Financial Accounting Homework: Journal Entries and Ledger Accounts

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FINANCIAL ACCOUNTING
1

Bradbury, M (2011)
Table of Contents
Part A...............................................................................................................................................3
Question 1: Journal enteries.........................................................................................................3
Question 2: Ledger Accounts......................................................................................................5
Part B...............................................................................................................................................7
Direct Methods v/s indirect method............................................................................................7
References......................................................................................................................................12
2

Part A
Question 1: Journal entries
Journal Entries
Date Particulars Dr. Cr.
2019
Share final call a/c Dr. 3,92,000
To Share capital a/c 3,92,000
(Being share call due)
31-Aug Bank a/c Dr. 3,80,800
Call in Arrear a/c Dr. 19,200
To Share call a/c 3,92,000
To call in advance a/c 8,000
(Being call money received except due on 24000 shares)
10-Sep Share capital a/c Dr. 48,000
To called up a/c 19,200
To forfeited a/c 28,800
(Being share forfeited)
31-Oct Bank a/c Dr. 56,000
Employee compensation a/c Dr. 49,000
To share capital a/c 105,000
(Being call money due was received)
Profit & loss a/c Dr. 49,000
To employee compensation expenditure a/c 49,000
(Being amount charge to profit & loss account)
2020- Jan Share application a/c Dr. 2,00,000
To share capital 2,00,000
(Being share issued to raise fund of $1,00,000 ordinary
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shares of $2 each)
Bank a/c Dr. 2,00,000
To share application a/c 2,00,000
(Being application money received)
Underwriting commission a/c Dr. 6,700
To bank a/c 6,700
(Being underwriting commission issued)
Profit & loss a/c Dr. 6,700
To underwriting commission a/c 6,700
(Being underwriting commission charge to P&L account)
5-Feb Share allotment a/c Dr. Nil.
To equity share capital a/c Nil.
(Being shares allotted)
18-Feb Redemption of preference shares a/c Dr. 1,90,800
To share capital a/c 1,80,000
To share premium a/c 10,800
(Being redemption of preference shares on premium)
18-Feb Preference shareholder a/c Dr. 1,90,800
To bank a/c 1,90,800
(Being amount paid to preference shareholders)
15-Apr Bank a/c Dr. 45,600
Employee compensation expenditure a/c Dr. 39,900
To share capital a/c 28,500
To share premium a/c 57,000
(Being 52,000 shares were issued)
Profit & loss a/c Dr. 39,900
To employee compensation expenditure a/c 39,900
(Being employee compensation expenditure account
charged to P&L account)
4

5

Question 2: Ledger Accounts
General Reserve A/c
Date Particulars Amoun
t Date Particulars Amoun
t
22-
Feb To bonus 32,400 20-Jun By Opening balance 40,000
To closing
balance 60,600 30-Jun By Retained earnings 3,000
21-
Oct By Land 50,000
93,000 93,000
Retained Earnings A/c
Date Particulars Amoun
t Date Particulars Amoun
t
30-Jun To general
reserve 3,000 30-Jun By Opening balance 86000
0
To closing
balance
857,00
0
86000
0
86000
0
10% Cumulative preference share capital
Date Particulars Amoun
t Date Particulars Amoun
t
To closing
balance 400000 30-Jun By Opening balance 400000
400000 400000
Ordinary share capital A/c
6

Date Particulars Amoun
t Date Particulars Amoun
t
To closing
balance 132400 30-Jun By Opening balance 50000
19-
Sep By Bank 50000
22-
Oct By Bonus 32400
132400 132400
Preference share dividend payable A/c
Date Particulars Amoun
t Date Particulars Amoun
t
5-Oct To bank 40000 30-Jun By Opening balance 40000
40000 40000
Ordinary shares dividend payable A/c
Date Particulars Amoun
t Date Particulars Amoun
t
2019 2019
5-Oct To bank 7000 30-Jun By Opening balance 7000
2020 2020
10-Jan To bank 60000 10-Jan By equity shareholder 60000
67000 67000
Bank A/c
Date Particulars Amoun
t Date Particulars Amoun
t
9-Sep To ordinary
shares 50000 5-Oct By Preference shares 40000
To closing 57000 By ordinary shares dividend 7000
7

balance payable
By ordinary shares dividend
payable 60000
107000 107000
Bonus to shares A/c
Date Particulars Amoun
t Date Particulars Amoun
t
22-
Oct
To ordinary
shares 32400 22-
Oct By general reserve 32400
32400 32400
Equity shareholders A/c
Date Particulars Amoun
t Date Particulars Amoun
t
2020
10-Jan To dividend 60000 To closing balance 60000
8

Part B
Direct Methods v/s indirect method
Cash flow statement is income statement that is prepared by the company. It is the statement
which is based revenue and expenses occurred by the business. It also helps in finding the
performance over the period of the time. It is also a very helpful statement for investors. There
are 3 activities that is included in the cash flow such as operating activity, investing activity and
financing activity. Operating activity is the activity which includes all the operating transaction
that is occurred in the business. Usually, all the transaction in this is recorded on a cash basis.
There is no cash involved in the transaction than no entry will be made in the cash flow
statement. Investment activity includes all the activity that is related to the investment. The
financial activity includes all the transaction related to the finance and also any transaction
related to sharing capital; it also includes the dividend and any interest incurred by the company
(Williams, & Dobelman, 2017).
1. The indirect method is based on the net income and includes all the adjustment which
means by adding and subtracting all the variable transaction that are incurred so to find
out the accurate net cash inflow from the operating activity (Jooste, 2019).
2. In the direct method of the cash flow from the operating activity all the ash transaction
that is received from the customer and all the transaction in which the payment is made to
the supplier. It also includes any other payment made related to the operation of the
business such as interest expenses, income tax payment and any other variable expenses.
3. In the direct method of the cash flow statement, the transaction start with all the cash
received and cash paid but it excludes all the non-cash transactions (Khanji, & Siam,
2015).
4. Under the indirect method of the cash flow statement, the transaction starts from the net
income of the year.
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As per the concepts of AS 3, the cash flow is the statement which consists of cash in hand and all
the demand deposits that are deposited with the banks. It also includes the cash equivalents as
they are short term and also they are a highly liquid investment. They are always ready to
convert into the cash by the business (Williams, & Dobelman, 2017).
1. The direct method of the cash flow is more beneficial or superior to the indirect method.
The main of the direct method to provide information regarding all the cash transaction
that is incurred by the business such as receipts and payments.
2. The direct method has 2 activities as similar to the indirect but there is a difference in the
operating activity in both the method. Under the direct method it includes only that
transaction in which cash received or paid by the business but in the indirect method it
includes all the activity which are based on the operation of the business such as
depreciation, interest expenses, dividend expenses and any other extraordinary activity
that is related to the operation of the business.
3. The direct method is a very simple and easy method as compared to the indirect method,
it also small process in relation to the indirect method (Bradbury, 2011).
4. Usually, the direct method is more suitable for the small business to flow as it can be
easily understood. It also doesn’t require an advanced skill as it is based on the simple
concepts.
5. As per AS 3, the proper format has been prescribed so that it will be helpful for the
business to adapt and make the entries as per the format (Jooste, 2019).
6. The direct method is more flexible as compared to the indirect method (Khanji, & Siam,
2015).
7. The direct method of the cash flow helps in recording only that transaction in which cash
is involved.
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Examples of Cash flow (Direct & Indirect Method)
Cash Flow Statement (Direct Method)
Particular Amount Amount
sales (cash) $ 4,800,000
less: Cost of goods sold $ (3,600,000)
Gross Profit $ 1,200,000
less: Administration and Selling
expenses $ (360,000)
Operating profit before working
capital changes $ 840,000
Add: increase in creditors $ 100,000
increase in Investors $ (50,000) $ 50,000
cash generated from the operation $ 890,000
less: tax paid $ (150,000)
Net cash From Operating Activity $ 740,000
Cash flow from Investing Activity
Purchase of Fixed Assets $ (600,000)
Net cash used in the Investing
Activity $ (600,000)
Cash Flow from financing Activity
Dividend Paid $ (120,000)
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Net cash from financing activity $ (120,000)
$ 20,000
Add: opening balance of cash in hand
and bank $ 50,000
Cash in hand and at the bank on
31.03.2XXX $ 70,000
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