Index

Chapter 1 Introduction to Accounting

Chapter 2 Recording Financial
Transactions
Chapter 3 Introduction to Preparing Financial
Statements
Chapter 4 Accounting for Inventory

Chapter 5 Fixed Assets and

Depreciation
Chapter 6 Accounting for Bad Debts

Chapter 7 Accruals and

Prepayments
Chapter 8 Wages and Salaries
Chapter 9 Accounting for VAT
Chapter 10 Accounting for Errors
Chapter 11 Preparing Financial
Statements
Chapter 12 Bank Reconciliations
Chapter 13 Solutions to Chapter Questions
 Chapter 1 – Introduction to
Accounting

How do financial transactions arise?- In the normal day to day

transactions of a business such as:

Invoices issued to customers

Credit notes issued to customers
Invoices received from suppliers
Credit notes received from suppliers
Payments from customers
Payments to suppliers
Charges from the bank e.g. bank charges, interest etc
Debit notes

These normal day to day transactions need to be recorded

What is the purpose of accounting systems?

To collect, measure and record transactions

To summarise and communicate the results of these
transactions to users (which enables users make decisions)

What are financial statements?

Statement of Profit or Loss (SOPL) – (you will hear this also

referred to as Profit and Loss or P&L)
Statement of Financial Position (SOFP) – (you will hear this
also referred to as the Balance Sheet (BS))
Statement of Cash Flows (SOCF)

Looking at these one by one:

Statement of Profit or Loss (SOPL):

 Albert Ltd
Statement of Profit or Loss for the year ended 31 December 2020

The organisation name is clearly identified

It is prepared for a fixed reporting period, which is clearly
identified
It is prepared on an accruals basis – this will be discussed in
Chapter 7
The reporting date is the last day of the reporting period – in
this case 31 Dec 2020
In this text the term SOPL will be used, however in
organisations it will often called the P&L (Profit and Loss)
This provides information on the financial performance of
the organisation

Statement of Financial Position (SOFP):

Albert Ltd
Statement of Financial Position as at 31 December 2020

The organisation name is clearly identified

It is prepared at a fixed reporting period, which is clearly
identified (as at 31 December 2020)
It is prepared on an accruals basis – this will be discussed in
Chapter 7
The reporting date is the last day of the reporting period – in
this case 31 Dec 2020
This will be referred to as the SOFP. In an organisation it is
often called the BS (Balance Sheet)
This provides information on the financial position of the
organisation

Statement of Cash Flows (SOCF):

Albert Ltd
Statement of Cash Flows for the year ended 31 December 2020
 The organisation name is clearly identified
It is prepared for a fixed reporting period, which is clearly
identified
It is prepared on a cash paid and received basis
The reporting date is the last day of the reporting period – in
this case 31 Dec 2020
Note – This statement provides information on the cash
inflows and outflows. It shows the cash inflows and outflows
in relation to the following activities: Operating, Investing and
Financing. The SOCF will not be studied further in this text

Understanding the Statement of Profit or Loss (SOPL):

The information from the SOPL/P&L is that pertaining to the financial

performance of an organisation.
It shows the profit or loss for the organisation, which is income
earned less costs incurred.

Profit/Loss for the reporting period = Income/Revenue Earned –

Expenses/Costs Incurred

What is income/revenue earned?

Income earned includes sales for the period (regardless of whether

they have been paid or not and regardless of whether the
organisation has invoiced the customer or not. It also includes
income received in an earlier period for work carried out in this
current period (as the income was earned in this current period)

Question:

What is the income earned for the period if?

i. Invoices issued to customers for €811,000 for goods sold

during the reporting period.
ii. Payments received from customers amounted to €460,000
during the reporting period which related to goods sold in a
 prior period.
iii. Invoices for goods sold during the reporting period where
invoices were not issued by the reporting date amounted to
€25,000.

Solution:

Invoices issued for goods €811,000

and services sold during the
reporting period
Invoices not issued by the €25,000
end of the reporting period
for goods/services sold
during the reporting period
Income earned during the €836,000
reporting period (SOPL
figure)

Note - payments received are not relevant in calculating

earned income

What are expenses/costs incurred?

Cost of goods or services consumed during the reporting period,

regardless of whether an invoice has yet been received and
regardless of whether they have yet been paid. It also includes the
cost of goods or services consumed during the reporting period
where payment was made in an earlier reporting period.

Question:

What is the cost incurred for the period?

i. Invoices were received from suppliers for €231,000 relating to

goods and services received during the reporting period.
ii. Payments made to suppliers amounted to €132,000 during the
reporting period.
 iii. Expenses were incurred of €19,300 for which invoices were
not received by the reporting date.

Solution:

Invoices received for goods 231,000

and services consumed
during the reporting period
Invoices not received by the 19,300
end of the reporting period
for goods/services consumed
during the period
Costs incurred during the 250,300
reporting period (SOPL
figure)

Note - payments made are not relevant in calculating

expense incurred

Calculation of Profit/Loss:

Remember: Profit/Loss for the reporting period = Income Earned –

Expenses Incurred

Question on calculating profit/loss:

If provided with the following information – what is the profit/loss for

the reporting period

Sales invoices issued to customers 245,000

during the period
Amounts received from customer in 182,000
relation to the invoices issued during
the reporting period
Expenses incurred on goods/services 178,000
for which invoices were received from
suppliers within the reporting period
Amount paid to suppliers of 175,000
goods/services for expenses incurred
during the reporting period

Solution:

Profit/Loss for the reporting period = Income Earned – Expenses

Incurred

Profit for the reporting period = 245,000 – 178,000

Profit for the reporting period = 67,000

What types of organisations or entities might you encounter?

• Sole traders
• Partnerships
• Companies
• Not for profit organisations such as charities,
club/societies/associations etc
• Government bodies

Who are the users of financial statements?

• Customers
• Suppliers
• Banks
• Investors
• Shareholders
• Staff
• Competitors
• Government bodies
• General public
• Regulators
Accounting Equation – this is something you need to become
familiar with:

Looking at each element of the accounting equation:

Liabilities (Loans, Trade payables (creditors), Other payables, Bank

overdrafts)

Capital (This relates to funds invested by the owner into the

business)
Assets (Property, Vehicles, Plant and Equipment, Inventory (stock),
Trade Receivables/Debtors, Bank, Cash, Investments)

Looking at the accounting equation from a practical perspective

John started business by investing €10,000 cash

Impact of transaction:
Asset – Cash increased by €10,000
Capital – Capital increased by €10,000

Developing this further:

Capital is increased by profits and further injections of capital and
reduced by losses and drawings

Capital at the start of reporting period (RP) + Profit earned + Capital

introduced – Drawings -Losses = Capital at the end of reporting
period (RP) – see question 1.4

Chapter questions (see solutions in Chapter 13):

Question 1.1

Assets = €120,000
Capital = €15,000
What are liabilities?

Question 1.2

Liabilities = €82,000
Capital = €26,000
What are assets?

Question 1.3

Assets = €197,000
Liabilities = €132,000
What is Capital?

Question 1.4

What is the capital attributable to the owner at 31 Dec 2020 if?

Capital at 1 Jan 2020 was €58,000
Profit for the year 2020 was €12,600
Drawings for the year were €8,300
 Chapter 2 – Recording Financial
Transactions

Chapter 1 discuss how transactions originated. Journal entries are

used to record these transactions in a business.

Journal entries are entered/posted to the accounts system

(once you understand how to do this manually, it is easy to use
a system in order to carry out these transactions).
Each posting has both a debit and credit entry – THIS IS
REALLY IMPORTANT – THERE ARE 2 SIDES TO EVERY
TRANSACTION. This is the double entry system often spoken
of
Once this process is completed there is either a debit or credit
balance on each account, which in turn feeds into the Trial
Balance (TB). The TB is basically a list of all the accounts and
the balance of each account (whether it be a debit or credit
balance)
The financial statements are then prepared from the Trial
Balance

Process to enter (or post) journal entries:

First determine if dealing with an asset/liability/income or

expenditure
Then understand the impact on each account – is it increasing
or decreasing?
Finally determine if it is debit or credit for each side of the
transaction. Each journal will consist of a debit entry, a credit
entry and a brief explanation of the journal

How to determine if it is a debit or credit entry:

 Remember these 2 rules and you will be able to then
determine whether it is a debit or credit for every type of
transaction encountered.
• Debit an increase in an asset.
• Debit an increase in an expense

Rule 1 – Debit an increase in an asset

Using this rule, helps identify other scenarios and how they are
recorded, as follows:
If a debit records an increase in an asset, then a credit records a
decrease in an asset.
An asset is the opposite to a liability. Therefore, if a debit records an
increase in an asset, then a credit records an increase in a
liability
If a credit records an increase in a liability, then a debit records a
decrease in a liability. From learning one rule, this helps
identify 3 other scenarios (as highlighted)

Rule 2 – Debit an increase in an expense

Using this rule, helps identify other scenarios that exist.
If a debit records and increase in an expense, then a credit records
a decrease in an expense.
An expense is the opposite to income/revenue. Therefore, if a debit
records an increase in an expense, a credit records an increase in
income/revenue.
If a credit records an increase in income/revenue, then a debit
records a decrease in income/revenue.

From our 2 initial rules that need to be learned, we figured out

how do deal with 6 other possibilities highlighted above and
summarised below.
Note that the treatment of capital is the exact same as that of
any liability (capital could be inserted instead of liability)

• Increase in an asset = Debit

• Decrease in an asset = Credit
• Increase in a liability/capital = Credit
 • Decrease in a liability/capital = Debit
• Increase in an expense = Debit
• Decrease in an expense = Credit
• Increase in income = Credit
• Decrease in income = Debit

Preparing or posting a journal entry (When a transaction occurs,

apply this process to prepare the journal)

Firstly, determine if dealing with an asset/liability/income or

expenditure
Then understand the impact on each account – is it increasing
or decreasing?
Finally determine if it is debit or credit for each side of the
transaction and prepare the journal (There will be a debit entry,
a credit entry and a brief explanation of each journal (briefly
describe what the transaction is – every individual will describe
it slightly differently, which is normal))

Sample question:

In November 2020 the bank granted and lodged into their account a
loan of €10,000 to X Ltd

First determine if dealing with an asset/liability/income or

expenditure. The loan is a liability and the bank account is an
asset (go back to Chapter 1 if unsure)

Then understand the impact on each account – is it increasing

or decreasing? The loan which is a liability is increasing. The
bank, which is an asset, is increasing.

Finally determine if it is debit or credit for each side of the

transaction and prepare the journal.
The loan which is a liability is increasing – credit an increase in
a liability. The bank, which is an asset, is increasing - debit an
increase in an asset.
 The Journal for this transaction will be:
Debit bank account €10,000 – this is the debit entry
Credit loan account €10,000 – this is the credit entry
Loan obtained from bank November 2020 – this is the
explanation

Or else leave out the debit and credit and instead have a debit
(DR) and credit (CR) column and lay out as follows (either
format is perfectly acceptable):

DR € CR €
Bank Account 10,000
Loan Account 10,000
To record loan from
bank November
2020

Question

• Goods are sold in January 2020 for cash of €12,000

• Goods are sold in February 2020 on credit for €8,700

Prepare these journal entries

(Is it Asset/Liability/Income/Expenditure/Capital?
What is the impact (increase/decrease)?
What is the DR and what is the CR?

Solution

DR € CR €
Cash Account 12,000
Sales Account 12,000
To record cash sales
January 2020
Trade Debtors 8,700
Account
Sales Account 8,700
To record credit
sales February 2020

Note – the names of the accounts are generally chosen by the

business e.g. electricity costs may be posted to an electricity account
or else light and heat etc. The purchase of a computer may be
posted to a computers account or equipment etc. Also, the
distinction between cash and bank is sometimes blurred – so when
something is paid for in cash, we may see this being posted to the
bank account in some text books. Businesses will generally have
bank rather than cash transactions and any cash transactions, will
probably be carried out through petty cash e.g. buying milk/tea,
paying the window cleaner and so on.

Buying on credit
Most of the purchases of a business will be credit purchases. When
credit sales are made, the impacted accounts are Sales and Trade
Receivables (often called trade debtors). When credit purchases for
resale are made, the impacted accounts are Purchases and Trade
Payables (often called trade creditors). When credit purchases not
for resale are made e.g. stationery, the impacted accounts are
Stationery (or whatever the relevant cost account is) and Other
Payables (or other creditors).

Chapter questions (see solutions in Chapter 13):

Question 2.1

Prepare each of the following journal entries for Hair Ltd for January
2020:

Paid rent of €12,900 in cash 1 Jan 2020

Took out a loan from the bank of €33,250 and lodged it to the bank
12 Jan 2020
Sales €53,000 for cash (paid immediately into bank account) 19 Jan
2020
Purchased stationery for salon €945 (paid in cash) 21 Jan 2020
Bought a new laptop for the business (paid by cheque) €512 on 31
Jan 2020 (use equipment/computers account for the laptop)

Question 2.2

Prepare each of the following journal entries for Hair Ltd for February
2020:

Paid rent of €12,900 by cheque 1 Feb 2020

Electricity was paid by direct debit for €650 on 11 Feb 2020
Bank charges of €125 were deducted on 15 Feb 2020
Purchases of shampoos and conditioners on 20 Feb 2020 for the
business were made from Salon Ltd for €10,000 but have not yet
been paid for
 Chapter 3 – Introduction to Preparing
Financial Statements

Going back to the question in Chapter 2 for which journals were

prepared

• Goods are sold on 19 January 2020 for cash of €12,000

• Goods are sold in 10 February 2020 on credit for €8,700

DR € CR €
Cash Account 12,000
Sales Account 12,000
To record cash sales
January 2020

Trade Debtors
8,700
Account
Sales Account 8,700
To record credit
sales February 2020

These journals are recorded by the business into the appropriate

ledger accounts (cash account, sales account and trade debtors).
The left-hand side is ALWAYS the debit side (DR)
The right-hand side is ALWAYS the credit side (CR)
All that is required initially is to record the journals already
prepared, line by line, into the correct account that has been
identified in the journal
Ledger accounts are also referred to as T-accounts – due to
the T shaped format

Taking the prior 2 journal entries and posting them to the ledger/T
accounts:
Note from the above that each entry references the corresponding
entry e.g. In the Cash Account for 12 Jan, this references Sales.
Therefore, you know the corresponding credit entry is in the Sales
Account. Likewise, if you look at the Sales Account entry, it
references Cash. This is extremely important for audit purposes as
there will likely be many transactions in any given reporting period
for a business.

The next step is the close out all the accounts at the end of the
reporting period – which for this example we will use 31 December
2020. For the above transactions close out the accounts at 31
December 2020 as follows:
Chapter 2 briefly discussed the trial balance which is simply a listing
of all the balances (on either the relevant debit or credit side) from
the ledger accounts into the trial balance. The total of all the debit
transactions should equal the total of all the credit transactions, since
accounting is a double entry system and every transaction had both
a debit and credit entry.

From the above workings the Trial Balance will look as follows:

Business Name
Trial Balance at 31 December 2020 (last date of the reporting
period

Account DR CR
Sales account 20,700
Cash account 12,000
Trade receivables 8.700
account
Total 20,700 20,700

Once a trial balance is available, financial statements can then be

prepared (which will be covered in Chapter 11)
Chapter question (see solution in Chapter 13):

Question 3.1

You previously prepared the journal entries for Hair Ltd for the
following transactions.

Paid rent of €12,900 in cash 1 Jan 2020

Acquired a loan from the bank of €33,250 which was lodged to the
bank account 12 Jan 2020
Sales €53,000 for cash (paid immediately into bank account) 19 Jan
2020
Purchased stationery for salon €945 (paid in cash) 21 Jan 2020
Bought a new laptop for the business (paid by cheque) €512 on 31
Jan 2020 (use equipment/computers account for the laptop)
Paid rent of €12,900 by cheque 1 Feb 2020
Electricity was paid by direct debit for €650 on 11 Feb 2020
Bank charges of €125 were deducted on 15 Feb 2020
Purchases of shampoos and conditioners on 20 Feb 2020 for the
business were made from Salon Ltd for €10,000 but have not yet
been paid for

Required: Prepare the ledger accounts, close these ledger

accounts, using 31 December as the end of reporting period and
prepare the Trial Balance as at that date.
 Chapter 4 – Accounting for Inventory

What is inventory (or stock as it is frequently referred to) in a

business. It is a combination of:

• Raw materials
• Work in Progress
• Finished Goods
• Goods purchased for resale

It is important to distinguish between opening inventory (at the start

of the reporting/accounting period) and closing inventory (at the end
of the reporting/accounting period)

Opening Inventory - This is carried forward from the prior reporting

period (where it was the closing inventory figure)

Closing Inventory - This is on hand at the end of the current reporting

period

Up to now the SOPL has been considered at a fairly high level

(Income earned less Expenses incurred)

Delving into this a little deeper - after sales/income, cost of sales

must be looked at. To date this has been considered as purchases,
however, account must also be taken of opening and closing
inventory.

Consider a business selling kitchen tables which are purchased and

then sold on who are offered a large discount by their supplier (who
wanted to sell off old stock). Normally they purchase these tables for
€200 each. However, in March 2020 they can purchase them for
€50 each. Due to this substantial discount in March, instead of the
normal 100 that the business purchases, they purchased 900 units.
If they sell these tables at €300 each and normally sell 100 units per
month, then their February figures would initially look like this:

Sales 100 * €300 = €30,000

Purchases 100 * €200 = €20,000 (the normal purchase price before
March 2020)
Gross profit €10,000

And their March figures would look like this:

Sales 100 * €300 = €30,000

Purchases 900 * €50 = €45,000 (the purchase price in March 2020)
Gross profit/(loss) (€15,000)

March shows a loss of €15,000 simply because they purchased such

a large quantity, (due to the heavily discounted purchase price). This
distorts the figures completely. What should be done is to account
for the purchases cost related to the units that were sold – which
were 100 units. In other words, determine the COST OF SALES.

The units that remain unsold are inventory/stock (which is an asset),

so must be recognised accordingly.

What exactly is Cost of Sales:

Include:
• Opening inventory
• Purchases
• Carriage inwards
• Manufacturing wages (if we are making or changing the goods
to sell them)
• Manufacturing costs (if applicable)

Deduct:
• Closing inventory
• Purchases returns
Note – not all of these categories will be present in a question or
situation, but require an understanding, to account for all
possibilities.

Returning to the previous example of kitchen tables. If advised that

no kitchen tables were in inventory/stock at 28 February 2020 – i.e.
everything previously purchased was sold. In March the business
purchased 900 units at the discounted price of €50 and sold the
regular 100 units for the normal price of €300. What is the Cost of
Sales and what is the gross profit?

Solution

Cost of sales is:

Opening inventory = 0 +
Purchases = €45,000 +
Carriage inwards = 0 +
Manufacturing wages (if making or changing the goods to sell them)
=0+
Manufacturing costs (if applicable) = 0
LESS
Closing inventory = (900 purchased less 100 sold) = 800 * €50 =
€40,000
Less Purchases returns = 0

Totalling all of the above gives cost of sales of:

0 + €45,000 + 0 + 0 + 0 - €40,000 – 0 = €5,000

Can you explain this figure of €5,000?. Think about the concept of
Cost of Sales – it is the cost of the goods sold in the period. The
goods sold were 100 units and the cost was €50 per unit. So, yes,
this figure makes perfect sense.

The question asked to calculated cost of sales and gross profit.

Cost of sales is €5,000 as calculated above, and gross profit is:

Sales (100 * €300) – Cost of sales (€5,000) = €25,000

Does this gross profit figure make sense to you? Goods were
purchased for €50 each and sold for €300, making a gross profit on
each unit of €250. 100 units * gross profit of €250 = €25,000.

Question 1:

What is cost of sales when?

Purchases = €65,000
Opening inventory = €21,000

Solution 1:

Cost of sales is Opening inventory + Purchases = €86,000

Question 2:

What is cost of sales when?

Purchases = €65,000
Opening inventory = €21,000
Closing inventory = €17,000

Solution 2:

Cost of Sales is Opening inventory + Purchases – Closing inventory

= €69,000

Accounting for Inventory:

Opening Inventory Closing Inventory

This is carried forward from This is on hand at the end of
the prior reporting period the current reporting period
(closing inventory)
It increases the cost of sales It reduces the cost of sales in
in this reporting period the current reporting period
 Journal: Journal:
DR Cost of Sales (increases DR Inventory (increases
expense) asset)
CR Inventory (reduces asset) CR Cost of Sales/purchases
To record opening inventory (reduces expense)
at e.g. 1/1/20 To record closing inventory at
e.g. 31/12/20

Now that opening and closing inventory have been considered, they
need to be accounted for. Opening inventory is basically the prior
period closing inventory and is currently reflected as a balance on
the Inventory asset account, therefore at the start of the
accounting period:
Transfer opening inventory to the cost of sales account (which is
an expense account) – think back to what constitutes Cost of Sales

At the end of the accounting period:

Transfer closing inventory out of purchases/cost of sales and
into the inventory account (out of an expense account into an asset
account (decreasing an expense is a CR and increasing an asset is
a DR)

Question 3:

Assuming an end of reporting period of 31 December 2020, using

the prior question information of:

Purchases = €65,000
Opening inventory = €21,000
Closing inventory = €17,000
i) What journal entries need to be posted to account correctly
for these figures at the end of the reporting period?
ii) What is gross profit, if sales for the period were €103,000?

Solution 3:

i)
Journals can be presented in either format covered in Chapter 2 –
use whichever suits you

DR € CR €
Cost of Sales account 21,000
Inventory account 21,000
To transfer opening
inventory to cost of sales at
1 January 2020

Inventory account 17,000

Cost of sales
17,000
account/purchases
To transfer closing
inventory from purchases at
31 December 2020

ii)
Gross profit is Sales less Cost of Sales.

Cost of sales:
Cost of Sales is Opening inventory + Purchases – Closing inventory
= €69,000

Gross profit is Sales less Cost of Sales:

€103,000 - €69,000 = €34,000

Note on the SOPL you may see opening and closing inventory rolled
into the purchases figure (after journals have been prepared to
account for opening and closing inventory) or else each listed out
separately – opening inventory + purchases figure prior to these
inventory journals – closing inventory. Either format is perfectly
acceptable – this comes up in a practical setting in Chapter 11

Chapter questions (see solutions in Chapter 13):

Question 4.1

You have been provided with the following extract from the trial
balance of Mary Desor at 31 December 2020:

DR CR
Purchases 356,000
Purchases
returns 12,500
Inventory at 1
Jan 2020 31,850

The annual stocktake was undertaken on 31 December 2020 and

stock at that date was valued at €26,300.

Prepare the journal entries to recognise the cost of sales expense in

the SOPL for the year ended 31 December 2020.

Question 4.2

Reilly Ltd had the following entries on the trial balance at 31 Dec
2020:

DR CR
Purchases 297,000
Inventory at 1
Jan 2020 41,700

The value of closing stock at this date was €13,890

Prepare the journal entries to recognise the cost of sales expense in

the SOPL for the year ended 31 December 2020.
 Chapter 5 – Fixed Assets and
Depreciation

Expenditure on fixed assets is capital expenditure and this cost will

not appear in the SOPL. However, the assets can be depreciated
over their life, so the annual depreciation charge will be expensed to
the SOPL. The cost of the capital expenditure, will be recorded in an
asset account and presented under the category of non-current
assets in the SOFP (this will be looked at in Chapter 11 – Preparing
financial statements)

What fixed assets might we come across:

Property/buildings
Land
Plant
Equipment (usually plant and equipment are grouped)
Motor vehicles
Machinery
Fixtures and fittings

When purchasing an item of capital expenditure, this transaction

needs to be recorded, just as you have been doing for other
business transactions to date.

Question 1

If Ire Ltd purchased a new machine, paid for by bank transfer of

€30,000 on 10 March 2020, what journal entries are required to
record this transaction?

Solution 1

The 2 accounts in question are:

Bank account = Asset account (decreasing so a CR entry)
Plant and equipment account (or any other appropriate name e.g.
Machine account) = Asset account (increasing, so a DR entry)

DR Plant and Equipment €30,000

CR Bank €30,000
To record the acquisition of a new machine by bank transfer on 10
March 2020

Question 2

On 1 September 2020 Ire Ltd purchased a second machine for

€19,000, on credit from Best Machines Ltd. Ire Ltd paid for this
machine on 5 October 2020 by bank transfer.

Requirement:
Prepare the journal entries in relation to the purchase of the asset
and the payment to Best Machines Ltd on the appropriate dates

DR CR
Solution 2

Plant and Equipment/Machine

A/C 19,000
Other Payables A/C 19,000
To record purchase of new
machine on 1 September
2020

Other Payables A/C 19,000

Bank A/C 19,000
To record payment to supplier
of new machine 5 October
2020

The above simply records both transactions which occurred. The

balance on the Other Payables account in relation to this machine is
cleared to zero on 5th October.
Depreciation

Depreciation is an expense recognised in the SOPL of each

reporting period in which the asset is used. Basically, a portion of the
cost of the asset is expensed over its useful life. Compare this to the
purchase of stationary, which is expensed in the period in which it is
purchased.

Useful life is the period of time over which the entity intends to use
the asset. E.g. the above machine may be expected to have a
useful life of 10 years. If so, it will be depreciated over a 10-year
period – we will look shortly at depreciation methods.

Residual value is the amount the asset is expected to be sold for at

the end of its useful life.

Depreciable amount is the maximum amount of depreciation that

an entity can charge over the useful life. Depreciable amount is the
difference between the cost of the asset and its residual value. It is
the total depreciation to be charged in relation to the asset over its
useful life.

Example:

Ire Ltd purchased office furniture on 15 April 2020 for €10,000. It

expects that this furniture will have a useful life of 8 years and at the
end of this period be worth €2,000.

Useful life of the furniture is 8 years

The residual value of the furniture is €2,000
The depreciable amount is the amount that Ire Ltd can charge over
the useful life, which is Cost – Residual Value - €8,000.

Therefore €8,000 will be depreciated by Ire Ltd

Accumulated depreciation:
The total depreciation charged to date in relation to the asset is
presented in an accumulated depreciation account. The acquisition
of a capital item has previously been recorded to the relevant asset
account. Therefore, when considering both accounts together
(Asset and accumulated depreciation), this provides the carrying
amount of the asset, (also called Net Book Value - NBV). When this
asset is presented in the SOFP, it will be presented as three figures -
Cost, Less Accumulated Depreciation, totalling Carrying amount.

The journal to recognise the depreciation expense in a period is:

DR Depreciation
CR Accumulated Depreciation
To record depreciation for the period e.g. 2020

Now think back to ledger accounts. Do you expect a DR or CR

balance on the Depreciation expense account? As it is a cost
account, you expect a DR balance – which will then appear on the
Trial Balance on the DR side

Methods of Depreciation

An organisation can either:

Charge a full year’s depreciation in the year of purchase of the
asset and none in the year of disposal or
Time apportion depreciation in both the years of purchase and
disposal.

For exam purposes you are generally told which format the
organisation adopts and if not, charge a full year in year of
acquisition and none in year of disposal.

Straight line method of depreciation

Reducing Balance method of depreciation

Straight line:
Step 1 - Calculate the depreciable amount (Cost – Residual Value)
Step 2 - The Depreciation charge each year is this amount multiplied
by the appropriate rate (which is the same as this amount/useful life
of the asset)
The depreciation charge will be the same each year.

Question 3

Using the prior Ire Ltd example where the company purchased office
furniture on 15 April 2020 for €10,000. It expects that this furniture
will have a useful life of 8 years and at the end of this period be
worth €2,000. It uses the straight-line method of depreciation.

Solution 3

Step 1 - The depreciable amount is the amount that Ire Ltd can
charge over the useful life, which is Cost – Residual Value - €8,000.

What depreciation rate do we use? As the useful life is 8 years, our

rate is 100/8 = 12.5% per year

Step 2 – The depreciation charge is the amount by the rate: 8,000

*12.5% = €1,000 per annum.
Or else as per above you can simply divide the depreciable amount
by the life of the asset: €8,000/8 = €1,000 per annum

Just to test this. After 8 years, accumulated depreciation will be

€1,000 * 8 = €8,000. This is correct, as it equates to the depreciable
amount.

Reducing balancing method

The depreciation charge is calculated as:

Year 1: Cost x Depreciation rate
Subsequent years: Carrying amount x Depreciation rate

Note: Carrying amount = Cost – Accumulated depreciation

The actual depreciation charge is reducing each year as the rate is
applied to a decreasing carrying amount.

Question 4

Using the prior Ire Ltd example where the company purchased office
furniture on 15 April 2020 for €10,000. It uses the reducing balance
method of depreciation at 20% per annum. What is the depreciation
charge in 2020, 2021 and 2022?

Solution 4

2020 (Year 1) = Cost * depreciation rate = €2,000

2021 = Carrying amount (10,000 – accumulated depreciation of

€2,000 = €8,000) * 20% = €1,600

2022 = Carrying amount (€10,000-€8,000-€1,600 = €6,400) * 20% =

€1,280

Therefore, you can clearly see the reducing depreciation charge

each year.

Disposal of an asset

What is a disposal of an asset? This is generally the sale of an

asset but could also be a gift or transfer of an asset.

Accounting for an asset disposal:

When an asset is sold, the asset ceases to be recognised; this
means it is no longer presented in the SOFP. This involves the
following steps:

Step 1 - The balance on the asset cost account must be eliminated

(to do this credit the account – CR a reduction in an asset). The
corresponding DR is to the disposal account
Step 2 - The related accumulated depreciation must also be
eliminated (to eliminate this CR balance, a DR is required). The
corresponding CR is posted to the disposal account.
Step 3 - The sales proceeds are recognised e.g. DR Bank account
(or Cash account/Trade-in account). The corresponding CR is
posted to the disposal account.

At this stage it can be determined whether there is a profit or loss on

disposal from the disposal account.
However, it should be calculated manually as follows:

A profit or loss on disposal is calculated by comparing the

proceeds from the sale with the carrying amount of the asset at the
disposal date.

Sales proceeds > carrying amount = profit on disposal

Sales proceeds < carrying amount = loss on disposal

Question 5

Sales Ltd received a cheque for the sale of an item of equipment on

31 December 2020 for €12,500
The asset originally cost €32,000, and at the disposal date the
balance on the accumulated depreciation account for this asset was
€17,000.

Requirement
a) Calculate the profit or loss on disposal.
b) Prepare the journal entries to recognise the sale of the asset.
c) Prepare the ledger accounts in relation to the sale of the item
of equipment.

Solution 5

a)

Proceeds from Sale of Asset 12,500

Carrying amount of asset at (15,000)
disposal date
(€32,000 − €17,000)
Profit / (loss) on disposal (2,500)

Think about this so you understand it:

If carrying amount is greater than the proceeds from the sale of
the asset there is a Profit on disposal
If carrying amount is less than the proceeds from the sale of
the asset there is a Loss on disposal

b)
When you become more familiar, you can condense this into 1
journal if you wish, but this is perfectly acceptable:

DR CR
Bank Account 12,500
Disposal Account 12,500
Cash proceeds for asset
disposal

Disposal Account 32,000

Fixed Asset account 32,000
Transfer fixed asset cost to
disposal account

Accumulated Depreciation
account 17,000
Disposal Account 17,000
Transfer accumulated
depreciation to disposal
account

Loss on disposal Account 2,500

Disposal Account 2,500
To record the loss on disposal

c)
Ledger accounts:

Bank Account
31/12/2020 Disposal 12,500

Equipment cost Account

Bal b/d
before Disposal
31/12/2020 disposal 32,000 31/12/2020 Account 32,000

Accumulated Depreciation
Account
31/12/2020 Disposal 17,000 31/12/2020 Bal b/d 17,000

Disposal Account
Equipment
31/12/2020 Cost 32,000 31/12/2020 Bank 12,500
Accumulated
31/12/2020 Depreciation 17,000
Loss on
31/12/2020 disposal 2,500
32,000 32,000

Loss on disposal Account

31/12/2020 Disposal 2,500

Chapter questions (see solutions in Chapter 13):

Question 5.1

Hilow Ltd purchased a machine for €25,000 cash on 1 July 2018. At

the date of purchase, the company estimated that the machine had a
useful life of five years and a residual value of €6,000.
Hilow Ltd prepares its financial statements to 31 December each
year and charges depreciation on a monthly basis.

Requirement
a) Calculate the depreciation charge for 2018, 2019 and 2020.
b) Prepare the depreciation journal for 2020
c) What is the carrying amount of the machine at each reporting
date from December 2018 to 2020?

Question 5.2

On 1 January 2016 Drives Ltd purchased a delivery van for €30,000

by cheque. Management uses the reducing balance method to
calculate the depreciation charge at a rate of 20% per annum.
In 2020 Drives Ltd sold the van to another business for €14,000.
Financial statements are prepared annually to 31 December.

Requirement
a) Calculate the depreciation charge for each reporting period.
b) Prepare the depreciation journal for year ended 31 December
2019
c) What is the profit/loss on disposal in 2020?
d) Prepare all relevant journals relating to the 2020 disposal

You should be clear what the carrying amount of the machine is, at
each reporting date from December 2016 to 2019?
Chapter 6 – Accounting for Bad Debts

Operating a business and providing credit to customers runs the risk

of incurring debts that are not paid in full/or paid at all. To help
alleviate this, businesses run checks on potential credit customers
and work at minimising potential bad debts such as:

Obtaining credit references from potential new customers

Setting a credit limit (possibly smaller for new/unknown
customers)
Adhering to credit limits – not allowing further sales if
customers exceed their credit limit (or are causing trouble
regarding payments)
Follow up promptly on any issues that arise e.g. chase
payments quickly after the credit period expires (which is
usually 30 days but depending on the business could be longer
e.g. 60/90 days etc)

If a customer becomes unable to pay the debt (which is currently an

asset for the business who is owed this amount – trade receivables)
the seller cannot continue to recognise the amount owing to them
and must write off the balance (or part balance) which is not going to
be paid to them. This is an expense to the SOPL:

• DR Bad Debt expense account (increase in expense)

• CR Trade Receivables account (decrease in asset)

Example:

Sadly Ltd has a balance on trade receivables of €45,000. One of its

customers J Maguire who owes Sadly Ltd €2,500, has ceased
trading on 28 December 2020 due to Covid 19 and will not be paying
the amount owing. Prepare the journal entries and ledger accounts
in relation to the bad debt write off.
Solution:

Dr Bad Debts expense account €2,500

Cr Trade receivables account €2,500
To record bad debt Dec 2020 for J Maguire

Bad Debts
Expense A/C
28-
Dec- Trade
20 receivables 2,5000

Trade
Receivables
A/C
28- 28-
Dec- Dec- Bad
20 Bal B/D 45,000 20 debts 2,500
28-
Dec- Bal
20 C/D 42,500
45,000 45,000
31-
Dec-
20 Bal B/D 42,500

Provision for Bad Debts

A provision is made when an organisation considers that a certain

amount or certain customer/s (trade receivables) will not pay their
amounts owing (part of amounts owing). There are 2 types of
provision:
 General – this relates to the total receivables balance and is
typically a percentage of this balance. A business knows that
in any particular year it possibly has a certain amount of bad
debts which are a % of the total trade receivables e.g. 3%/5%
and so on
Specific – this relates to a particular customer account
(receivable account) – a provision is made as there is some
uncertainty about the possibility of this customer paying their
outstanding balance

The provision for bad debts (for both types) is presented in SOFP.
The balance on trade receivables is netted against the balance on
the provision for bad debts and presented as a single figure within
current assets. No journal is required to net them off.

To post a provision journal:

DR Bad debts expense A/C

CR Provision for bad debts A/C
To recognise a provision/increase in the provision for bad debts

Example:

John Peters had the following at 31 Dec 2020:

DR CR
Trade receivables 62,000
account
Provision for bad 3,100
debts account

How is the above presented in the SOFP?

Solution:

Statement of Financial Position for J Peters as at 31 December

2020
Current Assets:
Trade Receivables (62,000-3,100) €58,900

General provision:

A general provision could arise for the first time or else increase or
decrease in a period.

When it arises for the first time, the full amount is journaled in the
period

Be careful when the provision is increasing or decreasing – you need

to consider the current provision balance and the corresponding
journal will be the difference.

Example:

If John Peters in the above example wanted a closing balance in the

provision account of 7% of trade receivables at 31 Dec 2020.

Solution:

7% of trade receivables would be €4,340

However, there is currently a balance on the account of €3,100
Therefore, the journal required is for the difference (to bring the
existing balance up to €4,340) = €1,240

You already know how to post a provision journal:

DR Bad debts expense A/C €1,240

CR Provision for bad debts A/C €1,240
To post the increase in bad debt provision to 7% of trade receivables

The balance on John’s provision account is now €4,340 and the

position is now as follows:
 DR CR
Trade receivables 62,000
account
Provision for bad 4,340
debts account

How is the above presented in the SOFP?

Statement of Financial Position for J Peters as at 31 December

2020

Current Assets:
Trade Receivables (62,000-4,340) €57,660

Example:

If instead John Peters wanted a closing balance in the provision

account of 3% of trade receivables at 31 Dec 2020.

Solution:

3% of trade receivables is €1,860

However, there is currently a balance on the account of €3,100
Therefore, the journal required is for the difference (to bring the
existing balance DOWN to €1,860), so reverse the process for the
prior journal posted – see journal for explanation

Journal to post a decrease in a provision:

DR Provision for bad debts A/C €1,240 (this is a reduction in a

liability account)
CR Bad debts expense A/C €1,240 (this is a decrease in an expense
account)
To post decrease in bad debt provision to 3%

The balance on John’s provision account is now €1,860 and the

position is now as follows:
 DR CR
Trade receivables 62,000
account
Provision for bad 1,860
debts account

How is the above presented in the SOFP?

Statement of Financial Position for J Peters as at 31 December

2020

Current Assets:
Trade Receivables (62,000-1,860) €60,140

Specific provision:

A specific provision relates to a particular customer (receivable

account) – a provision is made as uncertainty exists around the
possibility of this customer paying their outstanding balance or some
of this balance

As before, post a provision as follows (note some texts use a specific

provision account but this creates additional unnecessary ledger
accounts. At all times, a business would be aware of what makes up
the balance of a provision account):

DR Bad debts expense A/C

CR Provision for bad debts A/C
To recognise a specific provision for bad debts

At some date in the future the customer may:

i) pay this balance that the business was not expecting them to pay
(specific provision no longer required), or
ii) may go into liquidation/cease trading or some other occurrence
that results in the balance becoming unpayable (specific provision is
realised, and the previous uncertainty is now certain)
Specific provision no longer required – what is needed in this
case is the reversal of the specific provision. If a specific provision
had been made for €450 for Unlikely Ltd then the organisation would
have posted a DR to the Bad debt expense account and a CR to the
Provision for bad debts account. Should Unlikely Ltd pay this
balance, to reverse the specific provision, post the opposite
transaction:

DR Provision for bad debts A/C €450

CR Bad debts expense A/C €450
To reverse the specific provision for bad debts for Unlikely Ltd

The actual payment itself will be recorded as normal

DR Bank €450
CR Trade Receivables €450
To record the payment from Unlikely Ltd

Specific provision realised – If instead Unlikely Ltd did not pay this
balance but went into liquidation, (where there was no chance of
recouping this amount), recognition is required by a write off of the
relevant amount in Trade Receivables, instead of having a provision
for a possible unpaid debt.
At this point in time, the organisation has a specific provision for
Unlikely Ltd for €450. They would have posted a DR to the Bad debt
expense account and a CR to the Provision for bad debts account.

The DR to the bad debt expense account remains, as this is the

entry posted when writing off a bad debt, so this step has already
been completed.
However, the CR to the Provision for bad debts account needs to be
reversed (as it is no longer a provision). To reverse, post a DR to
this account.

So where is the corresponding CR – this was covered at the start of

the chapter. The Trade Receivables (asset account) balance is
reducing, there is no longer any chance of receiving this €450. To
reduce this account a CR is required for a decrease in an asset.

DR Provision for bad debts A/C €450 (to eliminate the provision as it
is now an actual bad debt)
CR Trade Receivables A/C €450
To recognise realisation of specific provision for Unlikely Ltd

Bad Debt Recovered:

There is also the possibility that a previously written off bad debt is
paid (recovered)
The previous entry was:
• Dr Bad Debts expense account €X
• Cr Trade receivables account €X
• To record bad debt e.g. Dec 2020 for Customer Y

If this is ultimately paid then the accounts in question are the Bank
and Bad Debt expense account (as an expense to the business was
recognised, which no longer is appropriate). The journal required in
this instance is:

• Dr Bank account €X (increase in asset)

• Cr Bad Debts expense account €X (decrease in expense)
• To record bad debt recovered for Customer Y

Chapter questions (see solutions in Chapter 13):

Question 6.1

Sadly Ltd has a balance on the trade receivables account of

€45,000. Sadly Ltd previously recorded a bad debt for one of the
customers J Maguire, who owed Sadly Ltd €2,500 and ceased
trading on 28 December 2020 due to Covid 19. J Maguire
commenced trading in 2021, after restrictions were lifted and in July
2021 they repaid Sadly Ltd the amount previously owed of €2,500
Prepare the journal entries to recognise this July 2021 transaction on
behalf of Sadly Ltd.

Question 6.2

In 2019 George Ltd had written off a balance relating to a customer

Unsus Ltd., for the amount of €1,570. The balance on trade
receivables was €162,000 but the following need to be considered.

In December 2020 George Ltd heard that another customer Grean

Ltd had gone out of business owing €2,900, therefore a bad debt
needs to be recognised (not yet recorded) in this regard.
Also, in December 2020 Unsus Ltd paid the previously written off
amount of €1,570 (not yet recorded)
For 31 December 2020, George Ltd believes it needs a 5% (of final
trade receivables) general provision for bad debts in its accounts.

Required:
Prepare journal entries for all of the above transactions and show the
calculation for the end of year general provision
 Chapter 7 – Accruals and
Prepayments

Accounts must reflect revenues and expenses relating to the period

in question to correctly determine profit (or loss) for this period.

How are expenses recognised? Most expenses/charges are

recognised when the invoice is received from the supplier.

However, an expense may be incurred but the invoice not yet

received - think about your home electricity bill which is bi-monthly.

If an electricity bill commenced on 1 Jan 2020 and ended 29 Feb

2020 and accounts were prepared to 31 Jan 2020, there is a month
of expenditure that has not yet been recognised at this date. In
order to recognise it, post an accrual for 1 month worth (estimated)
of electricity costs.

If the normal bi-monthly bill is €300, then 1-month electricity cost is

€150 (1/2 of €300). To accrue for this cost:
DR Light and heat/electricity (expense account) €150
CR Accruals (liability account) €150

If instead electricity runs from 15 Dec 2019 to 14 Feb 2020 and

accounts are being prepared at 31 Jan, then there is 1.5 months of
expenditure (half of December and all of January) that has not yet
been recognised at this date. In order to recognise this, post an
accrual for 1.5 months’ worth (estimated) of electricity costs

If instead electricity runs from 20 Jan 2020 and ends 20 Mar 2020.
By the end of January there has been a bill up to 19 January and a
requirement to accrue the remainder of January. I recommend
rounding this to 1/3 of a month (rather than by days) – this will be
perfectly acceptable to the auditors. To recognise this cost, post an
accrual for 1/3 month worth (estimated) of electricity costs

What are accruals:

Accruals are largely estimates. It is the best that can be done, in

order to ensure all costs are recorded in the correct accounting
period.

Example A repairs company quoted Mult Ltd €15,000 to carry out

storm repair work and at the date of accounts, is a third of the way
through that work (and will not be invoicing until this work is
complete). In this situation 1/3 of the cost of the work - €5,000 would
be accrued. It may transpire that this cost ends up higher/lower then
€15,000 but at the reporting date, that was the best estimate
available.

Costs that are frequently accrued:

Heating
Insurance
Phones (landlines and mobiles)
Legal costs – work done but not invoiced
Accountancy/audit work
Repairs/maintenance

A business will have a list of accruals at the start of each new period
and would need to review them to see if the invoices have since
come in – they are usually only a timing matter (the invoice not yet
received or work not yet complete)

If the invoice has been received and posted – what accounting is

now required?. There exists an accrual for the estimated expense
and the actual invoice has also been expensed to the accounts.
Therefore, the accrual needs to be reversed (eliminated as it is no
longer required)
How is it eliminated/reversed? By reversing the initial accrual
posting. Taking the electricity examples from above. To reverse any
of the accruals referred to:

• CR electricity account with the accrued amount

• DR accruals account
• To reverse the previous electricity accrual

What are prepayments:

A prepayment occurs when an expense has been invoiced in

advance. A typical example is insurance or other such annual bills.
Assume insurance fell due on 1 July 2020 for the year and costs
€6,000 and accounts were prepared on 31 Dec 2020.

Example:

What is the position regarding the insurance charge at 31 Dec 2020?

A full year insurance charge has been recorded in the accounts

What is this situation called? – It is a prepayment

How much should have been charged to 31 Dec? – 6 months

(July – Dec inclusive)
This needs to be accounted for to ensure the accounts reflect
the correct expenditure for the relevant period.

In this situation there is €3,000 (6 months relating to the next year –

up to 30 June 2021) prepaid insurance
To reduce the insurance cost for 2020 - credit a decrease in an
expense. The journal required is:

DR Prepayment (asset account) €3,000

CR Insurance (expense account) €3,000

Example:
Following from the above, if monthly accounts were prepared, this
figure would be reviewed each month. So, at the end of January
2021 what is the position?

At the end of January there remains 5 months prepaid (Feb – End of

June) so 1 month of insurance needs to be journaled to the
insurance expense account from the prepayment account

DR Insurance (expense account – being increased) €500

CR Prepayment (asset account - being reduced) €500
To record insurance cost relating to January 2021

What will be the balance on the prepayment account at 31 Jan

2021? It will be €3,000 - €500 = €2,500

Example:

At the end of Feb 2021 there remains 4 months prepaid, so another

month’s insurance charge needs to be journaled to the insurance
expense account from the prepayment account

DR Insurance (expense account – being increased) €500

CR Prepayment (asset account - being reduced) €500
To record insurance cost relating to February 2021

What will be the balance on the prepayment account at 29 Feb

2020? - €2,000

This continues until the last month of the insurance prepayment June
2021

As before the journal is posted:

DR Insurance (expense account – being increased) €500

CR Prepayment (asset account - being reduced) €500
To record insurance cost relating to June 2021
What will be the balance on the prepayment account at 30 June
2021? – It is now 0 and you expect a new invoice to arrive for the
Insurance commencing 1 July 2021 and the process restarts.

Note – small businesses usually prepare accruals and prepayments

at the end of the reporting period and not monthly. Ideally it should
be done monthly, particularly if large amounts are involved, which
will impact on the profit/loss figures.

Note that if accruals and prepayments are only accounted for

annually then the journals to post these, can be set up to reverse at
the start of the next year, so the new year starts with a clean slate.

Question:

Garden Ltd prepares accounts to 31 December 2020 and had

business insurance charged for the year on 1 September 2020, for
€27,000. Note that the 1 September 2019 policy cost €24,000.

What journal is prepared relating to insurance on 1 January 2020

and 31 December 2020.
What insurance cost will appear in the SOPL for 2020? Note that
prepayments and accruals are only accounted for at year end and
not monthly.

Solution:

Journal at 1 January 2020 will reverse the prepayment posted on 31

December 2019

DR Insurance account €16,000 (8 months of 2020 which was

prepaid in 2019 24k per annum is 2k per month)
CR Prepayment account (asset account - being reduced)
€16,000
To reverse the 2019 prepayment for insurance on 1 Jan 2020
 DR Prepayment account €18,000 (8/12 of €27,000 as this
relates to 2022)
CR Insurance €18,000
To record 2020 prepayment for insurance

The cost that will appear in the SOPL for 2020 will be:
Jan to Aug = €16,000 (was charged in 2019)
Sep to Dec = € 9,000 (was charged in 2020)
Total for 2020 = €25,000

Income Due

A business may have carried out work for a customer which has not
yet been invoiced by the end of the reporting period. This revenue
must be recognised in the period in which it is earned/work is carried
out. Since the work has not been invoiced, there is nothing showing
in the accounts to recognise the revenue, yet it must be recognized
in the period earned.

To recognise this earned income:

CR the income account (CR an increase in income/revenue) and
DR the income due account (asset account)

Income Received in advance

What happens if a customer pays in November 2020 for both the

November and December work that a business is carrying out for
them. At the end of November there is a months’ income received in
advance. Assume the work being carried out for the customer is for
€4,000 each for November and December and the customer paid the
full €8,000 in November. The appropriate journal for November 2020
is:

DR Bank €8,000
CR Income/revenue €4,000 (this income has been earned in
November)
 CR Income received in advance €4,000 (this income has not yet
been earned – it will be in Dec)
To record the November 2020 payment relating to both income
earned and the income received in advance

Question:

The balance on the accruals account at 1 January 2020 was €1,000

and this reflected the December 2019 charge (as the bill had not
been received at that date). Electricity bills were received in 2020
covering 1 December 2019 to 30 November 2020 for €2,000 per
month. No bill has yet been received for December 2020 and due to
significant work being done, is estimated to be €4,000.

What journals are required at 1 January 2020 and 31 December

2020 to correctly account for electricity charges.
What charge will appear for electricity in the 2020 SOPL?

Solution:

DR Accruals account €1,000

CR Electricity account €1,000
To reverse the 1 January opening accrual (relating to December
2019 electricity)

It transpires that the actual bill for Dec 2019 was €2,000 as per the
information provided in the question, so 2019 was under-accrued.
Accruals are best estimates at the time. This means that an
additional 1k will be charged in 2020 accounts, which actually relates
to 2019.

DR Electricity account €4,000

CR Accruals account €4,000
To accrue for December 2020 electricity not yet invoiced

Total charge for 2020 is made up of:

Reversal of 2019 accrual (€1,000)
Invoices received during 2020 €24,000
Accrual for December 2020 €4,000
Totalling €27,000 (note that €1,000 relates to 2019 under-accrual as
mentioned above). This €27,000 is what will appear in the SOPL for
2020

Chapter questions (see solutions in Chapter 13):

Question 7.1

James Ltd commenced renting the upper floor of their business

premises to a tenant on 1 March 2019 for €18,000 per annum. It
receives rent in advance on 1 March each year.

Required:

What journal entries are required for 2020?

What income is posted to the SOPL for 2020 in relation to rent

If instead of €18,000 rent, James Ltd changed the rental contract

and received monthly rent on 1 of each month, what journal entries
would be required at 1 January 2020 and 31 December 2020 and
what income will be posted to the SOPL for 2020

Question 7.2

Righly Ltd had a prepayment at 1 January 2019 for €3,000 which

related to insurance for Jan – Mar 2020)
On 1 April 2020 the annual insurance invoice was received for
€15,000

Required:

What journals are required at 1 January 2020 and 31 December

2020 to correctly account for insurance charges.
What charge will appear for insurance in the 2020 SOPL?
 Chapter 8 – Wages and Salaries

Wages and salaries expenses are charged to the Statement of Profit

or Loss (SOPL)

When an individual receives a job offer, they agree a gross

wage/salary which will be reflected in their contract of employment

However, there will be various deductions made each payday

(weekly or monthly) from this gross pay amount, such as:
Income tax,
PRSI/(NIC),
USC (Ireland only),
Other possible deductions such as Health Insurance
premium/Union fees/Local property tax/Pension deductions

An individual receives the net pay amount (which is usually a lower

amount than gross pay – unless they were obtaining tax back)

The deductions of Income Tax, PRSI/NIC and USC are paid to

Revenue/HM Revenue and Customs on the employees’ behalf (as
well as the employers PRSI/NIC). Local Property Tax, should it be
deducted, will also be paid on behalf of the employee by the
employer.

Other deductions are paid to the relevant bodies concerned e.g.

Health Insurance company, Union or Pension company

As a business owner or manager, you need to understand what the

payroll cost is to the employer:

• Cost to employer: Gross pay and Employers PRSI/NIC

Note PRSI relates to Ireland – Pay related social insurance and NIC
relates to the UK – National Insurance contributions. When using
PRSI from here on in, this is interchangeable with NIC, depending on
the jurisdiction payroll is operated in.
Revenue is the body that administers taxation in Ireland and HM
Revenue and Customs is the body that administers taxation in the
UK. From here on in, when using the description Revenue, it is
interchangeable with HM Revenue and Customs.

There are various steps involved in processing payroll by the

employer/business:

Step 1 – Recording wages/salaries when payroll is processed

by the employer
Step 2 – Payment to staff of wages/salaries whether it be
weekly/monthly
Step 3 – Payment of payroll taxes deducted to Revenue
(monthly)
Step 4 – Payment of other deductions such as health insurance
or pension over to the relevant bodies

Step 1 – Recording wages/salaries when payroll is processed

by the employer

Journal to record wages/salaries when processed by the business:

• DR wages expense (with gross wages) – see above - cost to
employer
• DR wages expense (with employers PRSI) – see above - cost
to employer
• CR Net wages payable (liability) account
• CR PAYE liability account
• CR Employer PRSI liability account
• CR Employee PRSI liability account
• CR USC liability account
• CR Local Property Tax liability account - (if applicable)
• CR Health insurance liability account (if applicable)
• CR Pension liability account (if applicable)
• CR Union Fees liability account (if applicable)
 To record the wage cost for month/week in question (example
June 2020)

Step 2 – Payment to staff of wages/salaries whether it be

weekly/monthly

Journal to record payment of wages/salaries to employees:

• DR Net wages payable account
• CR Bank account
To post payment of net wages to employees on X date (example
25th of the month)

Note the net wages payable account is now zero as there is no

longer an amount owing to staff for payroll.

Step 3 – Payment of payroll taxes deducted to Revenue

(monthly)

Revenue for the taxes deducted on behalf of the employee must be

paid over to Revenue accordingly each month by the due date,
together with a tax return. The journal to record this transaction for
the business is:

• DR PAYE liability account

• DR Employer PRSI liability account
• DR Employee PRSI liability account
• DR USC liability account
• DR Local Property Tax liability account - (if applicable)
(above are all now zero also) and finally
• CR Bank
To record the payment to Revenue of X month payroll taxes (e.g.
February 2020 payroll taxes)

Note the various payroll tax liability accounts now have a zero
balance, as there is no longer an amount owing to Revenue for
payroll taxes (i.e. cleared down each month (for most businesses))
Step 4 – Payment of other deductions such as health insurance
or pension over to the relevant bodies

In our example there were deductions of both health insurance

premiums and pension contributions, both of which must be paid
over to the relevant providers:

Health Insurance:
DR Health Insurance liability account
CR Bank
To pay health insurance premiums deducted in February 2020

Pension deductions:
DR Pension liability account
CR Bank
To pay pension contributions deducted in February 2020

Note the various other payroll liability accounts now have a zero
balance, as there is no longer amounts owing to these relevant
bodies. In business it is possible that these are paid quarterly rather
than monthly, so at the end of say March, there may be the balance
for the January, February and March deductions. In reality these
could be paid in early April. It is important that you understand why
there is a balance and what amounts/months make up this balance.

Question

Gonicely Ltd had the following wages and salaries information for
July 2020. All staff wages are paid on 25 day of each month:
€

Net wages 400,000

PAYE
deducted 180,000
Employer's
PRSI 82,900
Employee's
PRSI 71,000

USC 54,600

Required:

Prepare the journals in relation to the wages for July 2020 to

recognise:

i) The wages cost in the accounts of Gonicely Ltd

ii) The payment of wages to staff
iii) The payment to Revenue of all July payroll liabilities, which
was paid on 20 August 2020
Solution:

i) Wages cost for Gonicely Ltd

• DR wages expense (with gross wages) €705,600

• DR wages expense (with employers PRSI) €82,900
• CR Net wages payable (liability) account €400,000
• CR PAYE (liability) account €180,000
• CR Employer PRSI (liability) account €82,900
• CR Employee PRSI (liability) account €71,000
• CR USC (liability) account €54,600
To record the wage cost for July 2020 for Gonicely Ltd

ii) Payment of staff wages on 25 July 2020

• DR Net wages payable account €400,000

• CR Bank account €400,000
To post payment of wages (net) to employees on 25 July 2020

iii) Payment of July payroll liabilities to Revenue:

• DR PAYE liability account €180,000

 • DR Employer PRSI liability account €82,900
• DR Employee PRSI liability account €71,000
• DR USC liability account €54,600
• CR Bank €388,500
To record the payment to Revenue on 20 August for July 2020
payroll taxes

Chapter question (see solution in Chapter 13):

Question 8.1

Eames Ltd had the following wages and salaries information for April
2020.
€

Net wages 350,000

PAYE
deducted 107,000
Employer's
PRSI 38,000
Employee's
PRSI 13,800

USC 21,238

In addition, Aviva health insurance was deducted from staff

amounting to €3,150.

Eames Ltd pay all staff wages monthly on 30 day of each month.

Required:

Prepare the journals in relation to the wages for April 2020 to

recognise:
i. The wages cost in the account of Eames Ltd
ii. The payment of wages to staff
iii. The payment to Revenue of all April 2020 payroll liabilities, for
which payment was made on 18 May 2020
iv. The payment on 31 May 2020 to Aviva for April 2020 health
insurance premiums deducted on behalf of staff
 Chapter 9 – Accounting for VAT

VAT stands for Value added tax and it is an indirect tax on

transactions. While the final customer bears the cost or burden of
VAT, they do not physically pay it over to the tax authorities, as it is
done on their behalf by the various businesses involved in the
relevant chain of transactions. VAT is added on at each stage of the
process, but the final customer bears the charge.

A business charges and pays Revenue for VAT on sales. (Note the
rate of vat depends on the good or service)

A business is charged VAT on purchases. If they are a vat

registered business (in a VAT recoverable position) they are entitled
to claim back this vat (unless this is specifically disallowed e.g. food,
drink, petrol).

Therefore, the net Vat due owing is the vat on the “value added” to
the good/service

Example to demonstrate Value Added (assuming a VAT rate of

23% on stationery (this would be 20% currently in the UK)

If a business purchases stationery for €15 + vat, they will pay €3.45
vat (23%)

If they sell on that stationery to a customer and charge €25 + vat,

they will receive €5.75 vat from the customer.

The net vat owed is the vat on sales less the vat on purchases i.e.
€2.30

This equates to the vat on our profit element (i.e. the value added to
the stationery/goods) (23% of our profit of €10)
Example – chain of transactions (use VAT rate of 23% for
chocolate)

Manufacturer Ltd sells a large box of chocolate to Wholesaler Ltd for

€100
Vat is charged on this at 23%.
Total cost €123

Wholesaler Ltd sells this box to Retailer Ltd for €125 + vat (profit of
€25)
Vat is charged at 23%
Total cost €153.75

Retailer Ltd sells this chocolate to the final customer for €180 + vat
(profit of €55)
Vat is charged at 23%
Total cost €221.40

The final customer bears the cost of VAT which is €41.40. VAT was
charged at each stage in this chain of transactions. Each business
involved owes the VAT on sales and can deduct the VAT on
purchases.

Non-deductible VAT or a VAT exempt business

Some goods/services are classed as non-deductible for VAT such as

food, drink, entertainment, petrol (unless used as stock in trade).

Some businesses are not VAT registered as they may be providing

exempt goods/services or else are below the VAT threshold for
registration.

In all of these instances, the VAT is not reclaimable or recoverable.

In this situation, the cost to the business of the goods/services is the
VAT inclusive cost.
Example: If a business purchased wine in December 2020 in the off
license for the staff party costing €1,000 + VAT at 23%, which was
paid by cheque. The journal to record this transaction is:

DR Staff entertainment €1,230

CR Bank €1,230
To record the purchase of wine for staff party in December 2020

If this business went to the stationery store and purchased €1,000 +

VAT at 23% worth of stationery, which was paid by cheque.

The journal to record this transaction is:

DR Stationery €1,000
DR VAT €230
CR Bank €1,230
To record the purchase of stationery from Stationery Store X in
December 2020

VAT has been introduced. If you consider VAT as a liability account,

a CR would reflect an increase in a liability and a DR a decrease. A
DR was posted above (decrease in liability), as the business is owed
this VAT back. A DR balance would mean a refund due to the
business and a CR balance would mean an amount owing to
Revenue/HM Revenue and Customs.

Electricity has a VAT rate of 13.5% (20% in the UK). If an electricity

bill was paid from the business bank account amounting to €1,500,
how would we journal this transaction?

Actual electricity cost is €1,500 * 100/113.5 = €1.321.59 (amount

before VAT/VAT exclusive)
VAT element of cost is €1,321.59 * 13.5% = €178.41. This VAT
amount can be calculated in one step as follows: €1,500 *
13.5/113.5 = €178.41. It is important that you understand how to
arrive at the VAT amount when dealing with a VAT inclusive cost.
Watch for figures being VAT inclusive or exclusive. If referring to a
payment as above with the electricity payment, then this is a VAT
inclusive figure.

Question:

Furniture costs €2,500 (inclusive of vat at 23%). What is the VAT

amount?

Solution:

Pre VAT/VAT exclusive amount is €2,500 * 100/123 = €2,032.52

VAT amount is €2032.52 * 23% = €467.48

Or else do this in one step

VAT amount is €2,500 * 23/123 = €467.48

Question:

Stationary costs €350 exclusive of vat, what is the VAT amount?

Solution:

VAT amount is €350 * 23% = €80.5

VAT returns

A VAT return is Vat on Sales (output VAT), less VAT on purchases

(Input VAT)

If VAT on sales is greater than VAT on purchases, the business is in

a VAT payable situation – it owes VAT to the tax authority

If VAT on sales is less than VAT on purchases, the business is in a

VAT repayable situation – it is owed VAT from the tax authority
Question:

Guitars Ltd supplies musical instruments which are liable to vat at

23%. What is the vat liability if the income and expenses were as
follows (assume 23%, unless told otherwise)?

Sales (vat exclusive) 60k

Expenses (vat inclusive)

Goods for resale 25k
Petrol 1k
Accountancy fees 3k
Entertainment 1.5k

Solution:

€ €
VAT on sales:
(60,000 * 23%) 13,800
VAT on purchases:
Goods for resales (25,000 * (4,675)
23/123)
Petrol – non deductible N/A
Accountancy fees (3,000 * (561)
23/123)
Entertainment – non N/A (5,236)
deductible
Net Vat payable (repayable if 8.564
purchases are higher than
sales)

Chapter question (see solution in Chapter 13):

Question 9.1
Guitars Ltd supplies musical instruments which are liable to VAT at
23%. What is the VAT amount owing/owed, if the income and
expenses were as follows (assume 23% unless told otherwise)?

Sales (vat inclusive) 30k

Expenses (vat exclusive)

Goods for resale 25k
Petrol 1k
Accountancy fees 3k
Entertainment 1.5k
 Chapter 10 – Accounting for Errors

Types of errors that may arise in accounts:

An entry has not been recorded at all – error of omission

An entry was posted to the wrong account but the correct type of
account – error of commission
A journal is posted to the wrong account and wrong type of account
– error of principle
Incorrect amounts posted – error of original entry

Explaining this further

Error of omission - An entry has not been recorded at all e.g.

the business paid a direct debt for electricity and never
recorded this payment
Error of commission - An entry was posted to the wrong
account but the correct type of account e.g. the
recording/posting of repairs to the rent account in error (they
are both expense accounts)
Error of principle – The journal is posted to the wrong account
and wrong type of account e.g. repairs to machine posted in
error to the machine cost (asset) account
Error of original entry - Incorrect amounts posted e.g. a cheque
issued to a supplier for €1,900 but only posted as €900

How to account for such errors:

Error of omission

An entry has not been recorded at all e.g. the business paid a direct
debt for electricity and never recorded this payment (no invoice has
been recorded)
To correct - post this transaction now, identifying the correct
accounts to debit and credit

Dr Electricity
CR Bank

Error of commission

An entry was posted to the wrong account but the correct type of
account e.g. the recording/posting of repairs to the rent account in
error (they are both expense accounts)

To correct - debit the correct expense account and credit (to reverse)
the incorrect expense account

Dr Repairs (expense) and

CR Rent (expense) – to correct the prior incorrect posting to rent in
error

Error of principle

The entry journal is posted to the wrong account and wrong type of
account e.g. repairs to machine posted in error to the machine cost
(asset) account

To correct - Reverse the entry posted to the incorrect account and

post to the correct account

DR repairs (expense) account)

CR machine cost (asset)account

Error of original entry

Error of original entry - Incorrect amounts posted e.g. a cheque

issued to a supplier for €1,900 but only posted as €900
To correct - You can either post the remaining amount or else
reverse the full incorrect transaction and post the correct transaction
in full:

Either:
DR Trade payables €1,000
CR Bank €1,000 to post the amount not previously posted

OR
DR Bank €900
CR Trade payables €900 to reverse the prior incorrect entry
AND
DR Trade payables €1,900
CR Bank €1,900 to post the correct amount in full

In summary you are using journal entries to correct the error and
ultimately produce correct accounts.

Think about what has happened and what should have happened –
look at what is currently in the trial balance. Calculate what you
should have and post the journal to get to the required figure (just as
you did for the closing bad debt provision)

Question:

Allover Ltd upon reviewing their year-end accounts, discovered the

following errors/omissions:

Bank interest charged by the bank of €1,100 was not posted to the
accounts

A cash payment to a student for helping deliver leaflets of €50 was

incorrectly posted to the administration account instead of the
advertising account. (it has been correctly reflected in the cash
account)
A customer paid €13,800 which was been correctly reflected in the
accounts. However, their balance outstanding was €15,200 and they
refuse to pay the remainder, as they say the goods are not up to
specification. The Sales manager has agreed to write off this
outstanding balance.

A donation to the local rugby club for €500 was not posted to the
accounts. This was paid by cheque and should have been entered
in the Donations expense account

The owner withdrew €300 cash from the bank for personal use which
was not posted to the accounts

A credit supplier invoice for legal fees was incorrectly posted in the
accounts as €9,300, which should have been entered as €3,900.

Repairs of €3,500 was posted to the Plant and Machinery account in

error

During the year damaged stock was identified which cost €500,
which now needs to be written off to the Damaged stock expense
account

Required:

Prepare journals to correct the above transactions for Allover Ltd

Solution:

Journal entries to correct the above transactions for Allover Ltd:

DR € CR €
Bank interest account 1,100
Bank account 1,100
To record bank interest charged by
bank

Advertising account 50
Administration account 50
To correct posting for leaflet
delivery

Bad debts expense account 1,400

Trade receivables account 1,400
To write off customer balance (due
to dispute)

Donations expense account 500

Bank 500
To record donation to rugby club

Drawings account 300

Bank account 300
To record drawings made by
owner

Trade payables account 5,400

Legal fees 5,400
To correct prior posting (invoice is
€9.3k, previously posted as €3.9k)
Also appropriate to reverse prior
journal and post correct journal in
full

Repairs account 3,500

Plant and machinery account 3,500
To correctly post repairs
(previously posted to P&M)
Damages stock expense account 500
Inventory 500
To record damaged stock
identified

Chapter question (see solution in Chapter 13):

Question 10.1

Drealy Ltd upon reviewing their year-end accounts, discovered the

following errors/omissions:

The owner withdrew €600 cash from the bank for personal use which
was not posted to the accounts

Bank interest charged In October of €231 was not posted to the

accounts

A Sales invoice (on credit) issued to a customer was entered in the

accounts as €7,740 but should have been entered as €7,470

An outstanding customer balance of €600 will not be received as the

customer has gone into liquidation. This balance needs to be written
off in the accounts

A cash payment of €70 made to the local shop for milk was
incorrectly posted to the Stationery account instead of Canteen
account. It was correctly reflected in the Cash account

During the year damaged stock was identified which cost €147,
which the owner advised now needs to be written off to the
Damaged stock expense account

A credit supplier invoice for legal fees was incorrectly posted in the
accounts as €5,200, which should have been entered as €2,500.
A donation to the local homeless charity for €990 was not posted to
the accounts. This was paid by cheque and should have been
entered to the Donations expense account

Required:

Prepare journals to correct the above transactions for Drealy Ltd

 Chapter 11 – Preparing Financial
Statements

A sole trader is a business operated and owned by a single

individual (therefore all profits of the business go to the individual)

To set up a business, the only action that needs to be taken is to

inform the revenue authorities of the intention to be self-employed
and complete the appropriate paperwork

Advantages of operating as a sole trader:

Profit after tax earned by the business is attributable completely to

the owner
Easy to establish and/or cease the business (compared to a
company)
Quick decision-making and ability to implement change – compare
this to a large organisation where a lot of meetings and work may
have to take place before any decision is agreed upon
Less compliance costs due to reduced filing requirements for sole
traders compared to other types of business, such as a company
The owner of the business is invested in the success of the business
– a manager may possibly be less so
What other advantages do you think there are?

Disadvantages of operating as a sole trader:

The owner is liable for the debts incurred by the business (unlimited
liability)
No one else involved in sharing/assisting in decision-making
Responsibility and workload may all fall to the individual
Can be difficult obtaining loans – this is spoken about frequently in
the media, particularly so since the central bank tightened up on
lending after the last economic downturn
The individual may not possess all the talents required to run a
successful business e.g. marketing the business, collecting
payments from customers etc.
Taxation rates are generally higher than that for a company
Potentially long working hours as the individual tries to do everything
themselves
What other disadvantages can you think of?

Moving from Trial Balance to Financial Statements:

Chapters 2 and 3 demonstrated how to prepare a trial balance and

explained that it is a listing of all the balances (on either the relevant
debit or credit side) from the ledger accounts. The total of all the
debit transactions should equal the total of all the credit transactions,
since accounting is a double entry system and every transaction had
both a debit and credit entry.

We now proceed a step further

• In the business accounting system, each ledger account that

relates to the SOPL (Statement of Profit or Loss) is closed out
to the SOPL. The relevant accounts are those relating to
Income and Expenditure. Why are these accounts closed
out? These accounts will start afresh (with a zero balance) in
the new accounting period. How do you commence the SOPL
? Take all the income and expenditure accounts and balances
from the Trial Balance and present them (according to the
sample layout below) in the SOPL. The resulting profit/loss for
the period, will be reflected in the Statement of Financial
Position (see SOFP sample layout below).

• The ledger accounts that feed into the SOFP will not be closed
out e.g. fixed asset accounts, bank account, loans and so on –
these will have opening balances at the start of the next period
(basically the Bal b/d figure from closing out each of these
accounts)
Sample layout of SOPL:

Business name e.g. Joe Bloggs

Statement of Profit or Loss for the year ended 31 December
2020

€ € €
Sales X
Less Sales returns (X) X

Less Cost of Sales:

Opening Inventory X
Purchases X
Less purchases (X) X
returns
Add Carriage X
inwards
X
Less Closing (X)
inventory
Cost of Sales (X)
Gross Profit X

Less Expenses:
Wages and Salaries X
Light and heat X
Rent and rates X
Depreciation X
Stationery X
Legal/professional X
fees
Other accounts X
Total expenses (X)
Net profit/(loss) X/(X)
Note – the account names are not prescribed – each business will
have its own particular accounts, appropriate to the business in
question.

The Net profit/loss figure will feed into the SOFP (see Equity and
Reserves section)

Sample layout of SOFP:

Business name e.g. Joe Bloggs

Statement of Financial Position as at 31 December 20XX

Cost Accumulated Carrying

Depreciation Amount
Non-Current
Assets
Buildings X X X
Plant and Machinery X X X
Motor Vehicles X X X
X
Current Assets
Inventory X
Trade Receivables X
Prepayments X
Bank X X
Total Assets X
Equity and
Reserves:
Capital X
Net profit/(loss) from X/(X)
SOPL
Drawings (X) X

Non-current
Liabilities:
Bank loan X

Current Liabilities:
Trade payables X
Bank overdraft X
Accruals X X
Total Equity and X
Liabilities

Note – the Total Assets will equal the Total Equity and Liabilities. If
they don’t, go back and check that you have included all accounts
provided in the trial balance and accounted for all adjustments
through to the SOPL and SOFP.

Things to watch out for:

• Identify the depreciation method and the depreciation policy

regarding assets purchased or sold during the reporting
period. Also don’t forget depreciation journals impact
(increase) accumulated depreciation. In the SOFP existing
assets remain listed at cost, but the accumulated depreciation
figures increase each year, thus reducing carrying amount.
Additions would increase the asset cost and depreciation
would be required on these. Disposals reduce the asset cost –
as covered in Chapter 5
 • Other common adjustments (which have been covered in prior
chapters)
• accruals and prepayments
• disposals
• bad debts e.g. write offs/recovered etc
• provision for bad debts
• accounting for errors/omissions

• Drawings are not an expense presented in SOPL as they are a

reduction in the capital. (it is a withdrawal of some of the
capital initially put into the business)

A typical type of question presents a Trial Balance, with several

transactions that have not yet been accounted/correctly accounted
for. What is required of these are journal entries and/or ledger
accounts to make the required adjustments.

Any adjustments will impact on the account balance already

presented in the question e.g. If the light and heat balance in the
Trial Balance was €8,600 but an electricity accrual is required for
€700. This will increase the light and heat balance (as you DR light
and heat by €700) to €9,300, as well as increasing the accruals
balance by €700. The light and heat charge that is reflected in the
SOPL is the updated correct balance of €9,300.
All adjustments that are made, must be followed through into the
financial statements.

Normally questions ask for journals/ledgers to account for

adjustments and a SOPL and SOFP. They generally do not ask for
another trial balance (after adjustments) but this could be requested.

The next example illustrates the above.

Example:
Comsey Ltd had the following Trial Balance as at 31 December
2020:

DR € CR €
Plant and Machinery at 18,000
cost (P&M)
Fixtures and Fittings at 9,000
cost (F&F)
Accumulated 10,800
Depreciation at 1 Jan
2020 P&M
Accumulated 3,240
Depreciation at 1 Jan
2020 F&F
Sales 474,000
Wages 105,000
General provision for 800
bad debts
Inventory (1 Jan 2020) 21,000
Accruals 1,000
Purchases 218,000
Purchases returns 6,000
Sales returns 3,200
Light and Heat 18,000
Rent 26,000
Insurance 15,500
Trade receivables 253,000
Bank 68,092
Capital 124,702
Legal fees 12,950
Loan (5% interest per 15,000
annum)
Trade Payables 140,000
Admin expenses 7,800
Total 775,542 775,542

Additional Information:

Inventory at 31 December 2020 was €38,000

The loan was taken out in January 2020. By 31 December
interest has not yet been charged by the bank
Depreciation is on a straight-line basis for P&M at 15% per
annum
Depreciation is on a reducing balance basis for F&F at 20%
per annum
An invoice for rent was posted to the accounts in 2020 to cover
the period 1 March 2020 to 1 March 2021 for €24,000
Opening accruals related to light and heat for December 2019
The December 2020 electricity bill has not been received,
which is estimated at €3,000
The closing bad debt provision should be 4% of the final trade
receivables balance

Required:
1) Prepare journal entries to record these transactions
2) Prepare a Statement of Profit or Loss for the year ended 31
December 2020 and a Statement of Financial Position as at 31
December 2020 for Comsey Ltd

Solution:

1) Journal entries required for Comsey Ltd:

DR € CR €
Cost of sales 21,000
Inventory 21,000
To record opening inventory at 1
Jan 2020

Inventory 38,000
Cost of sales/purchases 38,000
To record closing inventory at 31
Dec 2020

Loan interest expense 750

Accrual 750
Accrue loan interest for 2020, not
yet charged

Depreciation Expense 2,700

Accumulated Depreciation P&M 2,700
To record Depreciation on P&M
15%

Depreciation Expense 1,152

Accumulated Depreciation F&F 1,152
To record Depreciation on F&F
(Reducing Balance (9k-3.24k) x
20%)

Prepayment 4,000
Rent 4,000
To prepay 2 months’ rent Jan and
Feb 2021 (24k * 2/12)

Accruals (see note 1 below) 1,000

Light & heat 1,000
To reverse the opening accrual
(ref Dec 2019)

Light & heat (see note 1 below) 3,000

Accruals 3,000
To accrue for electricity Dec 2020
Bad debt expense (see note 2 9,320
below)
Bad debt provision 9,320
To record closing bad debts 4%

Note 1 – the journals to reverse the opening accrual and post the
closing accrual for light and heat can be combined into:
DR light and heat €2,000
CR accruals €2,000
Either way is perfectly acceptable, once you show your working

Note 2 – the closing provision for bad debts is 4% of the trade

receivables closing balance, i.e. 4% * €253,000 = €10,120. However
there already exists a balance on the bad debt provision of €800, so
the journal required is the difference of €9,320

Before commencing the financial statements, look at the accounts

that have been adjusted by the above journals as the balances now
need updating to reflect the journal entries. See SOPL below where
the adjustments are noted briefly on various accounts such as Light
and Heat and Depreciation etc.

2) SOPL and SOFP

Comsey ltd
Statement of Profit or Loss for the year ended 31 December 2020

€ €
Sales 474,000
Less Sales returns (3,200) 470,800

Opening inventory 21,000

Purchases 218,000
Less Purchases returns (6,000)
233,000
Less closing inventory (38,000)
Cost of Sales 195,000
Gross Profit 275,800

Less Expenses:
Depreciation (2.7k+1.152k) 3,852
Insurance 15,500
Light & Heat (18k -1k+3k) 20,000
Wages and Salaries 105,000
Rent (26k-4k) 22,000
Legal fees 12,950
Loan interest (15k*5%) 750
Admin Expenses 7,800
Bad debt expense (note 2 9,320 (197,172)
above)
Net profit 78,628

Statement of Financial Position as at 31 December 2020

Cost € Accumulated Carrying

Dep € Amount
€
Assets
Non-Current
Assets:
Plant and 18,000 13,500 4,500
Machinery
Fixtures and 9,000 4,392 4,608
Fittings
9,108
Current Assets
Inventory 38,000
Trade 253,000
Receivables
Prepayments 4,000
Bank 68,092 363,092
Total assets 372,200

Equity and
Reserves
Loan 15,000
Capital 124,702
Net profit (from 78,628 218,330
SOPL)

Current
liabilities
Provision for 10,120
bad debts
Trade Payables 140,000
Accruals 3,750 153,870

Total equity and 372,200

liabilities

Chapter question (see solution in Chapter 13):

Question 11.1

Sussty Ltd had the following Trial Balance as at 31 December 2020:

DR € CR €
Plant and Machinery at 298,000
cost (P&M)
Computer Equipment at 53,000
cost (Comp Eq)
Accumulated Depreciation 89,400
at 1 Jan 2020 P&M
Accumulated Depreciation 25,864
at 1 Jan 2020 Equipment
Sales 330,000
Wages 52,000
General provision for bad 15,000
debts
Inventory (1 Jan 2020) 33,000
Purchases 164,000
Purchases returns 3,000
Carriage inwards 1,800
Light and Heat 7,050
Rent 8,000
Insurance 15,000
Trade receivables 45,500
Bank 68,092
Capital 250,702
Bad debt expense 4,700
Trade Payables 39,676
Prepayments 3,500
Total 753,642 753,642

Additional information:

Inventory at 31 December 2020 was €28,000

Depreciation is on a straight-line basis for P&M at 10% per
annum
Depreciation is on a reducing balance basis on Computer
Equipment at 20% per annum
No heating bill has been received yet for November or
December 2020. The expected winter quarterly cost is €6,000
The opening prepayment relates to insurance as the 2019
invoice for €12,000 covered the period to 15 April 2020. The
2020 invoice for €15,000 covering 16 April 2020 to 15 April
2021 has been posted to the accounts
 A lodgement was received in the bank relating to a prior bad
debt written off for a customer for the amount of €1,200
The closing bad debt provision should be 5% of the final trade
receivables balance

Required:

1) Prepare journal entries to record these transactions

2) Prepare a Statement of Profit or Loss for the year ended 31
December 2020 and a Statement of Financial Position as at 31
December 2020 for Sussty Ltd
 Chapter 12 – Bank Reconciliations

Each business/individual has their business bank account (the

ledger account that you have been posting transactions to).

There are also bank statements for each period for the business
(whether paper or online). It is expected that the bank statement
balance will always differ to the balance of the business bank
account, generally because of timing differences but also there are
other reasons for this.

Reasons why the bank statement does not reconcile/differs to

the business bank account:

Timing differences – such as cheque payments made to suppliers

that they have not yet presented to their bank – which have been
recorded by the business but the bank have no knowledge or record
of this transaction yet, so is not reflected on the bank statement.
Likewise, the business may have received cheques from customers
on the last day of the month and sent these by post to the bank for
lodgement. The bank will not receive and lodge these cheques until
at least the next day (which is the next accounting month for the
business).

Business may be unaware of transactions – such as:

A customer payment directly into their bank account (where no
remittance/payment advice was received),
Bank charges/fees by the bank on our account

Remember that the bank will show the transactions of the business
on the opposite side to where the business presents them (debits
and credits). Think about this. If a business has money in their
bank, they record this as a debit balance (DR increase in an asset).
This will be a credit for the bank as they owe this money to the
business – it’s a liability for the bank (CR increase in liability)
Why prepare bank reconciliations?

Businesses need to reconcile their bank account to their bank

statement for several reasons:

To ensure all transactions posted by the bank are correct

To identify any items gone through the bank that they are not
aware of
To identify any possible errors that they may have made (e.g. a
cheque that they gave a supplier for €450 and recorded in
error for €540. It will be €450 on the bank statement and this
difference will ensure the business checks and corrects their
own transaction (Chapter 10 Accounting for errors)

How to prepare a bank reconciliation:

In a question/in a business you are provided with the business bank

account as well as the bank statement for the entity

To commence a reconciliation – start by working through each line

item as follows:
Identify items on the bank statement not yet posted to the bank
account for the business and post these to the bank ledger
account (start from the existing closing balance and adjust for
the items not yet accounted for. Don’t redo the full account
again) – this will provide a new closing bank balance for the
business
Identify items on the bank account but not yet on the bank
statement – these are generally the timing differences referred
to above – these will be listed on the bank reconciliation, which
starts with the balance as per bank statement and finishes with
the balance as per bank account

To demonstrate this process in an example:

Question:
Joely Ltd had the following bank account for January 2021

Bank A/C
Cheque
01/01/21 Bal B/D 2,045 01/01/21 120 1,480
J
Donovan
Trade
Rec Cheque
13/01/21 (TR) 1,510 01/01/21 122 390
F
Weston Cheque
18/01/21 TR 16,000 10/01/21 121 560
P Peters Cheque
25/01/21 TR 800 12/01/21 123 100
Cheque
31/01/21 124 630
31/01/21 Bal C/D 17,195
20,355 20,355
31/01/21 Bal B/D 17,195

Joely Ltd received the following bank statement for January 2021:

DR CR Balance
I Jan balance 2,045
carried forward
4 Jan Lodgement P 800 2,845
Peters
5 Jan Cheque 121 560 2,285
15 Jan Cheque 122 390 1,895
25 Jan Bank fees 100 1,795
Solution:

To commence a reconciliation – start by working through each line

item as follows:
Identify items on the bank statement not yet on the bank
account for the business and post these to the bank ledger
account (start from the existing closing balance and adjust for
the items not yet accounted for. Don’t redo the full account
again) – this will provide a new closing bank balance for the
business – The only item in this case is bank fees of 100 – see
bank ledger account updated below for this
Identify items on the bank account but not yet on the bank
statement – these are generally the timing differences referred
to above – these will be listed on the bank reconciliation.
Items highlighted:
Lodgement – Donovan
Lodgement – Weston
Cheque 120
Cheque 123
Cheque 124

To update the bank account for bank fees not posted

Bank A/C
Bal Bank
31/01/21 B/D 17,195 31/01/21 fees 100
Bal
31/01/21 C/D 17,095
17,195 17,195
Bal
31/01/21 B/D 17,095

Bank Reconciliation for January 2021:

Balance as per bank 1,795
statement at 1 Jan
Add cheques
received from
customers but not
yet presented to our
bank:
J Donovan 1,510
F Weston 16,000 17,510
Less cheques to
suppliers not yet
presented to bank:
Cheque 120 1,480
Cheque 123 100
Cheque 124 630 (2,210)
Balance as per bank 17,095
account

Chapter question (see solution in Chapter 13):

Question 12.1

The following is the bank account for Sunny Ltd for June 2020

Bank Account
Date Detail € Date Detail €
Balance Cheque
01/06/20 8,150 12/06/20 405
b/d 201
Cash Cheque
03/06/20 1,200 15/06/20 30
sale 202
Cheque
06/06/20 Capital 25,000 19/06/20 1,040
203
15/06/20 Roberts 1,875 26/06/20 Cheque 2,210
 Ltd 204
Kelly Cheque
20/06/20 1,000 29/06/20 200
Ltd 205
Jones
28/06/20 1,500
Ltd
Balance
34,840
30/06/20 c/d
38,725 38,725
Balance
30/06/20 34,840
b/d

The following bank statement was received by Sunny Ltd for June
2020:

Best Bank plc

Bank Statement for Sunshine
Ltd June 2020 Account
number 42190284

DR CR Balance
I June balance 8,150
carried forward
4 June Cash lodged 1,200 9,350
19 June Cheque 405 8,945
201
24 June lodgement 25,000 33,945
25 June Cheque 1,000 34,945
Kelly
28 June Cheque 2,210 32,735
204
30 June fees 100 32,635
charged
Required:

i) Update the ledger bank account for Sunny Ltd at 30 June 2020,
showing the correct balance as at that date and
ii) Prepare the bank reconciliation at 30 June 2020, reconciling the
bank account of Sunny Ltd with the bank statement
 Chapter 13 - Solutions to chapter
questions

Chapter 1
Question 1.1

Assets = €120,000
Capital = €15,000
What are liabilities?

Solution 1.1

Liabilities = €105,000 as L + C = A

Question 1.2

Liabilities = €82,000
Capital = €26,000
What are assets?

Solution 1.2

Assets = €108,000 as L + C = A

Question 1.3

Assets = €197,000
Liabilities = €132,000
What is Capital?

Solution 1.3

Capital = €65,000 as L + C = A
Question 1.4

What is the capital attributable to the owner at 31 Dec 2020 if?

Capital at 1 Jan 2020 was €58,000
Profit for the year 2020 was €12,600
Drawings for the year were €8,300

Solution 1.4

Capital at the start of reporting period (RP) + Profit earned + Capital

introduced – Drawings = Capital at the end of reporting period (RP)

Capital at 31 December 2020 = €58,000 + €12,600 + 0 – €8,300 =

€62,300

Chapter 2
Question 2.1

Prepare each of the following journal entries for Hair Ltd for January
2020:

Paid rent of €12,900 in cash 1 Jan 2020

Took out a loan from the bank of €33,250 and lodged it to the bank
12 Jan 2020
Sales €53,000 for cash (paid immediately into bank account) 19 Jan
2020
Purchased stationery for salon €945 (paid in cash) 21 Jan 2020
Bought a new laptop for the business (paid by cheque) €512 on 31
Jan 2020 (use equipment/computers account for the laptop)

Solution 2.1

DR € CR €
Rent Account 12,900
Cash Account 12,900
To record rent paid in cash
1 Jan 2020

Bank Account 33,250

Loan Account 33,250
To record lodgement and
new loan 12 Jan 2020

Bank Account 53,000

Sales account (or
53,000
revenue)
To record cash sales 19
Jan 2020

Stationery Account 945

Cash Account 945
To record cash purchases
of stationery 21 Jan 2020

Equipment Account 512

Bank Account 512
To record purchase of
laptop by cheque on 31
Jan 2020

Question 2.2

Prepare each of the following journal entries for Hair Ltd for February
2020:

Paid rent of €12,900 by cheque 1 Feb 2020

Electricity was paid by direct debit for €650 on 11 Feb 2020
Bank charges of €125 were deducted on 15 Feb 2020
Purchases of shampoos and conditioners were made from Salon Ltd
for €10,000 but have not yet been paid for on 20 Feb 2020

Solution 2.2

DR € CR €
Rent Account 12,900
Bank Account 12,900
To record rent paid by
cheque 1 Jan 2020

Electricity Account (or

650
Heat and Light account)
Bank Account 650
To record DD for electricity
11 Feb 2020

Bank Charges/Fees
125
Account
Bank Account 125
To record bank charges
applied 15 Feb 2020

Purchases Account 10,000

Trade Payables/Creditors
10,000
Account
To record purchases on
credit 20 Feb 2020

Chapter 3
Question 3.1
You previously prepared the journal entries for Hair Ltd for the
following transactions.

Paid rent of €12,900 in cash 1 Jan 2020

Acquired a loan from the bank of €33,250 which was lodged to the
bank account 12 Jan 2020
Sales €53,000 for cash (paid immediately into bank account) 19 Jan
2020
Purchased stationery for salon €945 (paid in cash) 21 Jan 2020
Bought a new laptop for the business (paid by cheque) €512 on 31
Jan 2020 (use equipment/computers account for the laptop)
Paid rent of €12,900 by cheque 1 Feb 2020
Electricity was paid by direct debit for €650 on 11 Feb 2020
Bank charges of €125 were deducted on 15 Feb 2020
Purchases of shampoos and conditioners on 20 Feb 2020 for the
business were made from Salon Ltd for €10,000 but have not yet
been paid for

Required: Prepare the ledger accounts, close these ledger

accounts, using 31 December as the end of reporting period and
prepare the Trial Balance as at that date.

Solution 3.1

These are the postings and subsequent close out of the various
ledger accounts in question

Rent A/C
01- 31-
Jan- Dec-
20 Cash 12,900 20 Bal C/D 25,80
01-
Feb-
20 Bank 12,900
25,800 25,800
31- Bal B/D 25,800
Dec-
20

Cash A/C
31- 01-
Dec- Jan-
20 Bal C/D 13,845 20 Rent 12,900
21-
Jan-
20 Stationery 945
13,845 13,845
31-
Dec-
20 Bal B/D 13,845

Loan A/C
31- 12-
Dec- Jan-
20 Bal C/D 33,250 20 Bank 33,250
31-
Dec-
20 Bal B/D 33,250

Bank A/C
12- 31-
Jan- Jan-
20 Loan 33,250 20 Equipment 512
19- 01-
Jan- Feb-
20 Sales 53,000 20 Rent 12,900
11- Electricity 650
Feb-
 20
15-
Feb- Bank
20 charges 125
31-
Dec-
20 Bal C/D 72,063
86,250 86,250
31-
Dec-
20 Bal B/D 72,063

Sales
Account A/C
31- 19-
Dec- Jan-
20 Bal C/D 53,000 20 Bank 53,000
31-
Dec-
20 Bal B/D 53,000

Stationery
A/C
21- 31-
Jan- Dec-
20 Cash 945 20 Bal C/D 945
31-
Dec-
20 Bal B/D 945

Equipment
 A/C
31- 31-
Jan- Dec-
20 Equipment 512 20 Bal C/D 512
31-
Dec-
20 Bal B/D 512

Electricity
A/C
11- 31-
Feb- Dec-
20 Bank 650 20 Bal C/D 650
31-
Dec-
20 Bal B/D 650

Bank
Charges A/C
15- 31-
Feb- Dec-
20 Bank 125 20 Bal C/D 125
31-
Dec-
20 Bal B/D 125

Purchases
A/C
20- 31-
Feb- Trade Dec-
20 Payables 10,000 20 Bal C/D 10,000
31- Bal B/D 10,000
Dec-
 20

Trade
Payables
A/C
31- 20-
Dec- Feb-
20 Bal C/D 10,000 20 Purchases 10,000
31-
Dec-
20 Bal B/D 10,000

Trial Balance for Hair Ltd at 31 December 2020:

Account: DR CR
Rent 25,800
Cash 13,845
Loan 33,250
Bank 72,063
Sales 53,000
Stationery 945
Equipment 512
Electricity 650
Bank Charges 125
Purchases 10,000
Trade Creditors 10,000
Total 110,095 110,095

As can be seen, the Trial Balance balances – i.e. the debit side
equals the credit side
Chapter 4
Question 4.1

You have been provided with the following extract from the trial
balance of Mary Desor at 31 December 2020:

DR CR
Purchases 356,000
Purchases
returns 12,500
Inventory at 1
Jan 2020 31,850

The annual stocktake was undertaken on 31 December 2020 and

stock at that date was valued at €26,300.

Prepare the journal entries to recognise the cost of sales expense in

the SOPL for the year ended 31 December 2020.

Solution 4.1

DR € CR €
Cost of Sales account 31,850
Inventory account 31,850
To transfer opening inventory
to cost of sales at 1 January
2020

Inventory account 26,300

Cost of sales account 26,300
To transfer closing inventory
from purchases at 31
December 2020
Question 4.2

Reilly Ltd had the following entries on the trial balance at 31 Dec
2020:

DR CR
Purchases 297,000
Inventory at 1
Jan 2020 41,700

The value of closing stock at this date was €13,890

Prepare journal entries to recognise the cost of sales for 2020

Solution 4.2

DR € CR €
Cost of Sales account 41,700
Inventory account 41,700
To transfer opening inventory
to cost of sales at 1 January
2020

Inventory account 13,890

Cost of sales account 13,890
To transfer closing inventory
from purchases at 31
December 2020

Chapter 5
Question 5.1
Hilow Ltd purchased a machine for €25,000 cash on 1 July 2018. At
the date of purchase, the company estimated that the machine had a
useful life of five years and a residual value of €6,000.
Hilow Ltd prepares its financial statements to 31 December each
year and charges depreciation on a monthly basis.

Requirement
a) Calculate the depreciation charge for 2018, 2019 and 2020.
b) Prepare the depreciation journal for 2020
c) What is the carrying amount of the machine at December 2020?
(for yourselves, be able to determine what it is also for 2018 and
2019)

Solution 5.1

a)
Step 1 - The depreciable amount is the amount that Ire Ltd can
charge over the useful life, which is Cost – Residual Value - €19,000.

Step 2 – The depreciation charge is the amount by the rate: 19,000

*20% = €3,800 per annum (as 5 year useful life gives 100/5 = 20%
rate). Or simply €19,000/5 = €3,800 per annum

The Depreciation charge for 2018, 2019 and 2020 will be €3,800 per
annum

b)
• DR Depreciation account €3,800
• CR Accumulated Depreciation account €3,800
To record depreciation for the period 2020

c)
Note: Carrying amount = Cost – Accumulated depreciation

Accumulated deprecation at 31 Dec 2020 was €11,400 (3 years *

€3,800 for 2018, 2019 and 2020)
Carrying amount is €25,000 - €11,400 = €13,600

Question 5.2

On 1 January 2016 Drives Ltd purchased a delivery van for €30,000

by cheque. Management uses the reducing balance method to
calculate the depreciation charge at a rate of 20% per annum.
In 2020 Drives Ltd sold the van to another business for €14,000.
Financial statements are prepared annually to 31 December.

Requirement
a) Calculate the depreciation charge for each reporting period.
b) Prepare the depreciation journal for year ended 31 December
2019
c) What is the profit/loss on disposal in 2020?
d) Prepare all relevant journals relating to the 2020 disposal

You should be clear what the carrying amount of the machine is, at
each reporting date from December 2016 to 2019?

Solution 5.2

a)
Depreciation charge:
Year 1: Cost x Depreciation rate
Subsequent years: Carrying amount x Depreciation rate

Note: Carrying amount = Cost – Accumulated depreciation

2016 = €30,000 * 20% = €6,000

2017 = (€30,000 - €6,000 = €24,000) * 20% = €4,800
2018 = (€24,000 - €4,800 = €19,200) * 20% = €3,840
2019 = (€19,200 - €3,840 = €15,360) * 20% = €3,072
No depreciation in 2020 as van was sold/year of disposal
b)
Depreciation journal in 2019
• DR Depreciation account €3,072
• CR Accumulated Depreciation account €3,072
To record depreciation for the period 2019

c)
Profit/loss on disposal of van in 2020

Note accumulated depreciation is €(6,000+4,800+3,840+3,072) =

€17,712

Proceeds from Sale of 14,000

Asset
Carrying amount of asset (12,288)
at disposal date
(€30,000 − €17,712)
Profit on disposal 1, 712

d)
Journal entries for 2020 disposal

DR CR
Bank Account 14,000
Disposal Account 14,000
Cash proceeds for
asset disposal

Disposal Account 30,000

Fixed Asset account 30,000
Transfer asset cost to
disposal account

Accumulated
Depreciation account 17,712
Disposal Account 17,712
Transfer accumulated
depreciation to
disposal account

Disposal Account 1,712

Profit on disposal
Account 1,712

You were not asked for this, but the disposal ledger account will look
like this:

Disposal Account
Equipment
31/12/20 Cost 30,000 31/12/20 Bank 14,000
Profit on Accumulated
31/12/20 disposal 1,712 31/12/20 Depreciation 17,712

31,712 31,712

Chapter 6
Question 6.1

Sadly Ltd has a balance on the trade receivables account of

€45,000. Sadly Ltd previously recorded a bad debt for one of the
customers J Maguire who owed Sadly Ltd €2,500 and ceased
trading on 28 December 2020 due to Covid 19. J Maguire
commenced trading in 2021, after restrictions were lifted and in July
2021 they repaid Sadly Ltd the amount previously owed of €2,500

Prepare the journal entries to recognise this July 2021 transaction on

behalf of Sadly Ltd.

Solution 6.1
 DR Bank €2,500
CR Bad Debts expense account €2,500
To record the bad debt recovered for J Maguire July 2021

Question 6.2

In 2019 George Ltd had written off a balance relating to a customer

Unsus Ltd for the amount of €1,570. The balance on trade
receivables in late 2020 was €162,000 but the following need to be
considered.

i) In December 2020 George Ltd heard that another customer Grean

Ltd had gone out of business owing €2,900 and that a bad debt
needs to be recognised (not yet recorded)
ii) Also, in December 2020 Unsus Ltd paid the previously written off
amount of €1,570 (not yet recorded)
iii) For 31 December 2020, George Ltd believes it needs a 5%
general provision for bad debts in its accounts. The current balance
on the general provision account is €5,000

Required:
Prepare journal entries for all of the above transactions and show the
calculation for the end of year general provision

Solution 6.2

i)
DR Bad Debt expense account €2,900
CR Trade Receivables account €2,900
To record the bad debt for Grean Ltd December 2020

ii)
DR Bank account €1,570
CR Bad Debt expense account €1,570
To record the bad debt recovered for Unsus Ltd December
2020
iii)
To calculate the amount of the general provision – it is 5% of Trade
Receivables. Trade receivables was €162,000 and we adjusted it for
the bad debt for Grean Ltd, so is now (€162,000 - €2,900) €159,100

5% of final trade receivables is €7,955

The current balance on the account is €5,000, so a journal is

required for the difference of €2,955 (to increase the existing
provision)

DR Bad Debt expense account €2,955

CR Provision for bad debts account €2,955
To record the general bad debt provision for 2020 (5% of trade
receivables)

Chapter 7
Question 7.1

James Ltd commenced renting the upper floor of the business

premises to a tenant on 1 March 2019 for €18,000 per annum. It
receives rent in advance on 1 March each year. What journal entries
are required for 2020?

What income is posted to the SOPL for 2020

If instead of €18,000 rent, James Ltd changed the rental contract

and received monthly rent on 1 of each month from 1 March 2020,
what journal entries would be required at 1 January 2020 and 31
December 2020 and what income will be posted to the SOPL for
2020

Solution 7.1
James Ltd had rental income received in advance at the end of 2019
of 2/12 of €18,000 = €3,000

Normally this would be accounted fro by DR Income in Advance and

CR Income/Rental income. However, knowing that another posting
is required for Jan and Feb 2021 and since the amount remains the
same for rent each year, this Income in advance journal will be the
very same. 2/12 of €18,000 = €3,000. Therefore, you can leave the
Income in advance stand, as it is correct (if you reverse the prior
journal and post the current – that is also acceptable)

The income that is posted to the SOPL for 2020 is €18,000 (which is
exactly as expected for a full year rent). Technically it is 3k for Jan
and Feb 2020 + 18k invoice – 3k income received in advance.

If instead of annual rent being paid on 1 March each year, James Ltd
changes to monthly rental receipts from 1 March 2020.

In this instance the income in advance journal will need to be

reversed for 2020:

DR Income received in advance €3,000 (Jan and Feb 2020)

CR Income/revenue €3,000
To reverse the income in advance posted on 31 December 2019

Each month from 1 March to 1 December the following journal will be

posted to reflect the monthly rental income received:

DR Bank €1,500
CR Income/revenue €1,500
To record monthly rental income received

The SOPL for 2020 will be:

Jan and Feb income received in advance €3,000
March – December €1,500 received each month = €15,000
Total income reflected in the SOPL for 2020 = €18,000
Question 7.2

Righly Ltd had a prepayment at 1 January 2019 for €3,000 which

related to insurance for Jan – Mar 2020)
On 1 April 2020 the annual insurance invoice was received for
€15,000

What journals are required at 1 January 2020 and 31 December

2020 to correctly account for insurance charges.
What charge will appear for insurance in the 2020 SOPL?

Solution 7.2

DR Insurance account €3,000

CR Prepayment account €3,000
To reverse the 2019 prepayment for insurance on 1 Jan 2021

DR Prepayment account €3,750

CR Insurance account €3,750
To prepay insurance at 31 December 2020 (for Jan – Mar 2021)

Total charge for 2020 is made up of:

Jan – Mar (Reversal of 2019 prepayment) €3,000
Invoices received during 2020 €15,000
Less prepayment relating to Jan – Mar 2021(€3,750)
Totalling €14,250 is what will appear in the SOPL for 2020

Chapter 8
Question 8.1

Eames Ltd had the following wages and salaries information for April
2020.
€
Net wages
 350,000
PAYE
deducted 107,000
Employer's
PRSI 38,000
Employee's
PRSI 13,800

USC 21,238

In addition, Aviva health insurance was deducted from staff

amounting to €3,150.

Eames Ltd pay all staff wages monthly on 30 day of each month.

Required:
Prepare the journals in relation to the wages for April 2020 to
recognise:

i) The wages cost in the account of Eames Ltd

ii) The payment of wages to staff

iii) The payment to Revenue of all April 2020 payroll liabilities, for
which payment was made on 18 May 2020

iv) The payment on 31 May 2020 to Aviva for April 2020 health
insurance premiums deducted on behalf of staff
Solution 8.1

i) Wages cost for Eames Ltd

• DR wages expense (with gross wages) €495,188

• DR wages expense (with employers PRSI) €38,000
• CR Net wages payable (liability) account €350,000
 • CR PAYE (liability) account €107,000
• CR Employer PRSI (liability) account €38,000
• CR Employee PRSI (liability) account €13,800
• CR USC (liability) account €21,238
• CR Aviva liability account €3,150
To record the wage cost for April 2020 for Eames Ltd

ii) Payment of wages to staff on 30 April 2020

• DR Net wages payable account €350,000

• CR Bank account €350,000
To post payment of wages (net) to employees on 30 April 2020

iii) Payment of July payroll liabilities to Revenue:

• DR PAYE liability account €107,000

• DR Employer PRSI liability account €38,000
• DR Employee PRSI liability account €13,800
• DR USC liability account €21,238
• CR Bank €180,038
To record the payment to Revenue of April 2020 payroll taxes on 18
May 2020

iv) Payment to Aviva on 31 May

DR Aviva liability account €3,150

CR Bank €3,150
To pay Aviva health insurance premiums on 31 May, deducted in
April 2020 payroll

Chapter 9
Question 9.1
Guitars Ltd supplies musical instruments which are liable to vat at
23%. What is the VAT amount owing/owed if the income and
expenses were as follows (assume 23% unless told otherwise):

Sales (vat inclusive) 30k

Expenses (vat exclusive)

Goods for resale 25k
Petrol 1k
Accountancy fees 3k
Entertainment 1.5k

Solution 9.1

VAT for Guitars Ltd

€ €
VAT on sales:
(30,000 * 23/123) 5,610
VAT on purchases:
Goods for resales (25,000 * (5,750)
23%)
Petrol – non deductible N/A
Accountancy fees (3,000 * (690)
23%)
Entertainment – non N/A (6,440)
deductible
VAT on Sales less VAT on
Purchases
Net Vat repayable (830)

Note in this example Guitars Ltd is owed €830 back from the tax
authorities.
Chapter 10
Question 10.1

Drealy Ltd upon reviewing their year-end accounts, discovered the

following errors/omissions:

The owner withdrew €600 cash from the bank for personal use which
was not posted to the accounts

Bank interest charged In October of €231 was not posted to the

accounts

A Sales invoice (on credit) issued to a customer was entered in the

accounts as €7,740 but should have been entered as €7,470

An outstanding customer balance of €600 will not be received as the

customer has gone into liquidation. This balance needs to be written
off in the accounts

A cash payment of €70 made to the local shop for milk was
incorrectly posted to the Stationery account instead of Canteen
account. It was correctly reflected in the Cash account

During the year damaged stock was identified which cost €147,
which the owner advised now needs to be written off to the
Damaged stock expense account

A credit supplier invoice for legal fees was incorrectly posted in the
accounts as €5,200, which should have been entered as €2,500.

A donation to the local homeless charity for €990 was not posted to
the accounts. This was paid by cheque and should have been
entered to the Donations expense account
Required:

Prepare journals to correct the above transactions for Drealy Ltd

Solution 10.1

Journals to correct transactions for Drealy Ltd

DR € CR €
Drawings account 600
Bank account 600
To record drawings made by
owner

Bank interest account 231

Bank account 231
To record bank interest charged by
bank

Sales account 270

Trade receivables 270
To correct invoice posted as
€7,740 but should have been
entered as €7,470

Bad debts expense account 600

Trade receivables account 600
To write off customer balance (due
to liquidation)

Canteen account 70
Stationery account 70
To correct posting for milk expense
to Canteen A/C
Damages stock expense account 147
Inventory 147
To record damaged stock identified

Trade Payables account 2,700

Legal fees account 2,700
To correct legal fees invoice
posted incorrectly

Donations expense account 990

Bank account 990
To record donation to homeless
charity

Chapter 11
Question 11.1

Sussty Ltd had the following Trial Balance as at 31 December 2020:

DR € CR €
Plant and Machinery at 298,000
cost (P&M)
Computer Equipment at 53,000
cost (Comp Eq)
Accumulated Depreciation 89,400
at 1 Jan 2020 P&M
Accumulated Depreciation 25,864
at 1 Jan 2020 Equipment
Sales 330,000
Wages 52,000
General provision for bad 15,000
debts
Inventory (1 Jan 2020) 33,000
Purchases 164,000
Purchases returns 3,000
Carriage inwards 1,800
Light and Heat 7,050
Rent 8,000
Insurance 15,000
Trade receivables 45,500
Bank 68,092
Capital 250,702
Bad debt expense 4,700
Trade Payables 39,676
Prepayments 3,500
Total 753,642 753,642

Additional information:

Inventory at 31 December 2020 was €28,000

Depreciation is on a straight-line basis for P&M at 10% per
annum
Depreciation is on a reducing balance basis on Computer
Equipment at 20% per annum
No heating bill has been received yet for November or
December 2020. The expected winter quarterly cost is €6,000
The opening prepayment relates to insurance as the 2019
invoice for €12,000 covered the period to 15 April 2020. The
2020 invoice for €15,000 covering 16 April 2020 to 15 April
2021 has been posted to the accounts
A lodgement was received in the bank relating to a prior bad
debt written off for a customer for the amount of €1,200
The closing bad debt provision should be 5% of the final trade
receivables balance

Required:
1) Prepare journal entries to record these transactions
2) Prepare a Statement of Profit or Loss for the year ended 31
December 2020 and a Statement of Financial Position as at 31
December 2020 for Sussty Ltd

Solution 11.1

1) Journal entries required for Sussty Ltd:

DR € CR €
Cost of Sales 33,000
Inventory 33,000
To record opening inventory at 1
Jan 2020

Inventory 28,000
Cost of Sales 28,000
To record closing inventory at
31 Dec 2020

Depreciation Expense 29,800

Accumulated Depreciation Plant 29,800
and Equipment
To record Depreciation on P&E
10%

Depreciation Expense 5,427

Accumulated Depreciation 5,427
Computer Equip
To record Depreciation on
Computer Equip 20% reducing
Balance (53k-25.864k) x 20%

Light and Heat 4,000

Accruals 4,000
To record heating for Nov and
Dec 2020 2/3 of estimated €6k

Insurance – see Note 1 below 3,500

Prepayment 3.500
To reverse opening prepayment
for insurance

Prepayment – see Note 1 below 4,375

Insurance 4,375
To post prepayment for
insurance (3.5/12 X 15k)

Bank 1,200
Bad Debt expense 1,200
Previously written off bad debt
recovered

General provision for bad debts 12,725

Bad debts expense 12,725
To adjust the general provision
for bad debts to 5% of
€45.5k=€2.275K (Was 15k –
reduce by €12.725k)

Note 1 the above 2 insurance journals can be netted and posted

as 1 journal – either way is acceptable

2)
Sussty ltd
Statement of Profit or Loss for the year ended 31 December 2020

€ €
Sales 330,000
Less cost of sales:
Opening stock 33,000
Purchases 164,000
Less Purchases returns (3,000)
194,000
Add carriage inwards 1,800
Less Closing stock (28,000) 167,800
Gross Profit 162,200

Less Expenses:
Depreciation (29.8k+5.427k) 35,227
Insurance (15k+3.5k-4.375k) 14,125
Light & Heat (7.05k+4k) 11,050
Wages and Salaries 52,000
Rent 8,000
Bad debt expense (4.7-1.2- (9,225) (111,177)
12.725)
Net profit 51,023

Statement of Financial Position as at 31 December 2020

Cost € Accumulated Carrying

Dep € Amount
€
Assets
Non-Current
Assets:
Plant and 298,000 119,200 178,800
Machinery
Computer 53,000 31,291 21,709
Equipment
200,509
Current Assets
Inventory 28,000
Trade 45,500
Receivables
Prepayments 4,375
(3.5k-
3.5k+4.375k)
Bank 69,292 147,167
(68.092k+1.2k)
Total assets 347,676

Equity and
Reserves
Capital 250,702
Net profit (from 51,023 301,725
SOPL)

Current liabilities
Provision for bad 2,275
debts (15k-
12.725k)
Trade Payables 39,676
Accruals 4,000 45,951

Total equity and 347,676

liabilities

Chapter 12
Question 12.1

The following is the bank account for Sunny Ltd for June 2020

Bank Account
 Date Detail € Date Detail €
Balance Cheque
01/06/20 8,150 12/06/20 405
b/d 201
Cash Cheque
03/06/20 1,200 15/06/20 30
sale 202
Cheque
06/06/20 Capital 25,000 19/06/20 1,040
203
Roberts Cheque
15/06/20 1,875 26/06/20 2,210
Ltd 204
Kelly Cheque
20/06/20 1,000 29/06/20 200
Ltd 205
Jones
28/06/20 1,500
Ltd
Balance
34,840
30/06/20 c/d
38,725 38,725
Balance
30/06/20 34,840
b/d

The following bank statement was received by Sunny Ltd for June
2020:

Best Bank plc

Bank Statement for Sunshine
Ltd June 2020 Account
number 42190284

DR CR Balance
I June balance 8,150
carried forward
4 June Cash lodged 1,200 9,350
19 June Cheque 405 8,945
201
24 June lodgement 25,000 33,945
25 June Cheque 1,000 34,945
Kelly
28 June Cheque 2,210 32,735
204
30 June fees 100 32,635
charged

Required:

i) Update the ledger bank account for Sunny Ltd at 30 June 2020,
showing the correct balance as at that date and
ii) Prepare the bank reconciliation at 30 June 2020, reconciling the
bank account of Sunny Ltd with the bank statement

Solution 12.1

Updating the bank account for items not yet posted – i.e. bank fees
and charges:

Bank
Account
Date Detail € Date Detail €
Fees
Balance and
30/06/20 b/d 34,840 30/06/20 charges 100
Balance
c/d 34,740
34,840 34,840
Balance
30/06/20 b/d 34,740

ii)
Bank reconciliation as at 30
Jun 2020

Balance as per bank 32,635

statement
Less Unpresented cheques
issued:
Cheque 20202 30
Cheque 20203 1,040
Cheque 20205 200 -1,270
Add cheques not yet
lodged:
Roberts Ltd 1,875
Jones Ltd 1,500 3,375
Balance as per bank account 34,740