Acca f3 Financial Accounting (int) Study Text

Part C  The use of double entry and accounting systems

  5:  Ledger accounts and double entry

77

3.5 Example continued 

You should now be aware that, when business transactions are accounted for it should be possible to 

restate the assets and liabilities of the business after the transactions have taken place. 

The next market day is on 10 July and Liza purchases more flowers and plants for cash, at a cost of $740. 

She is not feeling well, because of a heavy cold, and so she decides to accept help for the day from her 

cousin Ethel. Ethel is to be paid a wage of $40 at the end of the day. 

Trading on 10 July was again very brisk, and Liza and Ethel sold all their goods for $1,100 cash. Liza paid 

Ethel her wage of $40 and drew out $200 for herself. 

Required

(a) 

State the accounting equation before trading began on 10 July. 

(b) 

State the accounting equation at the end of 10 July, after paying Ethel: 

(i) 

but before drawings are made. 

(ii) 

after drawings have been made. 

You are reminded that the accounting equation for the business at the end of transactions for 3 July is 

given in Paragraph 3.4. 

Solution

(a) 

After the purchase of the goods for $740. 

Assets__=___Capital__+___Liabilities'>Assets

=

Capital

+

Liabilities

$

 

 

Stall

1,800

 

 

Goods

740

 

 

Cash (770 – 740)

     30

 

 

2,570

=

$ 2,570

+

$0

(b) 

(i) 

On 10 July, all the goods are sold for $1,100 cash, and Ethel is paid $40. The profit for the 

day is $320. 

$

$

Sales

1,100

Less cost of goods sold

740

Ethel's wage

 40

780

Profit

 320

Assets

=

Capital

+

Liabilities

$       

 

$        

 

Stall

1,800   

At beginning of 10 July 

2,570   

 

Goods

0   

Profits earned on 10 July 

320   

 

Cash

(30+ 1,100 – 40)

1,090   

 

   

 

2,890

2,890

+

$0

(ii) 

After Liza has withdrawn $200 in cash, retained profits will be only $(320 – 200) = $120. 

Assets

=

Capital

+

Liabilities

$

   

 

$

   

 

Stall

1,800

At beginning of 10 July

2,570   

 

Goods

0

Retained profits 

120   

 

Cash

  for 10 July

(1,090

200)

   890   

 

   

 

2,690   

 

2,690

+

$0

FAST FORWARD

---

78

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

It is very important you should understand the principles described so far. Do not read on until you are 

confident that you understand the solution to this example. 

3.6 Payables and receivables 

Trade accounts payable are liabilities. Trade accounts receivable are assets.

3.6.1 Trade accounts payable and trade accounts receivable

A

payable is a person to whom a business owes money. 

A

trade payable is a person to whom a business owes money for debts incurred in the course of trading 

operations. In the accounts of a business, debts still outstanding which arise from the purchase of 

materials, components or goods for resale are called 

trade accounts payable, sometimes abbreviated to 

'accounts payable' or 'payables'. 

A business does not always pay immediately for goods or services it buys. It is a common business 

practice to make purchases on credit, with a promise to pay within 30 days, or two months or three 

months, of the date of the invoice for the goods. For example, A buys goods costing $2,000 on credit from 

B, B sends A an invoice for $2,000, dated 1 March, with credit terms that payment must be made within 

30 days. If A then delays payment until 31 March, B will be a payable of A between 1 and 31 March for 

$2,000. From A's point of view, the amount owed to B is a

 trade account payable.

A trade account payable is a 

liability of a business. 

Just as a business might buy goods on credit, so too might it sell goods to customers on credit. A 

customer who buys goods without paying cash for them straight away is a 

receivable.

For example, suppose that C sells goods on credit to D for $6,000 on terms that the debt must be settled 

within two months of the invoice date 1 October. If D does not pay the $6,000 until 30 November, D will 

be a receivable of C for $6,000 from 1 October until 30 November. In the accounts of the business, 

amounts owed by receivables are called 

trade accounts receivable, sometimes abbreviated to 'accounts 

receivable' or 'receivables'. 

A trade account receivable is an 

asset of a business. When the debt is finally paid, the trade account 

receivable 'disappears' as an asset, to be replaced by 'cash at bank and in hand'. 

3.6.2 Example continued 

The example of Liza Doolittle's market stall is continued, by looking at the consequences of the following 

transactions in the week to 17 July 20X6. (See Paragraph 

3.5

 for the situation as at the end of 10 July.) 

(a) 

Liza Doolittle realises that she is going to need more money in the business and so she makes the 

following arrangements. 

(i) 

She invests immediately a further $250 of her own capital. 

(ii) 

She persuades her Uncle Henry to lend her $500 immediately. Uncle Henry tells her that she 

can repay the loan whenever she likes, but in the meantime, she must pay him interest of $5 

each week at the end of the market day. They agree that it will probably be quite a long time 

before the loan is eventually repaid. 

(b) 

She decides to buy a second hand van to pick up flowers and plants from her supplier and bring 

them to her stall in the market. She finds a car dealer, Laurie Loader, who agrees to sell her a van 

on credit for $700. Liza agrees to pay for the van after 30 days' trial use. 

(c) 

During the week, Liza's Uncle George telephones her to ask whether she would sell him some 

garden gnomes and furniture for his garden. Liza tells him that she will look for a supplier. After 

some investigations, she buys what Uncle George has asked for, paying $300 in cash to the 

Tutorial note 

Key term 

Key term 

FAST FORWARD

---