Acca f3 Financial Accounting (int) Study Text

Part C  The use of double entry and accounting systems

  6:  From trial balance to financial statements

113

Quick Quiz 

1 

What is the purpose of a trial balance?  

2 

A trial balance may still balance if some of the balances are wrong. 

Is this statement correct? 

A Yes 

B No 

3 

In a period, sales are $140,000, purchases $75,000 and other expenses $25,000. What is the figure for net 

profit to be transferred to the capital account? 

 A $40,000 

 B $65,000 

 C $75,000 

 D 

$140,000 

4 

The balance on an expense account will go to the I & E account. However, the balance on a liability 

account is written off to capital. 

Is this statement correct? 

A Yes 

B No 

 

5 

The balance brought forward on the bank account is a debit figure. This means that the balance is 

overdrawn. True or false? 

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6: From trial balance to financial statements   Part C  The use of double entry and accounting systems 

Answers to Quick Quiz 

1 

To test the accuracy of the double entry bookkeeping. 

2 

A 

See

 Section 1.4

. 

3 

A 

INCOME & EXPENSE ACCOUNT 

$       

$

Purchases 75,000 Sales 

140,000 

Gross profit c/d 

   65,000   

140,000

140,000

Other expenses 

25,000 Gross profit b/d 

65,000

Net profit – to capital a/c 

  40,000

65,000

65,000

B is the 

gross profit figure, while C is the figure for purchases and D sales. 

4 

B 

When an expense account is balanced off, the balance is transferred to the income and expense 

account. When a liability account is balanced off, the balance is carried forward to the next 

accounting period. 

5 

False.  A debit balance b/f is an asset and means that the bank account is 

not overdrawn. 

Now try the question below from the Exam Question Bank

Number

Level

Marks

Time

Q10

Examination

2

2 mins 

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115

Recording transactions

and events

P

A

R

T

D

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116

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117

Sales tax 

Introduction

Many business transactions involve sales tax (eg VAT in the UK). Invoices and 

bills show any sales tax charged separately. 

Sales tax is charged on the supply of goods and services. It is an 

indirect tax.

Section 1 explains how sales tax works. 

Section 2 deals with the accounting treatment of sales tax. If you understand 

the principle behind the tax and how it is collected, you will understand the 

accounting treatment. 

Topic list 

Syllabus reference 

1 The nature of sales tax and how it is collected 

D1(c)–(d)

2 Accounting for sales tax 

D1(d)

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118

7: Sales tax   Part D  Recording transactions and events

Study guide 

Intellectual level

D1 

Sales and purchases 

(c) 

Understand the general principles of the operation of a sales tax. 

1

(d) 

Calculate sales tax on transactions and record the consequent accounting 

entries.

1

Exam guide 

This topic could well be examined as part of another topic eg whether sales tax needs to be included when 

accounting for non-current assets. Be prepared for a range of rates to be used in the exam. 

1 The nature of sales tax and how it is collected 

 

Sales tax is an indirect tax levied on the sale of goods and services. It is usually administered by the local 

tax authorities. 

1.1 How is sales tax levied? 

Sales tax is a cumulative tax, collected at various stages of a product

'

s life. In the illustrative example 

below, a manufacturer of a television buys materials and components and then sells the television to a 

wholesaler, who in turn sells it to a retailer, who then sells it to a customer. It is assumed that the rate for 

sales tax is 15% on all items. All the other figures are for illustration only. 

1.2 Example 

Price net 

Sales tax 

Total 

 

 

of sales tax 

15% 

price 

$

$

$

(a)

(i)

Manufacturer purchases raw materials 

 

 

 

  and components

40

6

46

(ii)

Manufacturer sells the completed television 

 

 

 

  to a wholesaler 

200

30

230

The manufacturer hands over to tax authorities  

 

 24

(b)

(i)

Wholesaler purchases television for

200

30

230

(ii)

Wholesaler sells television to a retailer

320

48

368

Wholesaler hands over to tax authorities

18

(c)

(i)

Retailer purchases television for

320

48

368

(ii)

Retailer sells television 

480

72

552

Retailer hands over to tax authorities

24

(d)

 Customer purchases television for

480 72 552 

The total tax of $72 is borne by the ultimate consumer. However, the tax is handed over to the authorities 

in stages. If we assume that the sales tax of $6 on the initial supplies to the manufacturer is paid by the 

supplier, the tax authorities would collect the sales tax as follows. 

$

Supplier of materials and components

6

Manufacturer

24

Wholesaler

18

Retailer

24

Total sales tax paid 

72

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