making registration for VAT.
d. Preparing a bank reconciliation statement
Reconciliation statement
Date Particulars Amount Net amount
1-Oct Debit balance as per cash book 1440.85
Add:
6-Oct Wood 750
18-Oct bank credit 1500
21-Oct Sundries 54.75
23-Oct Brushes 115.25
28-Oct Petrol account 130.77
29-Oct paints Ltd 190.52
30-Oct Bank credit 750
4932.14
Less:
4-Oct Amount withdrawal 66.4
7-Oct payment 750
16-Oct bank 1500
24-Oct Payment 54.75
28-Oct sales 750
29-Oct sales 2500
29-Oct payment 115.25
30-Oct Withdrawal 156