Accounting Notes

Subject Code: 9706

2019-20 Edition

Article: 114

Muhammad Nauman Malik

FCMA, MS Accounting (Gold Medalist), MBA (Finance),
PIPFA, DCMA, B.Com (Gold Medalist)
Keynesian Institute of Management & Sciences (KIMS)
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Title A Level Accounting Notes (Article# 114)

Author Muhammad Nauman Malik

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CONTENTS

SECTION 1 AS LEVEL – FINANCIAL ACCOUNTING 4

CHAPTER 1.1 BAD & DOUBTFUL DEBTS 5
CHAPTER 1.2 ACCOUNTING FOR NON-CURRENT ASSETS 8
CHAPTER 1.3 BANK RECONCILIATION STATEMENT 16
CHAPTER 1.4 ACCOUNTING CONCEPTS 17
CHAPTER 1.5 CAPITAL AND REVENUE 23
CHAPTER 1.6 SUSPENSE ACCOUNT 24
CHAPTER 1.7 CONTROL ACCOUNTS 26
CHAPTER 1.8 FINANCIAL STATEMENTS OF SOLE TRADERS 30
CHAPTER 1.9 ACCOUNTS FROM INCOMPLETE RECORDS 32
CHAPTER 1.10 FINANCIAL STATEMENTS OF PARTNERSHIP 35
CHAPTER 1.11 PARTNERSHIP CHANGES 41
CHAPTER 1.12 RATIO ANALYSIS – AS LEVEL 45
SECTION 2 AS LEVEL – COST ACCOUNTING 55
CHAPTER 2.1 INVENTORY VALUATION 56
CHAPTER 2.2 LABOUR COSTING 61
CHAPTER 2.3 ABSORPTION COSTING 66
CHAPTER 2.4 MARGINAL & ABSORPTION COSTING 75
CHAPTER 2.5 COST CONCEPTS & CLASSIFICATIONS 78
CHAPTER 2.6 BREAK-EVEN & PROFIT VOLUME ANALYSIS 80
CHAPTER 2.7 MARGINAL COSTING DECISION MAKING 84
CHAPTER 2.8 ACCOUNTING FOR LIMITING FACTORS 92
CHAPTER 2.9 BUSINESS PLANNING 95
SECTION 3 AS & A2 LEVEL – COMMON TOPICS 98
CHAPTER 3.1 PARTNERSHIP DISSOLUTION 99
CHAPTER 3.2 FINANCIAL STATEMENTS OF COMPANIES 102
CHAPTER 3.3 ISSUE OF SHARES & DEBENTURES 114
CHAPTER 3.4 STATEMENTS OF CASH FLOWS 125
CHAPTER 3.5 BUSINESS FINANCING 130
SECTION 4 A2 LEVEL – FINANCIAL ACCOUNTING 147
CHAPTER 4.1 ACCOUNTS OF NON PROFIT ORGANISATIONS 148
CHAPTER 4.2 INTERNATIONAL ACCOUNTING STANDARDS 155
CHAPTER 4.3 AUDITING 165
CHAPTER 4.4 RATIO ANALYSIS - SUPPLEMENT 173
CHAPTER 4.5 PURCHASE OF BUSINESS 180
CHAPTER 4.6 ACCOUNTING FOR JOINT VENTURES 184
CHAPTER 4.7 CONSIGNMENT 187
CHAPTER 4.8 COMPUTERIZED ACCOUNTING 190
CHAPTER 4.9 MANUFACTURING ACCOUNTS 198
SECTION 5 A2 LEVEL – COST ACCOUNTING 204
CHAPTER 5.1 ACTIVITY BASED COSTING 205
CHAPTER 5.2 BUDGETING 211
CHAPTER 5.3 STANDARD COSTING 220
CHAPTER 5.4 CAPITAL INVESTMENT APPRAISAL 232
Section 1 4 AS Level – Financial Accounting
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SECTION 1 AS LEVEL – FINANCIAL ACCOUNTING

CHAPTER 1.1 BAD & DOUBTFUL DEBTS 5
CHAPTER 1.2 ACCOUNTING FOR NON-CURRENT ASSETS 8
CHAPTER 1.3 BANK RECONCILIATION STATEMENT 16
CHAPTER 1.4 ACCOUNTING CONCEPTS 17
CHAPTER 1.5 CAPITAL AND REVENUE 23
CHAPTER 1.6 SUSPENSE ACCOUNT 24
CHAPTER 1.7 CONTROL ACCOUNTS 26
CHAPTER 1.8 FINANCIAL STATEMENTS OF SOLE TRADERS 30
CHAPTER 1.9 ACCOUNTS FROM INCOMPLETE RECORDS 32
CHAPTER 1.10 FINANCIAL STATEMENTS OF PARTNERSHIP 35
CHAPTER 1.11 PARTNERSHIP CHANGES 41
CHAPTER 1.12 RATIO ANALYSIS – AS LEVEL 45
Section 1 5 AS Level – Financial Accounting
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CHAPTER 1.1 BAD & DOUBTFUL DEBTS

QUESTION 1
Distinguish between the accounting treatment of a bad debt and a doubtful debt. [2]
O/N 00/P2/Q1(a), M/J 09/P2/Q2(a)(iii)

SOLUTION
Mark Scheme
 a bad debt should be written off when it becomes bad, whereas
 a provision is set up to cover doubtful debts. [2]

Suggested Solution
 Bad debts are credited to trade receivables‟ account(s) whereas for doubtful debts a
separate provision account is kept.
 Bad debt is a confirmed loss (irrecoverable debt) whereas doubtful debt is an expected
loss.
QUESTION 2
State two reasons for maintaining a Provision for Doubtful Debts Accounts [2]
O/N 97/P1/Q2(b), O/N 00/P2/Q1(a), M/J 15/P21 Q2(e), O/N 15/P23/Q1(d), O/N 18/P22/Q1(g),
M/J 19/P21 Q1(d)
OR
Advise Ross whether or not he should create a provision for doubtful debts. Justify your answer.[4]
O/N 17/P22/Q1(c)

SOLUTION
Mark Scheme
 To avoid overstating trade receivables (1)
 To avoid overstating profit for the year (1)
 To apply the prudence concept (1)
 To apply the matching concept (1)
 To reflect the true and far view (1)
 To anticipate that some customers may not pay and become bad debts (1) [Max 3]

Suggested Solution
Provision for doubtful debts should be created
 to show trade receivables at more realistic value
 to prepare for likely losses
 to avoid overstatement of profit for the year
 to apply prudence concept
 To apply matching principle
QUESTION 3
Describe two factors that a business should consider when determining the amount to be
provided for in a Provision for Doubtful Debts. [2]
O/N 00/P2/Q1(a), M/J 09/P2/Q2(a)(ii), O/N 11/P21/Q2(e)
SOLUTION
Mark Scheme
 Past experience
 Specific knowledge about each individual customer
 The state of the economy
Section 1 6 AS Level – Financial Accounting
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 Consistency concept
 Industry average
 Length of time
 Size of trade receivables
 Comparing with previous years or with competitors. (3 × 1 mark) [3]

Suggested Solution
 Nature of industry
 Past experience relating to collection from customers
 The economic conditions
 Amount and age of trade receivables (ageing schedule).
 Knowledge of previous trends or policies of competitors.
 Specific information about each customer
 Present market and industry conditions.

QUESTION 4
Explain one accounting concept which is applied when making a provision for doubtful debts. [2]
M/J 19/P22/Q2(d)

SOLUTION
Mark Scheme
 Prudence (1)
Profit and current assets should not be overstated and liabilities are not understated (1)
 Matching (1)
Revenue of an accounting period is matched against the costs of the same period (1)

Suggested Solution
 Prudence
To avoid overstating trade receivables and to avoid overstating profit for the year
 Matching
To match costs of one year against revenue of the same accounting period
QUESTION 5
Kim has provided for doubtful debts at a rate of 2% and would like to change the existing rate of
the provision to 5%.
REQUIRED
Explain why this change might be necessary. [5]
M/J 15/P22Q2(d)
SOLUTION
Mark Scheme
 increase in credit sales/more credit customers/increase in trade receivables
 deteriorating economic situation
 less efficient credit control procedures
 state of aged trade receivables‟ list
 past experience
 Marker note: no marks for prudence/matching/accruals [Max 5]

Suggested Solution
 increase in credit sales
 inefficient credit control procedures
Section 1 7 AS Level – Financial Accounting
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 entering new markets

 ageing of trade receivables
 past experience.
 deteriorating economic situation
 increase in bad debts

QUESTION 6
The owner of a business is considering introducing a system of credit control.
Explain the benefits this may bring to the business. [4]
O/N 14/P23/Q1(d)

SOLUTION
Mark Scheme
 Improved cash flow (1 + 1 for development)
 Reduction in bad debts (1 + 1 for development) [4]

Suggested Solution
 Improved and early collection from trade receivables
 Reduction in bad debts
 Reduction in collection expenses

JOURNAL ENTRIES
1 Bad Debts 
Trade receivables 
(Entry to write off Trade receivables as bad)
2 Income statement
Provision for doubtful debts 
(Entry to create/increase provision) 
3 Provision for doubtful debts
Income statement 
(Entry to record decrease in provision) 
(4a) Cash 
Trade receivables 
(Entry to record recovery from customer previously written off as bad debt)
(4b) Trade receivables 
Bad Debts Recovery 
(Entry to reverse previously written off bad debts)
OR
(4) Cash 
Bad Debts Recovery 
(Bad Debts Recovery recorded)
Section 1 8 AS Level – Financial Accounting
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CHAPTER 1.2 ACCOUNTING FOR NON-CURRENT ASSETS

QUESTION 1
Explain what is meant by a non-current asset? [4]
M/J 97/P1/Q4(c)
SOLUTION
Mark Scheme
Non-current assets are those assets that are purchased for long-term use within the business
and not intended to be sold in near future e.g. machinery, premises, furniture, motor vehicles
etc. However, purpose of keeping these assets is very important as, e.g. for Northside Motors
Ltd motor vehicles held for business use are treated as fixed assets.

Suggested Solution
Non-current assets are those assets that are purchased for long-term use within the business
and not intended to be sold in near future e.g. machinery, premises, furniture, motor vehicles
etc. However, purpose of keeping these assets is very important as, e.g. for a motor vehicle
showroom motor vehicles held for business use are treated as non-current assets.

QUESTION 2
Explain the term „depreciation‟ and give one example. [5]
O/N 09/P22/Q2(b), M/J 16/P22/Q3(a)
SOLUTION
Mark Scheme
Depreciation is an expense used to spread the net cost of a fixed asset over its useful life.
If, for example, a motor vehicle costing $10 000 is expected to last for five years after which its
scrap value will be $1 000, then its net cost will be $(10 000 – 1 000) = $9 000. Using straight-
line depreciation, an annual charge of $9 000/5 - $1 800 would be made in the income
statement. [max. 5]

Suggested Solution
Depreciation is the permanent and continuing diminution in the quality, quantity or value of an
asset. It recognizes the fact that assets with finite lives lose value over time through the passing
of time and/or wear and tear from its use.
Depreciation is recorded as an expense in the Income Statement to spread the initial price of
the assets over their useful lives to match the revenue the asset is generating.
For example a machine costing $50 000 has an estimated life of 5 years and has a residual/
scrap value of $10 000 then its total depreciable will be ($50 000 – $10 000) = $40 000.
$40 000
Under straight-line method of depreciation an annual depreciation charge of $8 000 ( )
5 years
would be made in the Income Statement.

QUESTION 3
State four factors which must be taken into account when deciding how much depreciation to
charge. [4]
M/J 10/P22/Q2(c)
SOLUTION
Mark Scheme
 Cost or Market value
 Useful life
 Residual value at end of useful life
 Expected length of ownership
Section 1 9 AS Level – Financial Accounting
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 Rate of usage
 Method of depreciation
 Type of asset
 Machine hours
Any correct 4 for (4)
Suggested Solution
Whichever method or rate is used to calculate depreciation, we must consider the following:
 the original cost of asset
 the probable/estimated useful economic life of the asset
 the approximate residual value at the end of its life
 estimated amount of expenditure on repairs during the asset‟s useful life
 possibility of obsolescence etc

QUESTION 4
Explain the function of depreciation. [2]
M/J 00/P2/Q3(a)
OR Explain why businesses provide for depreciation on their non-current assets. [6]
O/N 11/P23/Q2(c), M/J 14/P23/Q2(a), M/J 15/P23/Q1(c), M/J 16/P31/Q3(c), M/J 17/P22/Q1(c)

SOLUTION
Mark Scheme
 Depreciation is a fall in value of a non-current asset (1) due to wear and tear and other
factors
 Depreciation represents that part of the cost of an asset that is consumed during the
accounting period (1).
 The provision for depreciation annually is intended to spread the cost over the useful life
of the asset.
 This follows the matching (accruals) concept (1) as matches costs with revenue
generated by the assets (1)
 Depreciation is not a movement of cash from the business.
 Depreciating the value of a non-current asset avoids overstating the net assets of the
business (1)
 This ensures that the statement of financial position shows a true and fair view (1).
 Profit is not overstated. (1) 1 mark per valid point

Suggested Solution
Depreciation represents that part of the cost of an asset that is used up during the accounting
period. In other words it is a process by which cost is spread over the useful life of the asset and
charged to Income statement.This is charged under matching concept. The value of an asset
reduces due to reasons like physical deterioration, obsolescence, inadequacy etc. Depreciating
the value of a non-current asset helps the business to include a charge for use of a non-current
asset and include them in the statement of financial position at a true and fair view.

QUESTION 5
State three causes of depreciation. [3]
M/J 10/P22/Q2(a), M/J 13/P21/Q2(c), M/J 16/P22 Q3(b), M/J 14/P23/Q2(b), O/N 15/P23/Q2(c)
SOLUTION
Mark Scheme
 Wear and tear
 Obsolescence
Section 1 10 AS Level – Financial Accounting
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 Passage of time
 Depletion
 Technological innovation
 Usage
 Economic reasons
No marks for methods. Any three correct for (3) [3]

Suggested Solution
The following are the main causes of depreciation:
 Wear and tear [physical using up like corrosion, rot, rust and decay];
 Obsolescence [change of fashion or new substitutes or inventions];
 Inadequacy or superfluous [business operation increased hence non-current assets
inadequate]

QUESTION 6
State three causes of depreciation and give an example of a non-current asset for which these
cause might be appropriate. [3]
M/J 10/P22/Q2(b)
SOLUTION
Mark Scheme
 Wear and tear: Machinery, vehicles
 Obsolescence: Computers, any technological equipment
 Time: Lease
 Depletion: Quarry, oil well etc.
No marks for methods. Any three correct for (3) [3]

Suggested Solution
 Wear and Tear: Furniture and fixtures may physically deteriorate due to factors like
corrosion, rot, rust and decay.
 Obsolescence: With the improvement in technology older version of computers or
machines may become obsolete.
 Inadequacy: An internal telephone exchange with twenty lines may be inadequate when
business expands and new lines are needed.

QUESTION 7
Explain why Land is less likely to have depreciation provided for it than other non-current
assets. [2]
M/J 00/P2/Q3(b)
SOLUTION
Normally land has unlimited life so there is nothing within land to depreciate unless it has value
due to the existence of natural resources, then it may be subject to depletion (depreciation)
when land erodes or minerals extracted from land etc.
QUESTION 8
Discuss the difference between depreciation & funds set aside for replacement of non-current
assets [3]
M/J 00/P2/Q3(c)
SOLUTION
Depreciation is charged to spread the cost of the asset over its useful life. It is a non-cash
expense. It is simply an accounting item so does not provide any cash for the replacement of
non-current assets.
Section 1 11 AS Level – Financial Accounting
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When cash is invested in a profitable manner to provide funds for the replacement of non-
current assets then it is known as funds for replacement of non-current assets.

QUESTION 9
The directors are considering the depreciation rates applied to the non-current assets.
REQUIRED
Advise the directors whether or not they should decrease the depreciation rates.
Justify your answer. [4]
O/N 18/P23/Q1(e)

SOLUTION
Mark Scheme
Reasons for:
 Profit would increase in the short term.
 The capital base / asset base of the company would rise in the short term.

Reasons against:
 The change would not be in accordance with the accounting concept of consistency.
 The change would not be prudent.
 Assets could be overstated.
 Lower depreciation charges would mean higher losses on disposal.
 The change would not help profit in the long term.
(max 1) for positive comments, (max 2) for negative comments plus (1) for decision [4]

Suggested Solution
Reasons for:
 Increase in profit in the short term.
 The net worth of the business would rise due to increase in asset base of the company.

Reasons against:
 The change would result in overstatement of assets.
 Lower depreciation charges would mean higher losses on disposal.
 The overall impact of change on profit in the long term would be the same.
 The change would contravene consistency concept.
 The change would go against prudence concept.
QUESTION 10
Name three methods of depreciation. [3]
M/J 00/P2/Q3(d), M/J 14/P21 Q2(b)
SOLUTION
Mark Scheme
 Reducing balance method (1)
 Revaluation (1) or any other valid method [2]
Suggested Solution
 Straight line
 Depletion
 Reducing balance
 Machine hours
 Sum of years‟ digits
 Revaluation
 Units of production (any three)
Section 1 12 AS Level – Financial Accounting
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QUESTION 11
Discuss the suggestion that it should be possible for a business to change the method of
depreciation used every year, depending on circumstances. [3]
M/J 00/P2/Q3(d)

SOLUTION
The depreciation methods should be applied consistently from one year to other (consistency
concept). Methods of depreciating the assets can only be changed if the new method is
expected to give a fairer value for non-current assets as allowed by SSAP I2 (FRS 10), however
the method must not be changed repetitively.

QUESTION 12
State an accounting concept which is applied when depreciation is provided. [1]
M/J 14/P22 Q2[d (i)], M/J 18/P22/Q3(d), O/N 16/P22/Q1(e)
OR
Explain two accounting concepts which are being applied when depreciation is provided. [4]
O/N 15/P23/Q2(d), O/N 17/P22/Q3(b), M/J 18/P21 Q2(c)

SOLUTION
Mark Scheme
 Consistency (1) using the same depreciation method each year (1) to assist
comparisons of performance between years. (1)
 Prudence(1) reducing the cost of the asset to net book value so not overstating asset
worth (1) and charging depreciation as an expense to reflect asset use and so not
overstating profits (1).
 Accruals / matching (1) matching wear and tear of the asset via use against the
reduction in value (1). Matches the cost of the asset (1) with the income generated from
its use (1).
(max 3 marks for one concept only)
Suggested Solution
 The matching principle requires that the actual cost of non-current assets be allocated
to the accounting periods in which the company will benefit from their use.
 As most non-current assets lose value over time so prudence concept requires that the
accounts of a business should show a fair view of the financial position so it is necessary
to record this loss in value.
 Consistency concept requires that same depreciation method should be used over the
useful life of the asset.

QUESTION 13
SMC is considering changing the depreciation method for equipment to reducing balance
method. Explain the possible reasons why the business is considering this change. [7]
M/J 14/P22 Q2[d (ii)]

SOLUTION
Mark Scheme
 Straight line depreciation is easy to calculate (1) and therefore there is less chance of
errors (1) whereas reducing (diminishing) balance depreciation is more complex.
 Reducing (diminishing) balance depreciation has a higher depreciation charge in
earlier years (1) which more accurately reflects the profit (1) – prudence (1) and matches
costs to revenues (1) – matching / accruals (1).
Section 1 13 AS Level – Financial Accounting
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 Straight-line depreciation is an equal charge each year (1). As equipment gets older
maintenance costs increase (1) and with reducing (diminishing) balance method
depreciation will decrease (1) therefore ensuring a more even charge (1) over the life of
the asset.
(Maximum 7 marks) [7]
Suggested Solution
Straight line method is relatively easy and simple to use. Under this method depreciation rate
and amount remain constant in each year of asset‟s life as depreciation rate (%) is always
applied on original cost of asset. This method is best rated for those assets, which provide equal
benefit to the business for each year of their useful lives. Examples include building and
furniture. Moreover in straight line method annual cost of repairs increases as the asset gets
older whereas the annual depreciation charge remains constant. Hence, the total of income
statement charge on account of depreciation and repairs increases every year which reduces
annual profit progressively.
On the other hand, reducing (diminishing) balance depreciation is more complex and difficult
to use. This method is very useful for calculating depreciation on assets like equipment, which
operate faster, produce more, incur low maintenance costs and perform more accurately when
they are new. Under this method, the annual cost of repairs increases as the asset gets older
whereas the annual depreciation charge decreases each year. Hence, the total income
statement charge on account of depreciation and repairs remains more or less the same each
year so will not affect annual profit/loss in a significant manner during the asset‟s life.
QUESTION 14
State why the reducing balance method of depreciation is more appropriate for non-current
assets like motor vehicles and plant and machinery [4]
M/J 12/P23/Q2(d), O/N 15/P23/Q2(e), M/J 18/P22/Q3(b)
SOLUTION
Mark Scheme
Motor vehicles tend to fall in value more in the early years. (1) They lose value the minute they
are registered for use. Repair and maintenance costs increase as the motor vehicle gets older
(1). The straight line method of depreciation depreciates the vehicle at the same amount each
year which does not balance up the increasing repair and maintenance costs in later years. (1)
However, the reducing balance method depreciates the motor vehicle more in the earlier years
and less in later years. The reducing balance method therefore depreciates the asset less in
later years which balances with the increasing repair and maintenance costs thus providing a
fairer matching of costs with income generated (1).
1 mark to a maximum of 4 [4]
Suggested Solution
The reducing balance method is suited to non-current assets such as motor vehicles. As
vehicles, in the early years, have lower maintenance costs but give more benefits than in later
year. So in early years more depreciation is charged due to greater benefits and less is charged
in the later years. Moreover increasing costs are offset by decreasing depreciation charge.

QUESTION 15
Explain why building is usually depreciated using the straight line method while motor vehicles
are usually depreciated using the reducing balance method. [4]
M/J 14/P23 Q2(d)

SOLUTION
Mark Scheme
Section 1 14 AS Level – Financial Accounting
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Assets suffer wear and tear, etc. and lose their value at different rates (1). This might depend on
the degree of use of the asset. Vehicles tend to lose more value in the early years of use (1);
hence the reducing balance method is more appropriate. Buildings tend to lose value (1) more
consistently over their lifetime; therefore, the straight line method tends to be more appropriate
(1).

Suggested Solution
As vehicles perform more accurately when they are new but also tend to lose more value in the
early years of use; therefore the reducing balance method is more appropriate.
Buildings, on the other hand, perform and give consistent benefits to the business and therefore
tend to lose value more consistently, hence, the straight line method seems more appropriate.

QUESTION 16
Explain two accounting treatments for loose tools. [4]
M/J 18/P22/Q3(c)

SOLUTION
Mark Scheme
Its cost may not be material (1) therefore it is written off as an expense (1) on purchase (1).
If there are a large number of items (1) and costs are significant (1) the business should use the
revaluation method (1) of depreciation.
1 mark each to a maximum of 4 [4]

Suggested Solution
As per materiality concept loose tools may be written off as expenses in the income statement if
they are not in large number and do not have a material value. However if they are large in
number with a significant total cost then they may be treated as non-current asset in the balance
sheet subject to revaluation method of depreciation.
QUESTION 17
Briefly outline the advantages and disadvantages of each of these three methods of calculating
depreciation. [6]
O/N 97/P1/Q5(A)

SOLUTION
Straight line is easier to calculate and is more reliable for the assets whose efficiency or
productivity remains constant over their lives. It is not useful for those assets, which are more
efficient and productive in the earlier years of their lives.
Reducing balance is more useful for assets, which operate faster, perform more accurately,
and produce more when they are new. Therefore more depreciation should be allocated in early
years and when it is added to low maintenance cost in early years as compared to later years it
gives more equitable expenses connected with use of assets. Moreover it has the drawback that
it is difficult to compute and asset value is not fully depreciated to the scrap value.
Revaluation Method
Normally used for calculating depreciation of items such as loose tools and farmers‟ livestock
where it is difficult to estimate with any certainty the rate at which the asset will depreciate.
Under the system each year the asset is valued at the end of the accounting period and the
value is compared with that in the beginning of the year. The fall is treated as depreciation for
that period.
Value of asset at new assets Value of asset at
Formula Depreciation = + –
the beginning purchased the end
 Section 1 15 AS Level – Financial Accounting
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Asset Account
Year $ Year $
First date Balance b/f (Cost at year start) xxxx Date of Sale Asset disposal ( Cost of disposal) xxxx
Date of Pur.Bank/Vendor (asset bought) xxxx Last date Balance c/d (Cost at end) xxxx
xxxx xxxx

Provision for Depreciation Account

Year $ Year $
Last date Disposal (Depn on asset sold) xxxx 1st date Balance b/f (Total depn at start) xxxx
Last date Bal c/d (Total depn at end) xxxx Last date Income statement (Current depn) xxxx
xxxx xxxx

Asset disposal account

Year $ Year $
Date of sale Asset a/c (Cost of asset sold) xxxx Date of sale Asset a/c (trade in allowance) xxxx
Date of sale Income Statement: Profit (*) xxxx Date of sale Prov. for depn (depn on disposal) xxxx
____ Date of sale Income Statement: Loss (*) xxxx
xxxx xxxx
Section 1 16 AS Level – Financial Accounting
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CHAPTER 1.3 BANK RECONCILIATION STATEMENT

QUESTION 1
Give three reasons why the bank column balance in the cash book does not always agree with
the balance shown in the bank statement at the same date. [6]
M/J 11/P23 Q2(d)

SOLUTION
Mark Scheme
Two marks for valid explanation to a maximum of 6 marks
 Direct debits
 Standing orders
 Bank charges
 Interest on overdrafts
 Cheques dishonoured

Timing differences
 Money lodged with the bank near the end of the month
 Cheques paid but not yet presented for payment
 Cheques received but not yet credited by the bank
 Errors in recording by the bank and/or the business [6]

Suggested Solution
 Cheques paid but not yet presented for payment (un-presented cheques)
 Cheques received but not yet credited by the bank (un-credited cheques)
 Errors in recording by the bank and/or the business
 Items recorded by the bank but omitted from the cash book unless bank statement is
received e.g. Direct credits, direct debits, standing orders, bank charges, dishonoured
cheques etc.

QUESTION 2
Describe advantages of preparing bank reconciliation statement.

SOLUTION
 Bank reconciliation is necessary for the accuracy of the accounting records and for the
company‟s financial statements.
 If the bank reconciliation is performed by someone other than the authorized check
signers and record keepers, the company can improve its internal control over cash.
 It gives us a true figure for cash at bank to be shown in the balance sheet.
 It helps to detect frauds and errors
 It helps to discover cheques which have become stale.
Section 1 17 AS Level – Financial Accounting
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CHAPTER 1.4 ACCOUNTING CONCEPTS

QUESTION 1
When Mr. X received his Income statement and Balance Sheet from his accountant, he had
some questions to ask. Accordingly he wrote the following letter to the accountant.

Letter written by Mr. X to his accountant

1 New Lane
Ledford
1 February 1998
John & Co
2-Tikery Street
Ledford
Dear John,
I know that I have little understanding of accounting matters, and have always preferred to leave
such things to you. I have recently looked at the accounts for the year ended 31 December
1997 and I am writing to ask you to help me understand the following points.
1. My equipment is shown at a lower figure than I expected. I know that I could get more
than the book value if I sold it. My balance Sheet isn‟t showing the true business‟ worth.
2. I notice that my capital has increased substantially by the year-end. I am thinking of
making some improvements to my home at a cost of about $20 000. Rather than take
out a personal loan from the bank, I would like to withdraw some of my capital – after all,
it does all belong to me, doesn‟t it?
3. Last time we spoke, I remember you said that my business has built up a large amount
of goodwill. Surely this is worth something – why isn‟t it shown in the Balance Sheet?
I think I should get to know more about my accounts, so could you please explain the above
points to me – and in words that I can understand.
Regards
Terry X
REQUIRED
Draft a reply to the questions in Mr. X‟s letter. Refer to generally accepted accounting principles
as appropriate. Write you reply in sentence form with supporting figures [25]
M/J 98/P3/Q3
SOLUTION
Mark Scheme
To: Terry X
From: John and Co. Registered Accountants
Subject: Reply to the accounting queries
Sir,
The following is the brief discussion of the points raised by you in the query.
1. In Balance Sheet non-current assets including equipment should be reported in
balance sheet at cost less total depreciation provided. Although equipment has a
market value higher than its book value, even then it should not be shown at price it
would fetch if sold. As business is a Going Concern (assumption of infinite life) so
there is no compulsion of selling the non-current assets in near future, likewise by their
definition non-current assets are not expected to be sold in near future so the
Section 1 18 AS Level – Financial Accounting
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equipment should not be valued at estimated selling price. Moreover “Cost Concept”
states that non-current assets should be recorded at cost. Lastly if equipment has
realisable value more than its book value it may be revalued but for doing the
revaluation process there should be a proper policy for revaluing non-current assets.
2. Although capital within the business legally belongs to you but for accounting
purposes, your business is treated as an independent entity distinct from you (Entity
concept). So withdrawal of huge sums of money out of the business for your personal
needs may put your business in a liquidity problem. Before making such a decision,
you should keep in mind needs and funding requirements of your business in near
future. Lastly if the proposed interest rate on bank loan is less than the rate of return
you are getting from your business, then you should go definitely for the bank loan.
3. A business should not include goodwill in the Balance Sheet as nothing has been paid
for it and its actual worth is difficult to be quantified in monetary terms (Money
measurement concept). Moreover IAS38 states that inherent, or non-purchased goodwill
cannot appear in the Balance Sheet, however if goodwill arises because of purchasing
another business (purchased goodwill) then it may be shown as an intangible non-
current asset in the Balance Sheet.
Regards,
QUESTION 2 M/J 01/P3/Q2
The managing director, who is not an accountant, has seen the accounts produced by the
accountant and is not satisfied with the profit figure. He has sent the accountant the following
memo with three suggestions for action to increase the profit. The accountant explains to the
managing director that there are rules to be followed in the preparation of company accounts
and tells the managing director about IAS 8 which is about the disclosure of accounting policies
and names four fundamental accounting concepts which must be followed.
MEMORANDUM
From: Managing Director
To: Accountant
I believe the profit shown in the Income statement could be improved if you amend the accounts
as follows:
1. You have calculated depreciation on the factory machinery @ 30% on net book value
and yet you have used the rate of 15% for office equipment. You should use the rate of
15% for factory machinery as that will not only increase profit but will have the merit of
being consistent.
2. You have valued some of the inventory at cost, but other inventory at net realisable value
when that is less than cost. Cost can be ascertained with certainty but it seems to me
that net realisable value does not represent any identifiable figure in the inventory
records. For the sake of consistency you should value all inventory at cost. Besides, if
the inventory has not been sold yet, no loss has been incurred at the date of the
accounts in respect of the inventory you have included at net realisable value.
3. You have included a provision for unrealised profit on finished goods in the accounts.
The factory has made the profit and full credit for it should be included in the accounts.
You should therefore delete the provision.
REQUIRED
(a) (i) Name the four fundamental accounting concepts mentioned in IAS 1.
(ii) State what is meant in IAS8 by „accounting policies‟. [6]

(b) State with reasons whether the accountant should carry out the instructions contained in
the managing director‟s memo. [15]
Section 1 19 AS Level – Financial Accounting
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SOLUTION
Suggested Solution
(a) (i) Going concern, Consistency, Accrual, Materiality concept.
(ii) Accounting policies are specific accounting bases judged by business
enterprises to be most appropriate to their circumstances and adopted by them
for the purpose of preparing their financial statements. For example methods of
charging depreciation, methods for providing doubtful debts etc.
(b) Sir:
1. Different non-current assets have different lives and are depreciated by using
different rates, so it is not surprising to have two different depreciation rates for two
different assets. Moreover, consistency concept means applying same accounting
methods from year to year for same class of item rather to use same depreciation
rate for all assets, so there is no need to depreciate factory machinery @ 15%.
2. If inventory comprises more than one item then lower of cost or net realisable value
should be calculated individually for each item. (Separate Valuation concept), In one
respect consistency concept is though not applied, as at one year the inventory may
be shown at cost only and in next year at lower of cost and net realisable value, but
as it is prudent to recognise the loss which is likely to incur in near future in advance
by valuing inventory at lower of cost or NRV, so it can be said to be consistently
prudent to consistently take the lower figure for calculating inventory value.
3. To be prudent, profit should not be anticipated unless it is being realised or earned,
as inventory has not yet been sold so it will be imprudent to include profit in the
inventory value, so inventories should be valued at lower of cost or NRV. Moreover,
as total profits have been segregated into factory and trading profits so there is no
need to inflate the inventory value.
QUESTION 3
(a) Define prudence. [2]
(b) Discuss how the concept of prudence might be relevant when considering:
(i) Goodwill
(ii) The valuation of Inventory in Trade [6]
O/N 01/P2/Q4
SOLUTION
Mark Scheme
(a) It states that when alternative treatments are possible, the one selected should give the
most cautious presentation of the business financial position or results.
(b) (i) Goodwill is different from other assets, as it cannot be sold unless the whole
business is subject to sales, moreover it normally has no objective monetary value,
and so it is prudent to write it off from the books. Besides it should be written off as
purchased goodwill would progressively be replaced by the goodwill created by the
new management of the business.
(ii) Prudence concept states that losses being provided for as soon as they are
recognised. Inventory is likely to be sold in near future so by valuing inventory at
lower of cost or net realisable value business can prudently show its profits and
assets as inventory and profits are not overvalued.
QUESTION 4
A business depreciates its non-current assets.
Explain why a business should comply with Prudence and accruals (matching) concepts when
accounting for non-current assets. [4]
O/N 18/P21 Q2(a)
Section 1 20 AS Level – Financial Accounting
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SOLUTION
Mark Scheme
Prudence: If a depreciation charge was not included in the income statement, non-current
assets would be overstated (1), the profit would be overstated (1)
Accruals (matching) : The cost of using a non-current asset should be matched (1) against the
benefits that the asset produces (1)
Suggested Solution
According to “prudence concept” the value of assets and profits should not be overstated and
therefore through depreciation charge, businesses show a more realistic (not market) value for
asset. However the depreciation of assets is not undertaken purely to show market value for
non-current assets.
The main reason for charging depreciation is concerned with the “matching concept” which
states that while preparing the income statement, revenues of the business are matched with
the related expenses incurred in earning these revenues. This implies that the cost of a non-
current asset is not written off all in the income statement at once. Instead, depreciation is a
charge in the income statement over the asset‟s estimated useful life to “match" its cost with the
benefits it produces.
QUESTION 5
Define the prudence concept. State three examples of how this has been applied in the financial
statements. [6]
O/N 12/P23 Q1(c)
SOLUTION
Mark Scheme
1 Assets should not be overstated (1)
2 Liabilities should be understated (1)
3 Revenue should not be bought into the financial statements until realised (1)
(Up to 4/Points for the definition)
1 Inventory (1)
2 Provision for doubtful debts (1)
3 Depreciation (1) (Up to 4/Points for examples)[6]

Suggested Solution
Prudence is a key accounting principle which makes sure that assets and income are not
overstated and liabilities and expenses are not understated. The examples of Prudence may
include the valuation of inventory at lower of cost or market, writing off of receivables as bad
debts and providing for doubtful debts etc.

QUESTION 6
Explain the following concepts:
(i) Matching [3]
(ii) Materiality [3]
M/J 14/P21Q1(d)

SOLUTION
Mark Scheme
(i) Matching ensures that all income (1) and expenditure (1) are recognised in the financial
(1) period in which they occur. The timing of payment (1) is irrelevant, i.e. if goods are
sold in year one but not paid for until year two, then the sale is recognised in year one
(1). [Max 3]
Section 1 21 AS Level – Financial Accounting
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(ii) Materiality allows that if the amount of a transaction is insignificant 1, then the accepted
treatment of that transaction may be disregarded (1). For example, the purchase of an
stapler, which may last for several years, would tend to be treated as revenue rather
than capital expenditure, and the stapler itself would not be included in non-current
assets (1).

Materiality is decided on the following factors:

1 Will the cost of using normal treatment of an item outweigh the benefit obtained? (1)
2 Will the disclosure of an item (e.g., the stapler mentioned above) make any
difference to the decisions made by the person reading the financial statement? (1)
[Max 3]
Suggested Solution
(i) Matching concept implies that all incomes accounted for when they are earned and
expenditures are recognised when they are incurred. This further states that these
expenses are matched against the incomes of the relevant period.

(ii) Materiality concept allows disregarding the accepted accounting treatment of an item
which has insignificant amount. For example, the purchase of a paper weight of $5 will
though be used for a period more than one year should be treated as revenue
expenditure because of its insignificant value.

QUESTION 7
Define and explain different accounting concepts applied in accounting.

SOLUTION
Business entity
This convention states that, for accounting purposes, a business is to be treated as an
independent entity, distinct from its owner (or owners). The financial statements of a business
should provide information about the business only and should not provide information about
the owner‟s private financial affairs. It is important to note the following points:
Since owner and business are treated as separate entities, it is possible for one of them to owe
money to the other. In fact it is very likely that a business will owe money to its owner (capital).

Money measurement
This convention states that financial accounting is concerned only with items which can be
quantified and expressed in monetary terms. The main effect of this convention is that business
assets to which a monetary value cannot reasonably be attributed (e.g. the skill of the workforce)
are normally ignored in the financial statements, even though those assets might be great worth to
the business concerned.

Going concern
Under the going concern convention, it is assumed that a business will continue to operate for
the foreseeable future unless there is good reason to think otherwise. The balance sheet and
income statement are drawn up on the assumption that there is no intention or necessity to
liquidate or curtail significantly the scale of operation.

The Accrual Concept

Account profit is the difference between revenues and expenses rather than between cash
receipts and payments. Revenue is recognised as soon as it is earned irrespective of whether
cash has been received or not. Similarly any expense incurred for the benefit of a particular
accounting period is taken as cost for that period whether cash has been paid or not.
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Matching
The matching convention states that expenses should be matched against the revenue to which
they relate. In other words, revenue and the expenses incurred so as to earn that revenue
should be recognised in the same accounting period.

Conservatism (or Prudence) Principle

The principle states that an accountant should provide for all possible losses as soon as they are
known to exist even though the amount at which they will materialise is uncertain. On the other
hand, revenues and profits are not to be anticipated but are taken into account only when they are
realised. The justification for this principle is that accountants are cautious people. The natural
optimism of businessmen needs to be countered by the pessimism of the accountants. It is felt
that where doubt exists, it is better to err on the safe side.

Consistency Principle
There are many different ways in which items may be treated in the accounts. Each company
should select the most suitable methods and treatments which will give a fair picture of the
activities of the business. Once a suitable method is selected for an accounting treatment, the
same method is used in every accounting period. The aim is to provide records and information
that can be compared. If one method is used in one year and another method in the next year,
this would lead to distortion of financial reports.

Materiality Principle
Accounting is concerned with the measurement of profit and capital and the presentation of the
results to interested parties. In essence it is a summarising process. Too much detail in the
annual accounts and the view is obscured. Insignificant items are merged with other and are not
shown separately. The principal is concerned with accuracy in accounting, in particular with
materiality of information contained in accounting records and materiality of accounts. The
question as to what may be considered “material” would depend on judgment and
circumstances of the particular case.

Historic cost/Cost concept

The historic cost convention states that assets should be shown in the balance sheet at their
historic cost to the business (i.e. their original cost) or at a value which is based upon historic
cost. The current market value of assets is ignored. For example, if a building which was bought
for $150 000 five years ago has now increased in the value to $200 000, the historic cost
convention requires that the building should continue to be shown on the balance sheet at its
original cost of $150 000.
The main advantage of this convention is that the historic cost of an asset is a fact, whilst any
other valuation is only an estimate or an opinion. The historic cost convention increases the
objectivity and reliability of financial statements but may reduce their relevance to some users.

Substance over form

This convention states that the accounting treatment of an item should reflect its economic
substance rather than its legal form. For example, if a business buys a motor vehicle on hire
purchase terms, the legal position is that the business does not become the owner of the
vehicle until the last installment has been paid. The substance of the transaction is that the
business owns the asset from the outset, and this is the way that the transaction will be
represented in the financial statements of the business.
Section 1 23 AS Level – Financial Accounting
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CHAPTER 1.5 CAPITAL AND REVENUE

QUESTION 1
Advise Shostakovich Limited on why the distinction between capital and revenue expenditure is
important when preparing financial statements. [6]
O/N 13/P21/Q3(c)
OR
State the difference between capital and revenue expenditure. [2]
O/N 16/P22/Q1(d)

SOLUTION
Mark Scheme
 Capital expenditure is entered in the Statement of Financial Position (1) as a non-
current asset (1) with only the depreciation for the asset (1) being included in the Income
Statement (1).
 Capital expenditure is charged over consecutive accounting periods (1) in accordance
with the matching/accruals concept (1).
 If there was incorrect classification and the Capital Expenditure was included in the
Income
 Statement then the profit for the year would be understated (1) and the asset value in
the Statement of Financial Position would be understated (1).
 Revenue expenditure should be entered in the Income Statement (1) as an expense
(1).
 If this expenditure was placed in the Statement of Financial Position „profit for the year‟
would be overstated (1) and the asset total in the Statement of Financial Position would
be overstated (1). This would contravene the prudence concept (1).
(max. 3 marks for each type) [6]

Suggested Solution
Capital expenditures are recorded as non-current assets in the Statement of Financial Position
whereas „revenue expenditures‟ are entered in the Income Statement as expenses.
If a Capital Expenditure is wrongly included in the Income Statement as an expense (revenue
expenditure) then the profit for the year and the asset value in the Statement of Financial
Position would be overstated. However, cost of capital expenditure is charged to the income
statement as depreciation expense.

QUESTION 2
Define the term „revenue expenditure‟. [2]
O/N 17/P23/Q1(e)

SOLUTION
Mark Scheme
Revenue expenditure is money spent on the day-to-day running expenses of the business on
resources that will generally be used up within one year.

Suggested Solution
A revenue expenditure is a cost that is expensed in the accounting year in which it is incurred.
In other words, the cost will be matched with the revenues of the accounting year in which the
expenditure took place.
Section 1 24 AS Level – Financial Accounting
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CHAPTER 1.6 SUSPENSE ACCOUNT

QUESTION 1
Explain three reasons why it is necessary for a Trial Balance to „balance‟. [3]
M/J 97/P1/Q1(c)

SOLUTION
 According to double entry concept every debit has a corresponding credit with the same
amount so if all accounting entries are correctly recorded in journals and posted to
ledgers, Trial Balance should balance.
 Equality of Trial Balance also proves accounting equation i.e. total of assets equals to
totals of equity and liabilities.
 The total of debit balances in various accounts should be the same as the total of credit
balances of various accounts. Hence, Trial Balance is a list of ledger balances that
should balance.

QUESTION 2
State the use of a suspense account. [1]
O/N 16/P22/Q3[a(i)], M/J 18/P23/Q3(a)

SOLUTION
Mark Scheme
A suspense account is used to balance the trial balance where errors exist in the double entry
book keeping system (1).
The bookkeeper does not know where to post an entry.

Suggested Solution
If two sides of a trial balance do not agree due to errors then a suspense account is opened to
balance the trial balance. It is also used in general journal to complete the dual effects of an
entry. It is also used to balance the statement of financial position.

QUESTION 3
State the four types of errors not revealed or disclosed by a trial balance. [4]
M/J 18/P23/Q3(b)
OR
Explain what is meant by the term „error of commission‟. [2]
M/J 19/P21/Q2(b)

SOLUTION
1. Error of omission: This occurs where a transaction has been completely omitted from the
books
Example: A sale invoice to D. Riley was completely omitted from the books.

2. Error of principle: This is similar to the error of commission and arises when a transaction
is recorded without due regards to the fundamental accounting principle. This occurs when
an entry is made in entirely the wrong type of account.
Example: A machine purchased for $10 000 has been debited to purchases account.
Section 1 25 AS Level – Financial Accounting
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3. Error of Commission: This arises where one half of a transaction has been entered in
wrong account but to the correct type of account
Example: $400/Paid to P. Collins was debited to the account of J. Collins.

4. Complete Reversal of Entries: This arises when we debit the account which should be
credited and credit the account which should be debited.
Example: Rent paid $300 wrongly recorded as rent received.

5. Error of original entry: This occurs where the same wrong amount is posted to the debit of
one account and the credit of another. Although the accounts to which we enter are correct,
but the amount entered is incorrect.
Example: Goods returned from P. Wedge $639 were recorded in the accounts as $369.

6. Compensating/Compensatory Error: This is not a single error. Rather these are two or
more than two errors which cancel themselves out. So an error in one account is exactly
matched by an equal but opposite error in another a/c.
Section 1 26 AS Level – Financial Accounting
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CHAPTER 1.7 CONTROL ACCOUNTS

QUESTION 1
State three advantages (reasons) of preparing Control Accounts [3]
O/N 97/P1/Q2(c), O/N 98/P2/Q4(a), O/N 01/P2/Q1(a), O/N 04/P2/Q2(c), M/J 08/P2/Q2(c),
M/J 10/P23/Q2(c), O/N 11/P22/Q2(c), O/N 16/P21/Q2(c), O/N 17/P22/Q2(b), M/J
18/P21/Q1(g), M/J 18/P21/Q2(b), M/J 19/P23/Q3(a)
OR State three benefits and one limitation of preparing a sales ledger control account. [4]
O/N 17/P21/Q1(c)
SOLUTION
Mark Scheme
Benefits
 Accuracy (1)
It identifies the ledger or ledgers in which errors have been made when there is a
difference in Trial Balance. (1) as the balances on each control account should agree
with the totals of balances in each ledger(1).
 Prevention of fraud (1)
Segregation of duties helps in the prevention of fraud because members of staff who
complete the control accounts are not involved in completing the sales ledger (1).
 Availability of management information (1)
It provides a total of trade receivables and trade payables to be used in the trial balance
and financial statements (1).
 Division of Labour
It facilitates the division of labour within the accounting function
(Any two points – 2 each) [4]
Limitation
 Doesn‟t identify errors of commission, omission or original entry (1)

Suggested Solution
Benefits
(i) Trade receivables and payables figures for inclusion in trial balance & balance sheet can
be easily & quickly found without having to total the balances of the personal accounts.
(ii) Corresponding records of control account items in the subsidiary books act as check on
frauds and misappropriations, as the work of employees working on each ledger is
independently checked by another employee.
(iii) Mistakes and errors in trade receivables and payables control accounts can easily and
quickly be detected and corrected by comparing totals of subsidiary books with the
amounts shown in control accounts.
(iv) Act as independent check on the arithmetical accuracy of the total of Sales ledger and
purchase ledger balances.

Limitations
(i) The arithmetical accuracy of the total of sales ledger balances cannot be checked in the
absence of double entry system.
(ii) Mistakes, errors and frauds in Mary‟s accounts cannot be easily detected and corrected
in the absence of internal checks as mentioned above.
(iii) Control accounts cannot check individual trade receivables and trade payables
balances.
Section 1 27 AS Level – Financial Accounting
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QUESTION 2
State why a Sales Ledger Control Account may have both a debit and a credit closing balance[1]
O/N 98/P2/Q4(b)
OR
State three possible reasons why a trade receivable's account might have a credit balance [3]
M/J 08/P2/Q2(b), M/J 17/P21/Q3(c)

SOLUTION
Mark Scheme
 Overpayment
 Payment in advance
 Credit note issued
 Deposit received etc.
1 mark each to maximum [3]

Suggested Solution
 Advance payments from customers
 Over/duplicated payments by customers
 Return of goods after full payment.
 A contra has been put through but the customer has ignored it.

QUESTION 3
(i) Explain the purposes of the journal. [2]
(ii) State two examples of transactions which would be recorded in the journal, other than
the purchase of non-current assets on credit. [2]
M/J 14/P22Q2(a)
OR
State two types of entries, other than the correction of errors, which would usually be recorded
in the general journal [2]
M/J 16/P22 Q1(c)

SOLUTION
Mark Scheme
(i) It is used to record the double entry (1) of non-routine transactions (1) [2]
(ii) correction of errors (1)
Opening entries (1)
Purchase and sale of non-current assets (1)
Non-regular transactions (such as year-end transfers) (1)
Calculating opening capital (1)
Write off bad debts (1)
Depreciation (1)
Award 1 mark per correct example: (maximum 2 marks) [2]

SOLUTION
Suggested Solution
(i) Journal or General Journal is used to record the double entries of less frequent
transactions which are not entered in special journals.
(ii) Rectification of errors, Opening entries, Closing entries, sale of non-current assets on
credit, Adjusting entries like writing off of bad debts, provisions for doubtful debts &
depreciation etc.
Section 1 28 AS Level – Financial Accounting
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QUESTION 4
State two types of errors that will not be identified by producing a sales ledger control A/c. [2]
O/N 16/P21/Q2(c)

SOLUTION
Mark Scheme
1 Error of omission (1)
2 Error of commission (1)
3 Compensating error (1)
4 Error of original entry (1)

Suggested Solution
 Error of principles
 Error of commission
 Error of omission
 Error of original entry
 Complete reversal of entries
 Compensating error
QUESTION 5
Meena is considering charging interest on the full account balances of her customers who do
not pay promptly.
REQUIRED
Advise Meena whether or not she should take this course of action. Justify your answer. [3]
M/J 17/P21/Q3(d)
SOLUTION
Mark Scheme
 May improve trade receivables collection period.
 Improve cash flows
 Meena may lose customers
 May need tighter credit control which may increase cost
Decision (1 mark)
Justification (2 marks)
Suggested Solution
Charging of interest will expedite payments from trade receivables resulting in improved cash
flows and reduction in receivables collection period. On the darker side Meena may lose her
customers. Meena should also consider market and industry trends before making the final
decision.
QUESTION 6
Explain the effect on a business of not updating:
(i) customers‟ accounts in the sales ledger [2]
(ii) suppliers‟ accounts in the purchases ledger. [2]
M/J 19/P21/Q2(c)
SOLUTION
Mark Scheme
(i) Incorrect sales ledger balances could mean Lawrence not collecting the right amount
from credit customers.
It may also risk resulting in irrecoverable debts.
Non-collection of debts would negatively impact cash balances.
 Section 1 29 AS Level – Financial Accounting
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(ii) Incorrect purchase ledger balances could mean possible disputes with suppliers
affecting deliveries and may result in credit facilities being withdrawn.
May result in loss of opportunities of settlement discount.

Suggested Solution
(i) If customers‟ accounts in the sales ledger are not regularly updated then business may
face difficulties to
 have proper credit control
 receive timely and full payments from customers ultimately affecting cash flows
 determine amount of prompt payment discount

(ii) If suppliers‟ accounts in the purchases ledger are not regularly updated then business
may face difficulties to
 take advantage of prompt payment discount
 make timely payments which could affect credibility of the business and relationships
with suppliers.
 determine amount owing to suppliers which could result in overpayments to suppliers

Sales Ledger Control Account

Current yr $ Current $
yr
First date Balance b/f (Dr.) xxxxx First date Balance b/f (Cr.) xxxxx
Last date Sales (credit) xxxxx Last date Sales Returns xxxxx
Last date Interest on overdue a/c xxxxx Last date Discounts allowed xxxxx
Last date Cash refunds to customers xxxxx Last date Bad debts xxxxx
Last date Bank (dishonoured cheques) xxxxx Last date Bank/ cash from receivables xxxxx
Last date Balance c/d (Cr.) xxxxx Last date Pur. ledger control (contra) xxxxx
xxxxx Last date Balance c/d (balancing fig.) xxxxx
xxxxx xxxxx

Purchase Ledger Control Account

Current yr $ Current yr $
First date Balance b/f (Dr.) xxxxx First date Balance b/f (Cr.) xxxxx
Last date Purchases Returns xxxxx Last date Purchases (credit) xxxxx
Last date Discount received xxxxx Last date Interest on overdue accounts xxxxx
Last date Bank (payment to suppliers) xxxxx Last date Cash refunds from payables xxxxx
Last date Sales ledger control (contra) xxxxx Last date Balance c/d (Dr.) xxxxx
Last date Balance c/d (Cr) xxxxx _____
xxxxx xxxxx

Treatment of Two Balances in the Balance Sheet

The following equations would help you to determine the amounts to be included in the balance
sheet for trade receivables and trade payables.
• Sales ledger control a/c (Dr) + Purchases ledger control a/c (Dr) = Trade Receivables
• Purchases ledger control a/c (Cr) + Sales ledger control a/c (Cr) = Trade Payables
Section 1 30 AS Level – Financial Accounting
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CHAPTER 1.8 FINANCIAL STATEMENTS OF SOLE TRADERS

QUESTION 1
State two benefits and two drawbacks of operating as a sole trader. [4]
M/J 19/P22 Q1(c)

SOLUTION
Mark Scheme
Benefits:
 Entitled to all profits
 No need to publish financial statements

Drawbacks:
 Unlimited liability
 All the risk
 No separate legal entity
 Sole trader provides internal capital
 Sole trader provides ideas

Suggested Solution
Advantages could include:
 Sole traders are entitled to all the profits earned by their respective businesses.
 Sole traders are in the total control of all decisions in their respective businesses.
 Sole traders work independently so they do not have to gain the approval of anyone else.
 There is no legal obligation to publish sole trader accounts.

Drawbacks
 Limited ability to raise capital
 Unlimited liability for all the business‟ debts.
 Limited ideas
 Lack of continuity as it may dissolve due to various reasons.
 No sharing of managerial responsibilities for a sole trader resulting in increased workload
and more stress
 Higher risks

QUESTION 2
Explain the accounting treatment at the year-end in the income statement and statement of
financial position of Prepayments and Accruals [4]
O/N 18/P21/Q1(b)
SOLUTION
Mark Scheme
Prepayments:
Deducted from expenses
Increases profit
Shown as a current asset
Accruals:
Added to expenses
Decreases profit
Shown as a current liability
1 mark for each valid point. [4]
Section 1 31 AS Level – Financial Accounting
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Suggested Solution
Prepayments:
 Deducted from expenses
 Increases profit for the year
 Shown as a current asset

Accruals:
 Added to expenses
 Decreases profit for the year
 Shown as a current liability
Section 1 32 AS Level – Financial Accounting
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CHAPTER 1.9 ACCOUNTS FROM INCOMPLETE RECORDS

QUESTION 1
State five reasons why making a profit does not necessarily mean having more cash [5]
O/N 99/P2/Q5(a)

SOLUTION
Mark Scheme
 Sales on credit and purchases on cash.
 Expenses paid in advance.
 Income earned but still receivable.
 Repayment of loan.
 Purchase of non-current assets for cash.
 Redemption of shares or debentures.

QUESTION 2
Explain the difference between mark-up and margin. [2]
M/J 09/P2/Q2 B (a), O/N 18/P23/Q3(a)

SOLUTION
Mark Scheme
 Mark-up is the percentage added to cost to find selling price. (1)
 Margin is the percentage deducted from the selling price to find the cost price. (1)
Or any other correct answer. [2]

Suggested Solution
Gross Profit
 Mark-up is defined as Gross profit as a % of cost of sales and is calculated as Cost of Sales
× 100.
 Markup is added to cost to find out the selling price.
Gross Profit
 Margin is defined as Gross profit as a % of sales and is calculated as Net Sales ×100.
 Margin is deducted from the selling price to determine the cost price.

QUESTION 3
Ahmed and Raji are in partnership as retailers but have not maintained full accounting records.
They have been advised to use a double entry system of book-keeping.
REQUIRED
State three advantages to business owners of using the double entry system of book-keeping.[3]
O/N 17/P23/Q2(b), O/N 18/P21/Q1(a), M/J 19/P21/Q1(a)
OR
Advise Bilal whether or not he should maintain a full set of accounting records. Give reasons for
your answer. [5]
M/J 18/P21/Q1(f)
SOLUTION
Mark Scheme
 Assists with the preparation of the trial balance
 Assists with the preparation of the financial statements
 Reduces the risk of errors
 Reduces the risk of fraud
 Assist with the monitoring of the sales and purchases ledgers
Section 1 33 AS Level – Financial Accounting
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 Improves the accuracy of accounting records

 Balances on individual accounts are available throughout the year.
 Needs to employ specialised staff
 More time consuming
(1 mark for a valid point up to a maximum of 3)

Suggested Solution
 Individual transactions will be recorded and can be located easily.
 Matters are not forgotten or overlooked
 Accuracy of the accounts can be checked at regular intervals.
 Balances available at all times
 Financial statements can be easily prepared
 The accounts can be presented to the bank in order to obtain a loan or overdraft facility.
 Less risk of errors and fraud
 Easier to refer to previous transactions
 Easier to make business decisions

QUESTION 4
Finn started business on 1 January 2017. He did not keep full accounting records. Advise Finn
whether or not he should employ a book-keeper at a cost of $500 a month. Justify your answer.[4]
O/N 18/P22/Q1(f)
SOLUTION
Mark Scheme
For
 Profit is sufficient to cover the cost.
 A book-keeper could keep proper accounting records / double entry records.
 A book-keeper could provide some credit control.
 Trade receivables are very high because they are not been chased for payment.
 The longer a debt is allowed to be outstanding the more likely it is to end up
irrecoverable.
 The savings on irrecoverable debts might exceed the cost of the book-keeper.
 A book-keeper might create a provision for doubtful debts.

Against
 Wages would increase.
 The book-keeper would be paid as much as Finn is paying himself as drawings.
 (max 2) for positive comments, (max 1) for negative comments plus (1) for decision [4]

Suggested Solution
For
 Through delegating bookkeeping tasks to someone Finn can re-employ his time to
building his business. Finn can do what he loves to do while the bookkeeper takes care
of what Finn needs to do.
 Since a bookkeeper is someone who specializes in this area, Finn reduces the
possibility for errors.
 Through hiring a book-keeper proper accounting records / double entry records could be
maintained.
 Another benefit of hiring a bookkeeper is that Finn will get a fresh perspective on how
your business is running.
Section 1 34 AS Level – Financial Accounting
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 Knowing that a bookkeeper will be doing your books (weekly or monthly) can motivate
you to keep detailed and accurate records in a timely fashion rather than putting them off
until later, if you are the only one working on them.
 A bookkeeper can be an excellent source of information when it comes time to pay
estimated taxes and file federal and state tax returns.
 Finn earns sufficient profits to cover the cost of bookkeeper
Against
 Having someone as a bookkeeper means that Finn could become less familiar with the
financial details of his business than if he performs the bookkeeping tasks himself.
 Finn should vet his bookkeeper thoroughly and ask for referrals as the task requires
elements of honesty and trust with expertise
 Finn should not be fully dependant on his bookkeeper. It‟s a wise practice to review a
minimum of a week‟s work of postings every month to make sure that bookkeeper is
doing quality work.
 Doing your own books costs time, but not necessarily money. Hiring a bookkeeper to do
your books is an expenditure, and as a small business it may be hard to make that
financial commitment.

QUESTION 5
State three benefits to a business of preparing annual financial statements. [3]
M/J 18/P23/Q3(d)
SOLUTION
Mark Scheme
 Helps future planning
 Decision making
 Able to assess performance
 How much the business owns and owes
 For tax purposes
 To present to bank for additional finance
1 mark × 3 Max 3
Suggested Solution
 Evaluate business performance through calculation of profit or loss
 Help to evaluate Tax Liability
 Assist in mitigating errors:
 Build more trust on the financial results
 Better Decision Making, Planning and Forecasting:
Section 1 35 AS Level – Financial Accounting
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CHAPTER 1.10 FINANCIAL STATEMENTS OF PARTNERSHIP

QUESTION 1
State three advantages for existing partners of trading as a partnership rather than as sole
traders [3]
O/N 10/P23 Q1(c), M/J 11/P21 Q1(c), M/J 12/P22 Q2(d)M/J 15/P22 Q2(c), M/J 16/P22 Q2(c),
M/J 19/P31 Q2[d (i)]
OR Advise whether or not Hamid and Patel should enter into a partnership with each other
rather than continuing to trade on a consignment basis. Justify your answer. [4]
O/N 16/P33/Q4(c)
OR Advise Greaves and Hurst whether or not they should form a partnership. Justify your
answer by discussing advantages and disadvantages of forming the partnership. [6]
M/J 17/P31/Q3(d)

SOLUTION
Mark Scheme
 More capital is available;
 Different partners may have different skills that are beneficial to the business;
 The management of the business can be shared;
 The business is more efficient
 There are more ideas
 The responsibility is shared, so less stress
 Losses can be shared;
 Liquidity is improved. Two marks per valid point to maximum of 8. [8]

Suggested Solution
The advantages of a partnership compared to a sole trader are:
 availability of additional capital
 sharing of managerial responsibilities resulting in shared workload and less stress
 spread of risk as losses will be shared
 different skills of different partners may be beneficial to the business
 more ideas from more partners
 subject to limited government regulations
 economies of scale
QUESTION 2
State three disadvantages of operating as a partnership rather than being in business as a sole
trader. [6]
M/J 18/P22 Q1(a), M/J 19/P31 Q2[d (i)]
SOLUTION
Mark Scheme
 Profits will be shared in the partnership, whereas as sole traders the individuals would
be entitled to all the profits earned by their respective businesses.
 Decision making may take longer / some ideas may be abandoned because both
partners will be need to agree, whereas as sole traders the individuals would be in the
total control of all decisions in their respective businesses.
 There is the risk of disagreement which could be seriously affect the smooth running of
the business, whereas sole traders would not have to gain the approval of anyone else.
 The death or serious illness of a partners could cause the business to cease trading.
1 mark for stating + 1 mark for development Three disadvantages required.
Section 1 36 AS Level – Financial Accounting
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Suggested Solution
 Limited ability to raise capital
 Unlimited liability of partners for all partnership‟s debts.
 Delayed decisions due to lack of coordination or disagreement between partners.
 Lack of continuity as it may dissolve due to various reasons.
 No transfer of a partner‟s share without the consent of other partners.
 Each partner acts as an agent of the partnership with power to bind the partners and
partnership to contracts with other parties, which may affect negatively the personal
interest of the other partners

QUESTION 3
State four disadvantages a partnership has compared with a Limited company. [4]
M/J 99/P2 Q2(a)

SOLUTION
 First and foremost shareholders of a company enjoy limited liability whereas liability of
the partners for debts of their firm is unlimited.
 Companies have more opportunities to raise capital as compared to partnership and
consequently also enjoy economies of scale.
 A company enjoys perpetual existence as it continues in spite of death or insolvency of
shareholders, whereas death or insolvency of partner(s) dissolves the partnership.
 A shareholder can transfer his shares without the consent of other shareholders but a
partner cannot do so.

QUESTION 4
Identify non-financial factors, which a sole trader should consider when making his decision of
forming partnership. [5]
M/J 96/P1/Q4(C)

SOLUTION
Sole trader should remember that after forming the partnership the business is no longer under
his control and new partner may disagree on policy matters and he will be legally bound by the
acts of the new partner and can be held individually responsible for all of the partnership debts.

QUESTION 5
State two items which may be included in a partnership agreement (other than the share of
profit)
(i) which will affect the appropriation account [2]
(ii) which will not affect the appropriation account. [2]
O/N 16/P23 Q1(e)
OR
State three items that may appear in a partnership agreement. [3]
O/N 17/P23 Q3(d), O/N 18/P23 Q2(c)

SOLUTION
Mark Scheme
Affect appropriation account
 Interest on capital
 Partners‟ salaries
 Interest on drawings
1 mark × 2 [2]
Section 1 37 AS Level – Financial Accounting
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Will not affect appropriation account

 Interest on loans
 Amount of fixed capital
 Annual limit on drawings 1 mark × 2

Others
 Duties of each partner

Suggested Solution
Items affecting appropriation account
 Interest on capital
 Partners‟ salaries
 Bonuses to partners
 Interest on drawings
Items not affecting appropriation account
 Interest on partners‟ loans
 Amount of fixed capital
 Rent on partner‟s owned building
 Annual limit on drawings
Others
 Duties of each partner
 Rules regarding admission or retirement of a partner
 Amount of fixed capital
QUESTION 6
State three items that may be included in the appropriation account before the division of
residual profit. [3]
O/N 18/P21/Q3(d)

SOLUTION
Mark Scheme
 Interest on capital (1)
 Interest on drawings (1)
 Partners‟ salaries (1)

Suggested Solution
 Interest on partners‟ capital
 Interest on partners‟ drawings
 Partners‟ salaries
 Partners‟ bonuses and commissions
QUESTION 7
State three financial rules, which apply to a partnership, if no partnership agreement has been
drawn up. [3]
O/N 98/P2/Q3(a), M/J 17/P22/Q3(a)
SOLUTION
Mark Scheme
 Share profits and losses equally (1)
 Partners are not entitled to salaries (1)
 Partners are not charged interest on their drawings (1)
Section 1 38 AS Level – Financial Accounting
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 Entitled to contribute equally to the capital of the partnership (1)

 Partners are entitled to interest at 5% p.a. on loans they make to the partnership (1)
 Partners are not entitled to interest on the capital they have contributed (1) Max 4

SOLUTION
(i) Equal shares in capital, profits and losses.
(ii) No interest on capital and drawings.
(iii) 5% interest is allowed on partners‟ loans.

QUESTION 8
(i) State two reasons why the partners are charged interest on drawings. [2]
(ii) State two reasons why the partners receive interest on capital. [2]
O/N 14/P22/Q2 [e (i&ii)]
SOLUTION
Mark Scheme
(i) To try to limit partners‟ drawings (1)
Reward partner with lower drawings (1)
Ensure cash is retained in the business (1)
Maximum 2 [2]
(ii) Reward the partner for business investment (1)
Encourage partners to introduce more capital (1)
Reward partners for the lost opportunity cost of capital invested (1)
Maximum 2 [2]
Suggested Solution
(i) To ensure that cash is retained and reinvested within the business
To restrict partners‟ drawings
To reward partner with lower drawings

(ii) To reward the partner for business investment

To encourage partners to introduce more capital
To reward partners for the lost opportunity cost of capital invested

QUESTION 9
Explain two reasons why a partner might wish to keep separate capital and current accounts. [6]
O/N 97/P1/Q3(b), O/N 08/P2 Q1(c), O/N 10/P43 Q1(e), M/J 16/P21 Q1(d), M/J 16/P23 Q1(d),
M/J 16/P22 Q2(d),O/N 18/P23 Q2(d)
OR
Sate two advantages to the partners of keeping Current accounts in addition to Capital
accounts. [2]
M/J 00/P2 Q2(c)

SOLUTION
Mark Scheme
 To keep capital invested separate from profit and drawings
 To help avoid the possibility of partners overdrawing
 To reward the partner who has invested more with interest on the amount invested
 To identify partners‟ drawings in order to calculate interest on drawings
Max 3 marks [3]
Suggested Solution
 Separate Capital accounts show long-term investment made by the partners.
 Separate capital account also facilitates the calculations of interest on capital.
Section 1 39 AS Level – Financial Accounting
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 Capital accounts only show the structural change in partnership such as with additional
injection of capital, goodwill or revaluation of assets.
 Current accounts show transactions between partners and partnership on ongoing basis
due to business operations like drawings, interest on drawings, share of residue profits,
interest on capital and partnership salaries.
 Separate current account roughly specifies a limit up to which drawings may be made.

QUESTION 10
Explain how a debit (overdrawn) balance may arise on a partner‟s current account. [2]
M/J 12/P41 Q2(a), M/J 16/P21 Q1(c & d)

SOLUTION
Mark Scheme
A debit balance on a current account arises when a partner has withdrawn more money than he
is entitled to and is therefore in debt to the partnership. [2]

Suggested Solution
 A debit balance on a current account arises when a partner has withdrawn more money
than he is entitled to and is therefore in debt to the partnership.
 An overdrawn current account balance may also be due to running of partnership
business in continued losses

QUESTION 11
Suggest two reasons why the partners may have decided to have Loan Accounts as well as
Capital Accounts. [3]
O/N 97/P1/Q3(c)
SOLUTION:
Mark Scheme
(i) To enjoy high rate of return than capital
(ii) To ensure to have fixed returns even in case of losses.
(iii) Partners‟ loans could be repaid before partners‟ capitals.

QUESTION 12
Advise three ways to partners in which they could improve the cash position of the business. [3]
M/J 18/P23/Q1(f)
SOLUTION
Mark Scheme
 The partners could reduce their salaries
 The partners could reduce their drawings
 Additional capital could be introduced by the existing partners
 A new partner, or partners, could be admitted to the partnership
 A term loan could be negotiated
 The partnership could dispose of surplus non-current assets
1 mark per valid point to max of 3
Suggested Solution:
 Reduction in partners‟ drawings
 Introduction of additional capital by the exiting partners
 Admitted of a new partner, or partners, to the partnership
 Borrowing of new term loans
 The partnership could dispose of surplus non-current assets
Section 1 40 AS Level – Financial Accounting
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Name of partnership
Appropriations a/c for the year ended------------------------
$ $
Net profit (after all income statement expenses) xxx
Add Interest on drawings A xxx
B xxx xxx
xxx
Less Interest on capital A xxx
B xxx
Partner‟s salary, bonus, commission xxx (xxx)
xxx
Profit share A xxx
B xxx xxx
Partner’s Capital accounts

Fixed Capital accounts Fluctuating Capital accounts

↓ ↓
Two separate accounts are kept for each Only one single capital a/c is kept for
partner to record related transactions i.e. partners to record transactions relating to
Capital & current accounts them.

Partner’s Capital accounts (when fluctuating)

A ($) B ($) A ($) B ($)
Transfer to loan xxx xxx Balance b/f xxx Xxx
Drawings xxx xxx Assets (additional capital) xxx Xxx
Interest on drawings xxx xxx Profit share xxx Xxx
Loss share xxx xxx Interest on capital xxx Xxx
Balance c/d xxx xxx Interest on partner‟s loan xxx Xxx
Partner‟s bonus xxx Xxx
Partner‟s salary xxx Xxx
Partner‟s commission xxx Xxx
____ ____ Other payables to partners xxx Xxx
xxx xxx xxx Xxx

Partner’s Capital accounts (when fixed)

A ($) B ($) A ($) B ($)
Transfer to loan Xxx xxx Balance b/f xxx Xxx
Balance c/d Xxx xxx Assets (additional capital) xxx Xxx
Xxx xxx xxx Xxx

Partner’s Current accounts

A ($) B ($) A ($) B ($)
Balance b/f (Dr) xxx xxx Balance b/f (Cr) xxx Xxx
Drawings xxx xxx Profit share xxx Xxx
Interest on drawings xxx xxx Interest on capital xxx Xxx
Loss share xxx xxx Interest on partner‟s loan xxx Xxx
Balance c/d xxx xxx Partner‟s bonus xxx Xxx
Partner‟s salary xxx Xxx
____ ____ Partner‟s commission xxx Xxx
xxx xxx xxx Xxx
Section 1 41 AS Level – Financial Accounting
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CHAPTER 1.11 PARTNERSHIP CHANGES

QUESTION 1
Explain the meaning of Goodwill. [2]
O/N 00/P2/Q5(c), O/N 13/P22/Q2(c), O/N 16/P21/Q1[b(i)], M/J 17/P32/Q4(a), O/N 18/P22/Q2(b)

SOLUTION
Mark Scheme
Goodwill is the amount paid for the acquisition of a business in excess of the acquired business‟
separable net assets at fair value

Suggested Solution
Goodwill is an intangible non-current asset. It arises from the factors like advantageous location,
good reputation, quality products & customer loyalty of the concerned business. Mathematically,
it represents the value of the business in excess of the book value of its net assets.

QUESTION 2
Explain the meaning of goodwill and suggest two reasons how it may arise. [5]
M/J 13/P22/Q2(c), M/J 14/P21 Q2(c)
OR
State three factors which affect the value of goodwill [3]
O/N 16/P21Q1[b(ii)]
SOLUTION
Mark Scheme
 Reputation (1)
 customer base/monopoly (1)
 location (1)
 quality product (1)
 skilled workforce (1) Max 3 [3]
Suggested Solution
 advantageous location of the business premises
 access to sources of supply e.g. large quotas
 effectiveness of publicity
 nature and reputation of firm‟s products and services
 growth element
 less or negligible competition
 efficient and contended workforce
 good after sale services
 operating in an industry which does not allow new entrants with ease
QUESTION 3
Explain how goodwill should be treated in the books of partnership. [4]
M/J 14/P21Q2(d)
SOLUTION
Mark Scheme
As this is not purchased goodwill (1) it is not shown in the books of account (1) and must be
written off against the capital accounts (1) of the partners in their profit sharing ratios (1). [4]
Suggested Solution
Only purchased goodwill may be recorded in the books as an asset. Any non-purchased
goodwill must be written off against the partners‟ capital balances in their profit sharing ratios.
Section 1 42 AS Level – Financial Accounting
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QUESTION 4
Identify two situations where the capital accounts of partners may be adjusted for goodwill .[2]
O/N 16/P23Q2[a(iii)]
SOLUTION
Mark Scheme
 On the introduction of a new partner. (1)
 On the retirement of an existing partner. (1)
 On a change in the profit sharing ratio. (1) Max 2
Suggested Solution
 On admission of a new partner.
 On retirement or death of an existing partner.
 On a change in the profit sharing agreement
QUESTION 5
Discuss the treatment of goodwill in partnership accounts, with particular reference to retiring
and incoming partners. [6]
O/N 06/P2 Q1(b)
OR Explain why a partnership may make an adjustment for goodwill when they admit a new
partner. [2]
O/N 18/P22 Q2(c)
SOLUTION
Mark Scheme
Goodwill is taken into account on the retrial of a partner, who must be credited with his share of
Goodwill. An incoming partner must compensate the existing partners for his acquired share of
Goodwill. In this situation Goodwill may be raised in the books of account as an asset, but it is
considered prudent to adjust individual capital accounts in order to compensate each partner
when partners retire form or join a partnership etc. 2 for each point to a maximum of (6)

Suggested Solution
If the business has generated goodwill in the past, then it is only that the old partners are given
credit for that goodwill in their old profit-sharing ratios.
In that case an incoming partner may be asked to bring some amount for his share in goodwill in
addition to his capital investment whereas an outgoing partner receives his share of goodwill in
addition to his capital. This is in an effort to compensate the existing partners for their efforts
which have created the goodwill.
So on admission or retirement of a partner value of goodwill is determined and credited to old
partners‟ capitals in their old profit-sharing ratios. Then goodwill is normally written off by
debiting new partners‟ capitals in new profit-sharing ratios

QUESTION 6
Identify one advantage of writing off Goodwill after immediately after it arises. [1]
O/N 00/P2 Q5(c)
OR Explain why partners may agree not to maintain a goodwill account in the books of the
partnership on the admission of a new partner. [2]
O/N 18/P22 Q2(d)

SOLUTION
Mark Scheme
A goodwill account may not be shown in the partnership‟s books of account because its value is
just a matter of opinion, i.e. the value is subjective (1), so it is difficult to value (1) and it is
Section 1 43 AS Level – Financial Accounting
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difficult to prove it exists (1). So its value could be subject to sudden change (1) for example if a
problem arose which caused damage to the partnership‟s reputation (1).
1 mark for giving one reason and 1 mark for development [2]

Suggested Solution
As goodwill normally has no objective value and does not exist on physical basis so it cannot be
sold individually unless business is subject to sale. So writing off of goodwill enables to show
true and fair value of business assets. Moreover, it is prudent to write off goodwill as it is
progressively replaced by the goodwill created by the new management of business.

QUESTION 7
State two reasons why assets are revalued on the change of a partnership [2]
O/N 16/P23Q2[a(ii)]
SOLUTION
Mark Scheme
To give the benefit of the change in value of the business to the existing partners and any
partner who may be retiring. (1)
So that the statement of financial position on the entry of the new partner shows a true and fair
view.(1)
Suggested Solution
When a new partner takes admission in a firm, it is desirable for him as well as the existing
partners to opt for revaluation. It helps to assess true and fair values of assets and liabilities and
as a result actual worth of investment of each partner. Likewise in case of retirement of an
existing partner, revaluation may become necessary to find out the real and fair value of
investment of retiring partner.
QUESTION 8
Explain why partners may value goodwill and revalue the assets when one partner retires. [3]
M/J 17/P23 Q1(c)
SOLUTION
Mark Scheme
All partners, including the partner who is retiring are rewarded for their efforts in building up the
business. It is only fair that the retiring partner is compensated in this way.
Suggested Solution
Goodwill adjustment is made to reward the retiring partner in recognition of his efforts in building
up the reputation of business. It is in an effort to compensate the retiring partner for his efforts.
Revaluation adjustments are made to determine the true worth of retiring partner‟s total
investment in the partnership
QUESTION 9
Suggest one reason why Poppy and Rose might have decided to change the partnership
agreement. [2]
M/J 11/P43 Q2(e)
SOLUTION
Mark Scheme
 Years of inflation had made their salaries unrealistic.
 Change in balance of workload between partners
Other reasonable answer 1 × 2 [2]
Suggested Solution
Change in workload or managerial role of partners within the partnership.
Section 1 44 AS Level – Financial Accounting
Read & Write Publications

QUESTION 10
Identify two possible advantages and two possible disadvantages to Brian and Clive of
admitting Dilip to the partnership on the retirement of Alan. [4]
O/N 11/P41 Q1(d), O/N 15/P21 Q2(c)

SOLUTION
Mark Scheme
Advantages:
 Wider pool of knowledge/expertise.
 Greater resources (capital etc.).
 Share of losses when these arise.
Disadvantages:
 All responsible for debts and errors of new partner.
 Can slow decision making process.
 Share of profits. [4 marks]
(Maximum 2 for adv. & 2 for disadv.
Suggested Solution
Advantages:
 Increased amount of capital will be available
 Risks and responsibilities of business ownership are shared
 Widerpoolofskills and expertise
 Reduction in workload of existing partners
Disadvantages:
 Sharing of profits among more partners.
 Can slow decision making process
 Each partner is legally bound by the acts of all the other partner
QUESTION 11
Assess the impact of Alice‟s retirement on the partnership‟s statement of financial position. [4]
O/N 16/P23 Q2(c)
SOLUTION
Mark Scheme
 Reduced cash flow after paying Alice to leave the business in view of the current overdraft
 Having to raise additional finance to pay Alice off
 Impacts on profitability having to raise additional capital
 Lower capital investment in the business
 Difficult to raise additional finance to pay to Alice due to the current overdraft [4]
Suggested Solution
 Liquidity problems especially in the presence of bank overdraft
 Difficulty in arranging cash to pay to Alice
 Cash will have to be raised from some outside souse to pay to Alice.
 Arranging new finance may be difficult and costly
QUESTION 12
Describe what financial provision a partnership should make for the death or planned retirement
of a partner. [2]
O/N 96/P2/Q1(b ii)
SOLUTION:
Partnership should decide about mode and time for payment of deceased or retired partners‟
share in the firm after revaluation, goodwill adjustments other adjustments including profit share.
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