Acca f3 Financial Accounting (int) Study Text

Part C  The use of double entry and accounting systems

  5:  Ledger accounts and double entry

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supplier. Uncle George accepts delivery of the goods and agrees to pay $350, but he asks if she 

can wait until the end of the month for payment. Liza agrees. 

(d) 

Liza buys flowers and plants costing $800. Of these purchases $750 are paid in cash, with the 

remaining $50 on seven days' credit. Liza decides to use Ethel's services again as an assistant on 

market day, at an agreed wage of $40. 

(e) 

On 17 July, Liza succeeds in selling all her goods earning revenue of $1,250 (all in cash). She 

decides to withdraw $240 for her week's work. She also pays Ethel $40 in cash. She decides to 

make the interest payment to her Uncle Henry the next time she sees him. 

(f) 

We shall ignore any van expenses for the week, for the sake of relative simplicity. 

Required

State the accounting equation: 

(i) 

After Liza and Uncle Henry have put more money into the business and after the purchase of  

the van. 

(ii) 

After the sale of goods to Uncle George. 

(iii) 

After the purchase of goods for the weekly market 

(iv) 

At the end of the day's trading on 17 July, and after withdrawals have been appropriated out  

of profit. 

Solution

There are a number of different transactions to account for here. This solution deals with them one at a 

time in chronological order. (In practice, it is possible to do one set of calculations which combines the 

results of all the transactions.) 

(i)

The addition of Liza's extra capital and Uncle Henry's loan

An investment analyst might call Uncle Henry's loan a capital investment, on the grounds that it will 

probably be for the long term. Uncle Henry is not the owner of the business, however, even though 

he has made an investment of a loan in it. He would only become an owner if Liza offered him a 

partnership in the business, and she has not done so. To the business, Uncle Henry is a long-term 

payable, and it is more appropriate to define his investment as a liability of the business and not as 

business capital. 

The accounting equation after $(250 + 500) = $750 cash is put into the business will be: 

Assets__=___Capital__+___Liabilities'>Assets

=

Capital

+

Liabilities

$

$

$

Stall

1,800

As at end of 10 July

2,690

Loan

500

Goods

0

Additional capital put in 

250   

Cash (890+750)

1,640

3,440

=

2,940   +   

500

The purchase of the van (cost $700) on credit 

Assets

=

Capital

+

Liabilities

$

$

$

Stall

1,800

As at end of 10 July

2,690

Loan

500

Van

700

Additional capital

250

Payables

700

Cash

1,640

4,140 =

2,940 +

1,200

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80

5: Ledger accounts and double entry   Part C  The use of double entry and accounting systems 

(ii)

The sale of goods to Uncle George on credit ($350) which cost the business $300 (cash paid) 

Assets

=

Capital

+

Liabilities

$

$

$

Stall

1,800

As at end of 10 July

2,690

Loan

500

Van

700

Additional capital

250

Payables

700

Receivable

350

Profit on sale to

Cash

Uncle George (350 – 300)

     50

 (1,640 – 300)

1,340

4,190   =   

2,990    +   

1,200

(iii)

After the purchase of goods for the weekly market ($750 paid in cash and $50 of purchases on credit) 

Assets

=

Capital

+

Liabilities

$

$

$

Stall

1,800

As at end of 10 July

2,690

Loan

500

Van

700

Additional capital

250

Payables

Goods

800

Profit on sale to

  (van)

700

Receivables

350

Uncle George

50

Payables

Cash

   (goods)

      50

 (1,340 – 750)

   590

4,240 =

2,990 +

1,250

(iv)

After market trading on 17 July 

Sales of goods costing $800 earned revenues of $1,250. Ethel's wages were $40 (paid), Uncle 

Henry's interest charge is $5 (not paid yet) and withdrawals on account of profits were $240 

(paid). The profit for 17 July may be calculated as follows, taking the full $5 of interest as a cost

on that day. 

$    

    $     

Sales

1,250

Cost of goods sold

800

Wages

40

Interest

  5

845

Profit earned on 17 July

405

Profit on sale of goods to Uncle George

 50

Profit for the week

455

Drawings

240

Retained profit 

215

Assets

= Capital

+ Liabilities

$

$

$

Stall

1,800

As at end of 10 July

2,690

Loan

500

Van

700

Additional capital

250

Payable for

Goods (800 – 800)

0

Profits retained

215

van

700

Receivables

350

Payable for

Cash (590+

 

 

goods

50

1,250  40   240) 

1,560

Payable for

 

 

interest

payment

       5

4,410

3,155

1,255

3.7 Matching 

The

matching convention requires that revenue earned is matched with the expenses incurred in earning it. 

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