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On 1/1/2006, P - Leaving Cert Accounting - Question 7 - 2007
Question 7
On 1/1/2006, P. Lynch purchased a business for €590,000 which included the following tangible assets and liabilities: Premises €560,000; Stock €19,000; Debtors €12,... show full transcript
Worked Solution & Example Answer:On 1/1/2006, P - Leaving Cert Accounting - Question 7 - 2007
Step 1
a) Prepare with workings the Trading and Profit and Loss Account for the year ended 31/12/2006.
Answer
To prepare the Trading and Profit and Loss Account, follow these steps:
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Calculate Total Sales:
- Total Sales = Cash Lodgements + Debtors = €116,000 + €61,000 = €177,000.
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Calculate Gross Profit:
- Gross Profit = Total Sales - Cost of Sales
- Cost of Sales includes Opening Stock, Purchases (adjusted), and Closing Stock.
- Calculate Purchases = Cash Purchases + Credit Purchases.
- Total Purchases = €105,200 (provided) + Adjustments for stock and allowances.
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Identify Expenses:
- General Expenses = €73,800,
- Insurance = €6,700,
- Interest = €4,410,
- Light and Heat = €4,410.
- Total Expenses = €73,800 + €6,700 + €4,410 + €4,410 = €89,320.
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Calculate Net Profit:
- Net Profit = Gross Profit - Total Expenses.
Step 2
b) Show the Balance Sheet with workings as at 31/12/2006.
Answer
To prepare the Balance Sheet:
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List Assets:
- Fixed Assets: Premises, Furniture, Delivery Vans.
- Current Assets: Stock, Debtors, Cash, Prepayments.
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List Liabilities:
- Current Liabilities: Trade Creditors, Interest Due, Electricity Due.
- Long-term Liabilities: Loan.
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Calculation: Ensure total assets equal total liabilities.
Step 3
c) Explain the term Accounting Concept?
Answer
Accounting concepts are the fundamental principles that guide the preparation and presentation of financial statements. They ensure consistency, accuracy, and reliability in financial reporting. Key concepts include:
- Accrual Concept: Transactions are recorded when they occur, not when cash is exchanged.
- Going Concern Concept: The entity is assumed to continue its operations in the foreseeable future.
Step 4
Step 5
e) Illustrate an accounting concept applying to the accounts of P. Lynch.
Answer
The Accrual Concept applies to P. Lynch’s accounts by ensuring that earned revenues and incurred expenses are recognized in the period they occur, regardless of cash transactions. For example, the prepayment for the insurance is recognized as an asset and amortized over the period it covers.