Accounting Workbook Answers Combined Files

Cambridge IGCSETM and O Level Accounting
Answers to Cambridge IGCSETM and O Level

Accounting Workbook
1 The purpose of accounting
1 D
2 D
3 C
4 A
5 Book-keeping involves the detailed recording of all the financial transactions that have taken
place over a period in a business. Book-keeping is important as it ensures that the records of
all financial transactions that a business has undertaken are accurate, up to date and
comprehensive.
6 Any three of the following answers:
• to compare it with that of previous years
• to compare with a competitor’s profit
• to take corrective action if profits are falling
• to grow the business if profits are increasing
• to measure the business’ ability to pay the highest returns to its owners relative to its
competitors.
7 Any five of the following:
Owners; managers; trade payables; the bank; the government; prospective investors.
8
True/False
A book-keeper needs more accounting skills than an accountant. False
Book-keeping is carried out throughout the financial year. True
Owners use financial statements to know the net worth of the business True
One of the main aims of a business is to make a profit. True
Analysing financial statements is one of the tasks a manager does. True
9
a Book-keeping involves the collection, recording, storing and retrieving of financial
transactions for a business. The book-keeper is not as skilled as an accountant.
Accounting is a process of collecting, recording, classifying, summarising, analysing,
interpreting and communicating financial data to allow the users of accounting
information to make informed judgements and decisions. An accountant is more
skilled than a book-keeper.
b Financial data is any aspect of the business that can be measured in terms of money. It
is recorded in the financial statements.
Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1
Answers to Workbook
Non-financial data cannot be measured accurately in terms of money. It is not

recorded in the financial statements.
c Analysing means examining something in detail with the intention of explaining and
interpreting it. Analysis allows for comparisons, between years and between
competing businesses, for instance.
Interpreting is the act of deciding what the intended meaning is. A manager will use
information from the analysis of figures in the income statement to make important
decisions.
10 The income statement is used to calculate the profit a business has made. This profit is then
compared with that of previous years. If the profit in the current year is less than the previous
year’s profit, then owners and managers would want to take steps to remedy the situation by
either decreasing expenses or increasing revenue.
11
a The bank manager will ask for and use past and present accounting records of the
business before granting a loan or any other service, such as an overdraft facility, to
the business.
b Prospective investors would like to know how well their investment will do in the
future by studying present and past accounting records of the business they are
intending to invest in.
c Trade payables and suppliers of the business want to know whether they will be paid
on time, if at all.
12 Either of the following purposes:
The purpose of preparing financial statements is to provide important financial information
that helps the owner to monitor progress.
They also help with good decision making.

Accounting Workbook
2 The accounting equation
1 D
2 C
3 A
4 A
5 A
6 Assets = Owner’s equity + Liabilities (or Liabilities = Assets – Owner’s equity or Owner’s
equity = Assets – Liabilities) (any form of the equation is acceptable)
7
a An asset is a resource of monetary value that a business owns or is owed to the
business.
b A liability is a debt that a business owes for goods or services supplied.
c Owner’s equity is what the business owes the owner (resources supplied by the
owner).
d The statement of financial position is a statement listing a business’ assets,
liabilities and owner’s equity as on a particular day.
e A trade payable is a person or business to whom money is owed for supplies made
to the business.
8 Owner’s equity = Assets – Liabilities = (50 000 + 10 000 + 2 500) – 3 800 = $58 700
9
Asset Liability
Motor van ✓
Trade receivables ✓
Long-term loan ✓
Property and buildings ✓
Bank overdraft ✓
Equipment ✓
Inventory ✓
Trade payables ✓
Cash in hand ✓
Answers to Workbook
10
Assets Liabilities Owner’s equity
$ $ $
a 4 500 2 700 1 800
b 85 200 35 700 49 500
c 7 890 6 350 1 540
d 5 680 3 210 2 470
e 11 810 5 240 6 570
f 23 760 13 770 9 990
11
Transaction Effect
a Bought goods on credit increase increase (trade
(inventory) payables)
b The owner introduced cash into increase (bank) increase (owner’s
business bank account equity)
c The owner takes money out of the decrease (bank) decrease (owner’s
business bank account for personal equity)
use
d The business sold goods for cash increase (cash) decrease
(inventory)
e The business pays the amount owed decrease (bank) decrease (trade
to a trade payable by cheque payables)
f The business sold goods on credit increase (trade decrease
receivables) (inventory)
g The business took a loan in cash increase (cash) increase (loan)

h A credit customer pays the business in increase (cash) decrease (trade
cash receivables)
i The business bought a motor vehicle increase (non- decrease (bank)
paying by bank transfer current assets)
j The business pays back the loan by decrease (bank) decrease (loan)
bank transfer

Accounting Workbook
3 The double entry system of book-keeping
1 A system of book-keeping where a ledger account is opened for each asset, liability, expense,
income and for equity. Every transaction is recorded in at least two of these ledger accounts to
reflect the equal and opposite effect of it on those accounts.
2 B
3 B
4 D
5 B
6 D
7
a Purchases ledger
b i) Explanation: Sung Jin bought inventory from Monica Lee on credit.
ii) Purchases account will be debited in Sung Jin’s books.
c Sales ledger
8
a Any two of the following: for convenience; for good organisation of data and
accounts; to keep accounts of the same type together.
b
Account Ledger
Motor vehicle Nominal (general)
Nadhim, a credit customer Sales
Purchases Nominal (general)
Sales Nominal (general)
Returns outwards Nominal (general)
Barry, a credit supplier Purchases
Salaries Nominal (general)
9
a An asset is a resource of value that the business owns, e.g. machinery. It can also
be a debt owing to the business from its credit customers.
A liability is a debt that the business owes, e.g. trade payables.
b A non-current asset is purchased with the intention of using it to generate income
over a period of more than a year, e.g. machinery. Current assets are assets that can
Answers to Workbook
be sold, exhausted or consumed through the normal workings of a business with no

more than a year remaining on the date of the statement of financial position in
which they are listed, e.g. inventory.
c Non-current liabilities are debts that must be paid after a period of a year. Current
liabilities are those debts that must be paid within a year from the date of the
statement of financial position in which they are listed, e.g. trade payables or
overdraft.
d The personal accounts of a business’ credit customers appear in the sales ledger.
The nominal (general) ledger contains the accounts of all other assets, liabilities,
income, expenses, sales, purchases and returns – i.e. all accounts not contained in
the sales and purchases ledgers.
e Trade payables are suppliers to whom the business owes money for goods or
services received. Trade receivables are customers who owe the business money
for goods or services provided by the business.
10 a
Ji Lui’s equity = Assets – Liabilities
= (7 200 + 800 + 1 300 + 180 + 250) – (830 + 510)
= $8 390
b
Account(s) debited $ Account(s) credited $
i) Salaries 319 Cash 319
ii) Drawings 89 Cash 89
iii) Motor vehicle 1 970 Capital 1 970
iv) Ken Lee 100 Bank 98
Discounts received 2
11 a
Bank charges account
Date Details $ Date Details $
2018 2018
Mar 31 Bank 48 Dec 31 Income statement 261
June 30 Bank 86
Sept 30 Bank 71
Dec 31 Bank 56 ___
261 261
b The total of bank charges is transferred to the income statement because they are an
expense and need to be set against the income/profit of the year in which they are
incurred. If the balance was carried down it would indicate that it was an asset and
recorded in the statement of financial position.
Answers to Workbook
12 a
Motor vehicles account

2018 2018
Jan 1 Balance b/d 17 000 Dec 31 Balance c/d 38 000
Oct 31 Bank 12 000
Tip Top Motors 9 000 ______
38 000 38 000
2019
Jan 1 Balance b/d 38 000
Tip Top Motors account

2018 2018
Nov 30 Bank 1 000 Oct 31 Motor vehicles 9 000
Dec 31 Bank 1 000
Balance c/d 7 000 _____
9 000 9 000
2019
b The balance on the motor vehicles account was brought down as it represents an asset
which will be used in the coming year and which should be recorded in the statement
of financial position.
The balance on Tip Top Motors account was brought down as it represents a liability
which will be paid in the coming year and which also needs to be recorded in the
statement of financial position.

Accounting Workbook
4 Business documents
1 A
2 A
3 B
4 A
5 A
6 a Trade discount
b Invoice
c Statement of account
d Credit note
e Statement of account
f Debit note
g Debit note
7 Boxes of nails = 500 x 15.10 = $7 550
Trade discount = 2% x 7 550 = $151
Total of invoice = 7 550 – 151 = $7 399
8 a i) $60.75; ii) 20; iii) Trade; iv) $1.61; v) $159.14
b L. Kerry
c Because L. Kerry is returning goods which he had purchased from K Lui.

Accounting Workbook
5 Books of prime entry
1 A
2 A
3 C
4 D
5 D
6 Any of the following suggestions:
Book of prime entry Source document
Purchases journal Purchases invoice
Sales journal Sales invoice
Cash book Cash receipt/cheque
Petty Cash book Petty cash voucher/receipt
Purchases returns journal Credit note received
Sales returns journal Credit note issued
7 Any of the following answers:

• To prevent too many details from making their way into the ledgers
• A quicker way to record transactions
• Helps to prevent errors
• Book-keeping can be divided between several people.
8 Discounts allowed; Discounts received.
9 Source documents are used to make records in books of prime entry. Source documents also
serve as proof that a transaction has taken place.
10 Cash book/petty cash book/general journal
11
Basant’s account
Oct 1 Balance b/d 160 Oct 31 Sales returns 110
Oct 31 Sales 400 Oct 31 Bal c/d 450
560 560
Nov 1 Bal b/d 450
Sales account
Oct 31 Total for the month 770
Answers to Workbook
Sales returns account

Oct 31 Total for the
month 180
Answers to Workbook
12 a
Date Details Dis Cash Bank Date Details Dis Cash Bank
2018 $ $ $ 2018 $ $ $
Sept 1 Bal b/d 2 500 4 000 Sept 10 Drawings 60
Sept 3 Sales 300 Sept 16 Bank c 250
Sept 15 Johnny 40 460 Sept 18 Ali 35 665
Sept 16 Cash c 250 Sept 20 Cash c 320
Sept 20 Bank c ___ 320 Sept 30 Balances c/d 2 870 4 799
Sept 25 Jenny 36 864
Sept 28 Sales ___ _____ 270 __ _____ _____
76 3 120 5 844 35 3 120 5 844
Oct 1 Bal b/d 2 870 4 799
b Cash discount or discount allowed

c 4%
d Contra entries are used to record cash from the business’ cash till paid into the business’ bank account and cash withdrawn from the business’
bank account for business use. These transactions are called contra entries because they appear on both sides of the cash book, e.g. September
16 and 20 entries.
e
i. Discounts allowed account
2018
Sept 30 Total for the month 76
ii. Discounts received account

2018
Sept 30 Total for the month 35
13
a The advantage of the imprest system is that the cashier is always aware of how
much petty cash is being spent in each accounting period.
b One of the following reasons:
• To save the cash book from being cluttered with too many transactions.
• Gives experience to junior staff.
• Frees up the time of the chief cashier.
Answers to Workbook
c
Sangita’s petty cash book
Receipts Date Details Total Postage Travel Sundries Ledger
paid accounts
$ 2018 $ $ $ $ $
19 Aug 1 Balance b/d
231 Aug 1 Cash
Aug 3 Taxi fares 24 24
Aug 6 Postage 10 10
16 Aug 16 Loan
Aug 15 Mansi 17 17
Aug 20 Supplies 10 __ __ 10 __
61 10 24 10 17
___ Aug 31 Balance c/d 205
266 266
205 Sept 1 Balance b/d
45 Sept 1 Cash
d Postage account will be debited with the column total of $10

14
a Any three of the following:
to write off irrecoverable debts
to record the purchase of a non-current asset on credit
to record an opening entry to open the books of accounts
to correct errors
to record one-off irregular transactions.
b i) Electricity for the year $5 700 included a prepayment of $600.
Date Details Debit Credit

2019 $ $
Income statement 5 100
Electricity account 5 100
(Transfer of electricity for the year to the income statement)
ii) Provide for depreciation of equipment $400

2019 $ $
Income statement 400
Provision for depreciation of equipment account 400
(Transfer of annual depreciation charge for machinery to the income statement)
Answers to Workbook
iii) Closing inventory was $20 000

2019 $ $
Inventory 20 000
Trading account 20 000
(Transfer of closing inventory to the trading account section of the income statement)
iv) Provide for doubtful debts $200

2019 $ $
Provision for doubtful debts 200
(Transfer of provision for doubtful debts to the income statement)
v) Opening inventory on 1 January 2019 was valued at $10 000

2019 $ $
Trading account 10 000
Inventory 10 000
(Transfer of opening inventory to the trading account section of the income statement)
vi) Returned faulty furniture bought on credit from Ace Furniture, $2 500
2019 $ $
Ace Furniture account 2 500
Furniture account 2 500
(Furniture returned to Ace Furniture)
15 $54.20.
Workings:
$134.50 + $11.30 = $145.80
$200 – $145.80 = $54.20

Accounting Workbook
6 The trial balance
1 B
2 A
3 B
4 B
5
a A trial balance is a statement listing account names and their balances in debit and
credit columns as on a particular day.
b Closing inventory is inventory that has remained unsold at the end of the financial
year.
6 To detect errors; to provide information from which the financial statements can be
drawn up.
7 As a rule, the accounts of expenses or assets should each have debit balances. On the other
hand, the accounts of income, liabilities and owner’s equity should each have a credit
balance.
8 It does not reveal all errors. Errors of commission or principle are some of the errors not
revealed by a trial balance.
9
Gaurav’s corrected trial balance as at 31 July 2019
Debit Credit
$ $
Owner’s equity 40 000
Cash 170
Bank overdraft 300
Trade receivables 500
Trade payables 700
Property and buildings 28 520
Machinery 7 000
Inventory at 1 Sept 2018 1 000
Purchases 760
Sales 2 000
Returns outwards 50
Returns inwards 200
Salaries 500
Interest received 600
Rent 2 000
Furniture and fixtures 3 000 _____
43 650 43 650

Accounting Workbook
7 Correction of errors
1 A
2 C
3 C
4 B
5 C
6
a Any two of the following:
• Arithmetical errors – these would include errors of addition and subtraction, e.g. an
error in addition within an account or within the trial balance.
• Using one figure for a debit entry of a transaction and another figure for the credit
entry.
• Entering only one aspect of a transaction (e.g. making a debit entry but not the
corresponding credit entry)
• Entering a transaction twice on the same side of an account (e.g. entering two debits
instead of one debit and one credit)
b Error of complete reversal occurs when the correct amounts are used but double entries are
made on the wrong side of the accounts concerned. For example, Mason paid us $350 by
cheque. We debited Mason’s account and credited bank account with the amount of $350,
instead of debiting bank account and crediting Mason’s account with that amount.
c Error of principle is when the correct amount is entered, both debit and credit, but one of
the entries is made in an account belonging to a different class. For example, repairs to a
motor vehicle are debited to the motor vehicle account.
7
Error Effect on profit for the year

Increase Decrease No effect
$ $
1. $700
2. $426
3 $800
4. $1 300
Answers to Workbook
8
Profit for the year is overstated ✓
Profit for the year is understated
Current assets are overstated ✓
Current assets are understated
Non-current assets are understated
Non-current assets are overstated
9 a Error of original entry

b
Debit Credit
$ $
Nelly 180
Purchases 180
10 Two of the following reasons:

• To enable draft financial statements to be prepared
• To enable the correction of errors to be recorded using a ledger account
• To be able to see easily if the balance on the account is cleared, suggesting that all
errors have been found
11 a
Debit entry $ Credit entry $
Sales account 200 Ted account 200
b
Suspense account
$ $
Difference on trial balance 512 Heat and light 612
Insurance 100 ___
612 612
c The entries made to the suspense account clear the difference on the trial balance,
which will now balance. However there may still be errors which do not affect the
trial balance.

Accounting Workbook
8 Bank reconciliation
1 A
2 B
3 B
4 B
5 A
6
Increase Decrease Have no effect
Bank charges ✓
Credit transfer ✓
Customer’s cheque ✓
dishonoured
7 a
Salim’s cash book (bank columns only)
2018 2018
Mar 1 Balance b/d 3 500 Mar 6 Bishwas 1 100
Mar 2 Lala 400 Mar 10 Salaries 500
Mar 15 Anton 1 780 Mar 20 Arden 900
Mar 31 Sales 4 600 Mar 31 Balance c/d 7 780
10 280 10 280
Apr 1 Balance b/d 7 780
b
Salim’s bank reconciliation statement 31 March 2018
$ $
Balance as per cash book 7 780
Add: unpresented cheque: Arden 900
8 680
Less: uncredited to deposits 4 600
Balance as per bank statement 4 080
c When deposits are made by the business into their bank account, their cash book will
be debited as the bank now owes this money to the business and is a debtor. The bank
will, however, credit this amount as the business has now become one of the bank’s
creditors. Hence, a positive bank balance will appear as a debit balance in the cash
book and a credit balance in the bank statement. An overdraft will appear as a credit
balance in the cash book and a debit balance in the bank statement.
Answers to Workbook
8
a Dishonoured cheques are those cheques that the business has received from another
person or company which have been rejected for payment by the bank when deposited.
b A bank overdraft is a temporary loan extended by the bank to help the business through
a liquidity crisis. It allows the business to withdraw more than they have deposited.
9
a Items in the cash book which do not appear on the bank statement are usually caused by
timing differences.
b A cheque that has been received by the business from their debtors, paid into bank and
debited in the cash book but not recorded in the bank statement is called an un-credited
cheque.
c A bank statement is a copy of the bank’s customers’ account in the books of the bank.
d A positive bank balance will appear as a debit balance in the cash book and a credit
balance in the bank statement.
e The balance as per updated cash book is mentioned as a current asset in the statement of
financial position.
10 a
Logan’s cash book (bank columns only)
2018
Apr 1 Balance b/d 460 Apr 14 Henry industries 600
Apr 9 Kelsey 1 300 Apr 18 Kairu 780
Apr 19 Yuki 680 Apr 20 Interest 60
Apr 20 Dividends 400 Apr 20 Bal c/d 1 400
2 840 2 840
b
Bank reconciliation statement at 20 April
$ $
Balance as per cash book 1 400
Add: unpresented cheque: Kairu 780
2 180
Less: uncredited deposits 680
Balance as per bank statement 1 500

Accounting Workbook
9 Control accounts
1 C
2 C
3 A
4 C
5 C
6 Sales ledger control account
7
a
Sales ledger control account
2018 2019
June 1 Balance b/d 8 200 May 31 Cash/bank 37 600
2019
May 31 Sales 37 000
_____ May 31 Balance c/d 7 600
45 200 45 200
Sales = $37 000
b
Purchases ledger control account
2019 2018
May 31 Cash/bank 29 500 Jun 1 Balance b/d 7 900
2019
Balance c/d 5 700 May 31 Purchases 27 300
35 200 35 200
Purchases = $27 300
Answers to Workbook
c Any two of the following:

• To help identify errors in the sales and purchases ledgers by acting as as a trial balance
for the sales and purchases ledger. If the control account does not balance, only the
accounts relating to that control account need to be checked for errors. This speeds up
the checking process.
• As a quick way of calculating total trade receivables/payables or showing a summary of
transactions involving trade receivables/payables for the period
• Control accounts can help to speed up the preparation of draft financial statements
• Control accounts can help to reduce the risk of fraud
d A control account can only check for arithmetical accuracy. Errors such as errors of original
entry or errors of complete reversal of entries are not revealed by control accounts.
8
Entries in the Source of the entries
sales ledger
control account
Balance b/d List of trade receivables’ balances prepared at the end of the previous accounting
period or previous accounting period’s control account closing balance
Sales Total credit sales from the sales journal
Cash Total cash received from credit customers taken from the debit side of the cash
book (cash column)
Bank Total receipts from credit customers taken from the debit side of the cash book
(bank column)
Sale returns Total sales returns from sales returns journal
Irrecoverable debts Total taken from the general journal
Discounts allowed Total taken from the discounts column on the debit side of the cash book
Dishonoured Bank column of cash book (credit side)
cheques
Refunds to trade Cash book – cash or bank columns
receivables
Interest charged on Total posted from the general journal
overdue accounts
Balance c/d Total of the list of trade receivables’ balances prepared at the end of the current
accounting period or the balancing figure of the control account prepared for the
current accounting period.
Answers to Workbook
9 a Customer has overpaid

Customer has paid in advance/paid a deposit for goods
Customer paid for goods which were later returned
Customer failed to take discount to which he/she was entitled
b
Sales ledger control account
2018 2018
Jan 1 Balance b/d 9 760 Jan 1 Balance b/d 27
Dec 31 Credit sales 78 205 Dec 31 Sales returns 1 121
Bank 302 Bank 69 600
Balance c/d 117 Discount allowed 1 418
Irrecoverable debts 116
PLCA 405
______ Balance c/d 15 697
88 384 88 384
Purchases ledger control account

2018 2018
Jan 1 Balance b/d 16 Jan 1 Balance b/d 6 270
Dec 31 Purchases returns 764 Dec 31 Credit purchases 54 209
Bank 51 926 Bank 330
Discount received 1 061 Interest payable 61
SLCA 405 Balance c/d 54
Balance c/d 6 752 ______
60 924 60 924
d Charging interest on customers’ accounts might upset customers and cause them to
take their custom elsewhere. If customers are not paying because they do not have the
funds it may make no difference to cash flow and merely increase amounts which
have to be written off.
It could bring in additional income. It could encourage customers to pay earlier. It
could reduce irrecoverable debts.
Decision to be backed by appropriate reasons as outlined above.

Accounting Workbook
10 Capital and revenue expenditure and
receipts
1 D
2 C
3 B
4 B
5
a Capital expenditure is money spent to purchase or improve a productive asset with the
intention of increasing its efficiency or capacity to generate income for more than one
accounting period.
b Revenue expenditure is expenditure incurred in the day-to-day running of the
business.
c Capital receipts are funds received from the non-operating activities of the business.
d Revenue receipts are recurring in nature. They are income generated from the main
operating activities of a business.
6
True/False
Revenue expenditure is the amount spent by a business to acquire, improve or False
extend the life of non-current assets.
Capital expenditure is non-recurring by nature. True
Revenue expenditure is shown in the statement of financial position of a False
business.
Industries such as telecommunications have high levels of capital expenditure. True
Revenue expenditure is a short-term expense incurred to meet the operational True
costs of running the business on a day-to-day basis.
Revenue expenditure is meant to extend a business’ ability to earn income. False
The one-off costs incurred in the acquisition of non-current assets should be True
included as capital expenditure.
Capital expenditure is charged to profit in the income statement as soon as it is False
incurred.
Revenue expenditure is meant to maintain the business’ ability to operate. True
Businesses must spread the cost of a non-current asset over the years the asset True
is used.
Answers to Workbook
7
Capital Revenue
expenditure expenditure
Employees’ wages ✓
New mirrors for salon ✓
Installation of new mirrors for salon ✓
Purchase of shampoo ✓
Purchase of hair driers ✓
8
Capital receipts Revenue receipts
A loan taken from a bank ✓
Fees received by a service business ✓
Rent received ✓
An issue of shares ✓
Sales revenue received by a trading or ✓
manufacturing business
9
Profit for the year Total assets
$ $
Draft values 17 620 5 1204
Error i (400) (400)
Error ii (2 000) 0
Error iii 1 050 1 050
Corrected values 16 270 51 854

Accounting Workbook
11 Accounting for depreciation and disposal of
non-current assets
1 D
2 D
3 B
4 C
5 B
6 Any two of the following:
Depletion; time factor (e.g. lease); economic reasons.
7
a When the straight-line method is used, an estimate is made of how long the asset is
likely to last. The cost of the asset less any estimated scrap value is spread evenly
over the estimated useful life of the asset. Using furniture as an example, let us
assume that it cost $50 000 and will last ten years. At the end of this period it will
have a scrap value of $5 000. The original cost of $50 000, less the $5 000 scrap
value, $45 000, is divided by 10 (the number of years), to get the figure $4 500.
Each year $4 500 will be written off (written down from) the value of the furniture
and will be regarded as an expense. Hence, the asset will be depreciated by $4 500
every year for ten years. (Example not required)
b This method is used when the asset is expected to be used equally over its life to
generate income.
c Each year, the amount of depreciation written off will diminish, or get smaller.
Depreciation is charged each year on the net book value (cost less accumulated
depreciation) using a given percentage. For example, a motor vehicle is bought on
1 January 2018 for $50 000. It is decided to charge 10 per cent per annum as
depreciation. At the end of the first year, 2018, depreciation will be 10 per cent of
$50 000, i.e. $5 000. The statement of financial position will thus show the asset at
a net book value of $45 000 ($50 000 – $5 000). At the end of the second year,
2019, depreciation will be 10 per cent of $45 000, i.e. $4 500. This asset will be
shown on the statement of financial position at the end of the second year at a net
book value of $45 000 less $4 500 depreciation, i.e. $40 500. Each year
depreciation is calculated as 10 per cent of the net book value of the asset
Therefore, the depreciation charge gets smaller each consecutive year. (Example
not required)
d This method is used when an asset’s economic use is greater in the early years as
compared to the later years of its life.
Answers to Workbook
e i) Premises
Method: Straight-line
Reason: The asset is expected to be used equally over its life to generate
income.
ii) Motor vehicle
Method: Reducing balance
Reason: To balance the repairs and maintenance and provision for
depreciation charged to the income statement as the asset gets older and
needs more repairs and maintenance.
iii) Computer equipment
Method: Straight-line
Reason: The asset is expected to be used equally over its life to generate
income.
f With the revaluation method, the asset is revalued at the end of the financial year.
The end-of-year value is then subtracted from the value at the beginning of the
year. If the value at the end of the year is less than the value at the beginning of the
year, the result is a depreciation charge.
g The revaluation method is used in cases where assets are individually of little
monetary value but collectively of considerable value, e.g. a collection of loose
tools. This method is also used when it is difficult or time-consuming to keep
detailed records of inexpensive assets.
h Two answers from: Loose tools; lubricant; containers.
8 a Profit for the year will decrease
b Net book value will decrease.
9 a i) Year one: $1 800 ($6 000 x 30%);
ii) Year two: $1 260 ($4 200 x 30%);
iii) Year three: $882 ($2 940 x 30%)
b
Pamela
Statement of financial position (extract)
Non-current assets Cost Provision for Net book
depreciation value
$ $ $
Office furniture 6 000 3 942 2 058
c Depreciation rate should have been higher because net book value after three years
($2 058) is greater than expected scrap value after three years ($1 000).
Answers to Workbook
10
Angus Recanni
Machinery account
2018 2018
Jan 1 Balance b/d 14 000 Jun 30 Disposal of machinery 4 000
Jul 1 Bank 5 000 Dec 31 Balance c/d 15 000
19 000 19 000
2019
Provision for depreciation – Machinery account

2018 2018
Jun 30 Disposal of *1 000 Jan 1 Balance b/d 2 800
machinery
Dec 31 Balance c/d 3 250 Dec 31 Income statement **1 450
4 050 4 050
2019
* Accumulated depreciation for machine sold = 10% x 4 000 x 2.5 (years)

** Depreciation charge for the year = 10% x 10 000 + (10% x 5 000 x 0.5(yr)) + (10% x 4 000 x
0.5 (yr)) = 1 000 + 250 + 200
Disposal of machinery account

2018 2018
Jun 30 Machinery account 4 000 Jun 30 Prov. for depreciation - 1 000
machinery
Jun 30 Cash 300
_____ Dec 31 Income statement 2 700
4 000 4 000
11 Any two of the following

• To spread the cost of the asset over the years it is used.
• So that the income statement shows a ‘true and fair view’ of the expenses for the period.
Since the asset is being used to generate income, a figure representing the ‘cost’ of this
asset should be charged to the profits of the period in question. This is in keeping with
the matching principle.
• To follow the prudence principle so that profits and assets are not overstated.
• So that the statement of financial position shows a true and fair view of the non-current
assets.
Answers to Workbook
12 a
General journal
2018 $ $
Dec 31 Income statement 1245
Provision for depreciation of 1245
machinery account
(Depreciation charge for the year ended 31 December 2018 on
machinery)
b
General journal
2018 $ $
Dec 31 Disposal account 7000
Motor vehicles account 7000
Provision for depreciation of motor 3300
vehicles
Disposal account 3300
Cash account 3100
Sale of motor vehicle on 31 December 2018

Accounting Workbook
12 Other payables and receivables
1 B
2 D
3 B
4 A
5 B
6
a The matching principle states that income and expenses, earned and incurred in a
financial year, regardless of when received or paid, should be included to arrive at
a meaningful profit for that year.
b
Mala’s nominal ledger
Electricity account
2018 2018
Feb 15 Bank 110 Feb 1 Balance b/d 60
___ Feb 28 Income statement 50
110 110
Mar 8 Bank 85 Mar 31 Income statement 56
___ Mar 31 Balance c/d 29
195 195
Apr 1 Balance b/d 29
7 a Current assets – other receivable

b Matching principle
c
Richard’s nominal (general) ledger
General expenses account
2018 2018
Jan 1– Cash 10 900 Jan 1 Balance b/d 2 690
Dec 31
Dec 31 Balance c/d 2 500 Dec 31 Income statement 10 710
______ ______
13 400 13 400
Answers to Workbook
8 a $560
b $480
c $80 represents unused stationery.
d Name of the financial statement: The statement of financial position.
Reason: As a current asset as it represents money paid for goods that will be used in the
following year.
9 When a customer has not received the goods or services by the end of the financial year,
but has already paid for them, it is called prepaid income in the books of the supplier. Due
to the matching principle, only those expenses incurred during the year should be included
in the income statement. Accrued expenses should be included in the income statement or
else the profit will be overstated. Accrued income from sales is already represented by
trade receivables in the trial balance. If income is owing at the end of the current financial
year, it should be added to the amount already received, before being transferred to the
income statement to ensure that profits are not understated.
10 a
General journal
2017 $ $
31 Dec Income statement 1 200
Insurance account 1 200
b
General journal
2017 $ $
31 Dec Commission receivable account 15 100
Income statement 15 100

Accounting Workbook
13 Irrecoverable debts and provision for
doubtful debts
1 B
2 A
3 A
4 D
5 a Alex had more trade receivables.
b
Alex
General journal
Dr Cr
$ $
Provision for doubtful debts 400
(Increasing the provision for doubtful debts.)
c Any of the following answers:

• Prudence principle: The provision appears in the statement of financial position as a
deduction from trade receivables and the increase in provision appears as an expense
in the income statement; therefore, the trade receivables and profit are reported at a
lower figure, an application of the prudence principle which requires assets and
profit to be understated rather than overstated.
• Matching principle: The provision for doubtful debts should be made in the same
period that the revenue was earned. In this way, revenues are matched with all
relevant expenses in the income statement.
6 Any four of the following answers:
• The business should sell for cash or cheque payments only.
• The business can assess the creditworthiness of a potential customer by asking for
trade references or pay for a credit check.
• A lower credit limit for new customers could be set until trust is built in the ability of
the customer to pay their debts on time.
• The business should draw up clear terms and conditions and inform the customers of
them, by perhaps publishing them on their website or invoices.
• Customers should be reminded that the business has a right to charge interest on late
payments.
• Invoices and statements of account should be sent promptly.
• An offer of discounts for early payment publicised on the invoice or the statement of
account is a good way of influencing customers to pay on time.
• Reminder letters can be sent.
7 Any two of the following answers.
Answers to Workbook
• Using past experience to estimate what percentage of trade receivables will not pay.
• By looking at each debt to determine whether it will be paid or not. A total is made
of any doubtful debts to arrive at the amount of the provision.
• By using an ageing schedule.
8 a
i) An irrecoverable debt is an amount owed by a credit customer which is not
expected to be paid. It is written off and becomes a business expense.
ii) The recovery of debts written off occurs when a credit customer, whose debt has
been written off, later pays some or all of that debt.
b
1 To comply with the principle of prudence
2 To match the cost of debts not being paid with the income earned from the sales
giving rise to those debts
3 To prevent assets and profits from being overstated.
9 a
General journal
2017 $ $
Mar 7 Irrecoverable debts account 170
Sam account 170
(Write off of debt owed by Sam considered
irrecoverable)
b
Irrecoverable debts account
2017 2017
Mar 7 Sam 170 Dec 31 Income statement 385
Oct 9 Abdul 215 ___
385 385
c
General journal
2018 $ $
Jan 6 Sam account 170
Irrecoverable debts recovered account 170
Cash account 170
Sam account 170
(Payment of debt owed by Sam previously written off)
d
Sam account
Jan 6 Irrecoverable debts
170 Jan 6 Cash 170
Answers to Workbook
Irrecoverable debts recovered account

2018 2018
Dec 31 Income statement 170 Jan 6 Sam 170

Accounting Workbook
14 Valuation of inventory
1 A
2 A
3 ‘Inventory is valued at the lower of cost and net realisable value.’
4 a Cost or net realisable value, whichever is lower.
b
Product Selling price per unit Cost per Carriage Value of
unit inwards inventory
$ $ $ $
X 400 340 40 340
Y 230 400 - 230
Z 170 240 - 170
Value of inventory recorded in statement of financial position 740
c The prudence principle

5 Cost of five tables = $500
Net realisable value = (80 x 5) – 75 = $325
Value of five tables in Maximus’ inventory at 20 June 2019 = $325
6 Inventory is a term used to describe goods, purchased for resale by a business, that have
remained unsold. Inventory at cost includes, in addition to cost price, all those costs
necessary to acquire the inventory and convert it to a saleable condition. Net realisable
value is the difference between estimated receipts from sales of inventory less estimated
costs associated with bringing inventory to saleable condition. If closing inventory is
overvalued, the cost of sales will be undervalued and therefore the gross profit will be
overvalued. If inventory is overvalued, then the total assets figure in the statement of
financial position will be overstated.

Accounting Workbook
15 Sole traders
1 A
2 D
3 C
4 B
5 D
6
Felcy’s capital account
2018 2018
Dec 31 Jan 1 Balance b/d 56 000
Drawings (bank) 4 500
Drawings (inventory) 1 000 Dec 31 Income
statement(profit) 15 700
Dec 31 Balance c/d 66 200 ______
71 700 71 700
2019
Answers to Workbook
7
Sita
Statement of financial position as at 31 December 2019
ASSETS $ $ $
Non-current assets Cost Accumulated NBV
Depreciation
Machinery 1 440 750 690
Motor van 2 400 1 170 1 230
3 840 1 920 1 920
Current assets:
Inventory at 31 December 2019 2 380
Trade receivables 4 920
Less: provision for doubtful debts 240 4 680
Other receivables 240
Cash at bank 210
Cash in hand 1 140 8 650
Total assets 10 570
CAPITAL AND LIABILITIES
Capital:
Balance at 1 March 2018 8 500
Add: profit for the year 2 080 10 580
Less: drawings 2 850
7 730
Current liabilities:
Trade payables 2 490
Other payables 350 2 840
Total capital and liabilities 10 570
8
Sylvester
Income statement for the year ended 30 June 2018
$ $
Income:
Takings 14 500
Less: Expenses:
Rates 1 000
Assistant’s salary 1 650
Rent 350
Electricity 1 000
Internet 400
Depreciation 500 4 900
Profit for the year 9 600
Answers to Workbook
9
True/False
As a service business trades, a trading account is required to be prepared. False
Non-current assets are listed in the statement of financial position in the order of True
the length of their economic life.
Profit for the year decreases the owner’s capital. False
The trading account and the profit and loss account make up the income True
statement.
Carriage outwards is the cost of transporting goods to the customer. True
10
Sales Cost of sales Gross profit/loss
$ $ $
a 6 700 2 400 4 300 (profit)
b 4 100 3 000 1 100 (profit)
c 3 600 2 800 800 (profit)
d 4 600 4 900 300 (loss)
e 3 000 3 500 500 (loss)
11 Advantages:
• A sole trader makes his own decisions/there are no arguments/is his/her own boss.
• A sole trader keeps all the profits for him/herself.
Disadvantages:
Any two of the following:
• A sole trader bears all the workload/has no help for holidays and sickness.
• A sole trader bears all the risk.
• A sole trader bears all the losses.
• A sole trader has unlimited liability for the debts of the business/could lose his
personal assets.
12 An income statement is a summary of incomes and expenses for a specified period. It
measures the performance of a business by calculating the profit for the period and allows
comparisons to be made.
13 It is a summary of assets, liabilities and equity of a business or organisation at a specific
date. It shows the position of the business or organisation by showing its net worth (net
assets) and allows comparisons to be made.
14 A trading business purchases goods for resale. Gross profit measures the difference
between the sales and the cost of those sales, which is the profit on trading. Since a service
business does not sell goods there cannot be a profit arising from their sale.
15 a
Interest account
2018 2018
Oct 31 Bank 250 Oct 31 Income statement 500
Balance c/d 250 ___
500 500
Nov 1 Balance b/d 250
Answers to Workbook
b
Leroy
Income statement for the year ended 31 October 2018
$ $ $
Sales 195 600
Sales returns (600)
Net sales revenue 195 000
Inventory – 1 November 2017 22 100
Purchases 87 150
Carriage inwards 450
87 600
Drawings (2 000)
85 600
107 700
Inventory – 31 October 2018 (19 800)
Cost of sales 87 900
Gross profit 107 100
Rent 12 000
Wages and salaries 25 600
Operating expenses (52 600 + 1 650) 54 250
Irrecoverable debt 120
Increase in provision for doubtful debts 20
(14 000 x 0.02 – 260)
Deprecation
Loose tools (400 – 320) 80
Motor vehicles (13 600 x 0.2) 2 720
Fixtures and fittings (8 000 x 0.01) 800
95 590
Profit from operations 11 510
Finance charges (interest) 500
Answers to Workbook
c
Statement of financial position at 31 October 2018
$ $ $
Non-current assets Cost Accumulated Net book
depreciation value
Motor vehicles 17 000 6 120 10 880
Fixtures and fittings 8 000 3 200 4 800
Loose tools 400 80 320
25 400 9 400 16 000
Current assets
Inventory 19 800
Provision for doubtful debts (280) 13 720
Bank 780 34 300
Total assets 50 300
Capital and liabilities

Capital at 1 November 2017 19 290
30 300
Drawings (4 500 + 2 000) (6 500)
Capital at 31 October 2018 23 800
Non-current liabilities
5% bank loan (2026) 10 000
Current liabilities
Trade payables 14 600
Other payables (250 + 1 650) 1 900 16 500

Accounting Workbook
16 Partnerships
1 D
2 A
3 D
4 A
5 D
6
a
Rahila and Poppy
Profit and loss appropriation account for the year ended 31 May 2019
$ $ $
Add: Interest on drawings: Rahila (5% x 10 000) 500
Poppy (5% x 12 000) 600 1 100
92 100
Less: Salary (Rahila) 10 000
Less: Interest on capital: Rahila (5% x 25 000) 1 250
Poppy (5% x 30 000) 1 500 2 750 12 750
Residual profits to be shared 79 350
Rahila (1/3 x 79 350) 26 450
Poppy (2/3 x 79 350) 52 900 79 350
b
Rahila’s current account
Date Details Rahila Date Details Rahila
2019 $ 2018 $
May 31 Drawings 10 000 Jun 1 Balance b/d 15 000
May 31 Int. on drawings 500 2019
May 31 Balance c/d 42 200 May 31 Int. on capital 1 250
May 31 Salary 10 000
_____ May 31 Profit share 26 450
52 700 52 700
The balance on Rahila’s current account is $42 200 (cr)
Answers to Workbook
7 a Profit for the year = Gross profit – expenses = 25 000 – 10 500 =$14 500
b
$ $
Less: Interest on capital: Smith 3 000
Jamil 2 000 5 000
Residual profits to be shared: 9 500
Smith 4 750
Jamil 4 750 9 500
c
Current accounts
Date Details Smith Jamil Date Details Smith Jamil
2018 $ $ Date $ $
Sept 1 Balance b/d 100 Sept 1 Balance b/d 800
2019
Aug 31 Drawings 2 400 1 500 2019
Balance c/d 6 150 5 150 Aug 31 Int. on capital 3 000 2 000
_____ _____ Profit share 4 750 4 750
8 550 6 750 8 550 6 750
Sept 1 Balance b/d 6 150 5 150
Answers to Workbook
d Students may use either of the following methods:

Method 1 (showing only the balances on the capital and current accounts):
Smith and Jamil
Statement of financial position as at 31 August 2019 (extract)
$ $ $
Smith Jamil Total
Capital accounts 30 000 20 000 50 000
Current accounts 6 150 5 150 11 300
61 300
Method 2 (showing the current account in detail):
Smith and Jamil
$ $ $
Smith Jamil Total
Capital accounts 30 000 20 000 50 000
Current accounts:
Opening balance 800 (100)
Interest on capital 3 000 2 000
Share of profits 4 750 4 750
8 550 6 650
Less:
Drawings 2 400 1 500
6 150 5 150 11 300
61 300
8 Any five of the following reasons:

• Partnerships are simple and cheap to set up.
• It is easier to raise capital as each partner will contribute finance.
• Partners may have skills which work well together and enable the business to benefit
from them. Partners also contribute to the pool of knowledge and contacts that a
business can use.
• Partners with their own area of expertise will make the business more productive.
For example, a firm of lawyers could have a partner who specialises in family law,
and another in corporate law. This means that the business can have a wider
customer base.
• Partnerships can provide for more creative ideas that contribute to good decisions.
• Responsibilities and risks are now shared between the partners.
• Losses are shared.
9 Any three of the following disadvantages:
• Profits must be shared.
• Disagreements can occur.
• As decisions are jointly made, they take longer.
• All partners are liable for errors made by one of the partners on behalf of the
partnership.
• Partners of ordinary partnerships have unlimited liability, like sole traders. This
makes partnerships risky.
Answers to Workbook
10
a To avoid disagreements between partners.
b Any three of:
• Amount of capital contributed by each partner
• Profit sharing ratio
• Partners’ salaries
• Limits to partners’ drawings
• Rate of interest on capital
• Rate of interest on drawings
• Rate of interest on partners’ loans
11 To show how the profit for the year is to be distributed in accordance with the requirements
of the partnership agreement
12
Capital/Current
It shows whether a partner had withdrawn more than he has earned. current
It records the initial capital contribution of a partner. capital
It records drawings. current
It has a balance which usually changes every year. current
It records interest on capital. current

Accounting Workbook
17 Limited companies
1 A
2 A
3 A
4 A
5 B
6
a Dividend –a portion of a company’s earnings distributed to its shareholders.
b Debentures –non-current liabilities (long-term loans) that carry a fixed rate of
interest which must be paid regardless of whether the company has made a profit or
loss.
c Total equity – the sum of the ordinary share capital and the reserves.
d Called-up capital – the amount of share capital that the company has asked the
shareholders to pay.
e Issued capital –the amount of share capital that the company has sold
7
a Any two of the following answers:
• Ordinary shareholders are usually entitled to vote at annual general meetings
on the basis of one vote for each share.
• Ordinary shareholders are only paid dividends after the dividends of the
preference shareholders have been paid.
• When a company is closing down, assets remaining after all the creditors,
debenture holders and preference shareholders are paid, belong to the ordinary
shareholders. Therefore, the ordinary shareholders may receive more, or less,
than their original investment in the company.
b Any two of the following answers:
• Preference shareholders receive a dividend at a fixed rate which is expressed
as a percentage of the nominal value of the share.
• Preference share dividends are paid before the ordinary shareholders get paid
their dividend.
• In the event of a company being wound up, preference shareholders are
entitled to have their capital repaid before ordinary shareholders receive their
capital.
• Preference shareholders are not entitled to vote at annual general meetings.
Answers to Workbook
8
Josh Limited
Statement of financial position as at 31 May 2019 (extract)
$
Equity and liabilities:
Equity:
200 000 ordinary shares of $0.50 each 100 000
100 000 preference shares of $1 each 100 000
Retained earnings (18 000 +7 000) 25 000
225 000
9
Gilchrest Limited
Statement of changes in equity for the year ended 31 December 2019
Share General Retained Total
capital reserve earnings
$ $ $ $
Balance at 1 Jan 2019 50 000 15 000 5 000 70 000
Share issue 50 000 50 000
Profit for the year 60 000 60 000
Dividend paid (final) (2 000) (2 000)
Dividend paid (interim) (5 000) (5 000)
Transfer to general reserve 10 000 (10 000) -
Balance at 31 Dec 2019 100 000 25 000 48 000 173 000
10
• Enrique would have to comply with a number of legal requirements.
• Formation could be expensive.
• He could no longer be the sole owner.
• Financial statements would have to published.
• It would be easier to take out loans.
• It would be easier to raise finance by issuing shares.
• Enrique would benefit from limited liability.
Decision to be backed by appropriate reasons as outlined above.
11
a Limited liability means that the liability of a shareholder for the debts of a business
is limited to the amount which he/she has invested in the business.
b Limited liability is a disadvantage to Vikram. If the company does not have funds
available to pay him the private assets of the shareholders cannot be used to pay
business debts, which limits the total amount available to pay debts. Limited
liability reduces Vikram’s chances of receiving his money.

Accounting Workbook
18 Clubs and societies
1 D
2 C
3 C
4
a A subscription is a fee paid regularly by the members of a non-profit making
organisation in order to belong to it and have the right to use the facilities of the
club.
b An opening debit balance would indicate subscriptions owing by members brought
forward from the previous year, whereas an opening credit balance would indicate
subscriptions paid in advance by members for the current financial year.
c
The Torbay Activity Club
Subscriptions account
2018
Nov 1 Balance b/d 2 000
2019 2019
Oct 31 Income and expenditure 42 000 Oct 31 Cash/bank 37 500
_____ 31 Balance c/d 2 500
42 000 42 000
Nov 1 Balance b/d 2 500
5
Sole trader Club or society
Loss for the year Deficit (excess of expenditure over income)
Income statement Income and expenditure account
Owner’s equity Accumulated fund
Profit for the year Surplus of income over expenditure
Cash book Receipts and payments account
6 Income and expenditure Receipts and payments

account account
Profit from competition ✓
Profit from sale of furniture ✓
Purchase of furniture by bank ✓
transfer
Proceeds from sale of furniture ✓
Answers to Workbook
Subscriptions owing written off ✓

Depreciation of furniture ✓
7 a
Plucky Recreation Club
Trading account for the year ended 31 August 2019
$ $
Revenue 8 500
Inventory – 1 September 2018 410
Purchases 3 530
3 940
Inventory – 31 August 2019 1 940
Cost of sales 2 000
Gross profit 6 500
Purchases = 3 500 + 180 – 150 = $3 530
b
Income and expenditure account for the year ended 31 August 2019
$ $
Income:
Profit from trading account 6 500
Profit from fund raiser 500
Subscriptions (2 400 + 140) 2 540
Rent 350
Receipts from spectators 2 000
11 890
Expenditure:
Fees 40
Sundry expenses 2 300
Insurance (320 + 50 – 30) 340
Depreciation 500
Traveling expenses (400 – 20) 380 3 560
Surplus of income over expenditure 8 330
c
$
Accumulated fund:
Balance at 1 Sept. 2018 15 560
Add: surplus of income over expenditure 8 330
Balance at 31 August 2019 23 890
Answers to Workbook
8 There are no drawings in a club or society because a non-profit making organisation does not
have any owners who have invested in the organisation and are entitled to withdraw money in
the form of drawings.
9 Any four of the following answers:
• Hold a profit-generating one-off activity such as a competition.
• Run a profit-making activity on a regular basis, such as a restaurant or a café.
• Rent out equipment or other facilities such as fields, halls, etc., to increase income.
• Increase income by way of subscriptions by either increasing existing subscriptions or
recruiting more members.
• Hold charity events.
• Ask for donations.

Accounting Workbook
19 Manufacturing accounts
1 A
2 A
3 D
4
a A trader is in the business of buying and selling finished goods. A manufacturer
buys raw materials and converts them into finished goods before selling them on.
b A direct cost is a cost that can be directly attributed to the production of a specific
good, e.g. direct labour. Indirect costs are those that are not directly linked to the
production of a product, e.g. rent.
5 a
Tom Li
Manufacturing account for the year ended 30 June 2018
$ $
Opening inventory of raw materials 12 000
Add: Purchases of raw materials 55 000
67 000
Less: Closing inventory of raw material 10 000
57 000
Add: Carriage inwards 3 700
Cost of raw materials consumed 60 700
Add direct costs:
Direct wages 16 000
PRIME COST 76 700
Add factory overheads
Indirect factory wages 10 000
Factory fuel and power 8 000
Factory rent 15 000
Depreciation of factory machinery 4 000 37 000
113 700
Add: opening work in progress 3 500
117 200
Less: closing work in progress 3 900
Production cost of goods completed 113 300
Answers to Workbook
Tom Li
Trading account for the year ended 30 June 2018
$ $
Revenue 360 000
Less cost of sales:
Opening inventory of finished goods 6 700
Add production cost of goods completed 113 300
120 000
Less closing inventory of finished goods 4 500 115 500
Gross profit 244 500
6 Raw materials
Work in progress
Finished goods

Accounting Workbook
20 Incomplete records
1 C
2 B
3 B
4 D
5 A
6 Any two of the following advantages:
• Every business transaction is recorded and classified as assets, liabilities, expenses,
revenue and capital. Information about these transactions therefore, will always be
available for the business to use.
• Trial balances and financial statements can be easily and quickly prepared.
• Businesses can therefore determine their annual profit or loss or their net worth.
Hence, distribution of profit to business owners, shareholders and partners can be a
quick and easy process.
• Checks can be easily put in place to prevent fraud and monitor expenses, trade
payables and trade receivables.
• Comparisons are possible between similar business and between two different years in
the same business. This helps businesses to detect reasons for possible change and
help with decision making.
• Managers can use recorded data to identify the strengths and weaknesses of their
businesses.
• Accounting records can also help managers plan ahead to meet financial commitments
such as paying creditors (trade payables) on time.
• A good set of accounting records strengthens a business’ negotiating power with
banks and investors at the time of raising additional finance.
• Important information and documents can be quickly traced, in the case of a dispute,
for instance.
7
a
Depreciation of non-current assets for the year ended 31 May 2019 = 10% x 30 000 =
$3 000.
$3 000 + $8 000 = $11 000
Answers to Workbook
b
Kiran
Statement of affairs as at 1 June 2018
Assets: $
Non-current assets at cost 20 000
Less: Accumulated depreciation 8 000
12 000
Current assets 10 000
Total assets 22 000
Capital and liabilities:
Capital 20 500
Non-current liabilities 1 500
Kiran
Statement of affairs as at 31 May 2019
Assets: $
Non-current assets at cost 30 000
Less: Accumulated depreciation 11 000
19 000
Current assets 12 000
Total assets 31 000
Capital and liabilities:
Opening capital 20 500
Add profit 15 500
Less drawings (7 500)
Closing capital 28 500
Non-current liabilities 2 500
c Closing capital = $31 000 – $2 500 = $28 500

Profit = $28 500 + $7 500 – 20 500 = $15 500
8 a Cost of sales = 540 + 7100 – 620 = $7 020

Sales = 7 020 ÷ 0.4 = $17 550
b Gross profit = $19 200 x 0.6 = $11 520
c
Total trade payables account
Details $ Details $
Purchases returns 40 Balance b/d 692
Bank 6 770 Purchases 6 852
Discount received 30
Balance c/d 704 ____
7 544 7 544
Answers to Workbook
d Closing trade receivables = 1620 + 20 000 -130 – 19 910 = $1580

e i) Cost of sales = $492 + $6920 – $60 – $388 = $6964
Expected sales = $6964 ÷ 0.4 = 17 410
Difference between actual sales and expected sales = inventory stolen at selling
price = $17 410 – 17 000 = $410
ii) $410 x 0.4 = $164
9
a
Total trade receivables account
Details $ Details $
Sales 96 400 Irrecoverable debts 200
Cash 8 100
Bank 73 990
______ Balance c/d 14 110
96 400 96 400
b
Zahra
Income statement for the year ended 31 December 2018
$ $
Sales revenue 96 400
Purchases 52 600
Inventory – 31 December 2018 (1 200)
Cost of sales 51 400
Rent 6 000 45 000
Wages 3 220
Irrecoverable debt 200
Depreciation of fixtures and fittings 900
Operating expenses W1 9 910
20 230
W1 $9100 + $770 + $110 – $70 = $9910
Answers to Workbook
Statement of financial position at 31 December 2018

$ $ $
Non-current assets Cost Accumulated Net book
depreciation value
Fixtures and fittings 9 000 900 8 100
Current assets
Inventory 1 200
Other receivables 70
Bank W1 9 410
Cash W2 730 25 520
Total assets 33 620
Capital and liabilities

Capital at 1 January 2018 6 000
30 770
Drawings (6 600)
Capital at 31 December 2018 24 170
Current liabilities
Trade payables W3 9 340
Other payables 110 9 450
W1 $6 000 + 73 990 – (43 260 + 6 000 + 3 220 + 9 000 + 9 100) = $9 410

W2 8 100 – 6 600 – 770 = $730
W3 52 600 – 43 260 = $9 340

Accounting Workbook
21 Calculation and understanding of
accounting ratios
1 D
2 A
3 B
4 B
5 D
6
a Two of the following drawbacks:
• The suppliers may stop selling goods to the business on credit.
• The relationship with the suppliers will be damaged.
• The business will lose cash discounts for early payment
b Two of the following:
• By sending reminders such as a statement of account.
• By offering cash discounts for early payment.
• Charging interest on overdue amounts
• Stop supplying customers with outstanding debts
c Two of the following:
• Money, that could be used elsewhere, is tied up in inventory.
• Inventory could become unfashionable, damaged or stolen
• It could mean that sales are slowing down due to a fall in demand
d One of the following:
• So that it can take steps to avoid a liquidity problem, if there is one.
• To know that it can pay its immediate liabilities with its liquid assets
e Two of the following:
• By selling off non-current assets that are not being used.
• By taking a long-term loan.
• Introduction of more capital by the owner
• Reduction in drawings
7
a Capital employed: the total funds being used (employed) by the business on a given day.
Therefore, it is the sum of the capital invested in the business and the non-current
liabilities. It could also be calculated by adding non-current assets to working capital.
b Working capital is the difference between current assets and current liabilities. It is the
capital used in the day-to-day running of the business.
Answers to Workbook
c Return on capital employed: This ratio measures a business’ efficiency with which money
invested in it is used. It is used to gauge the value gained by the business from its use of the
assets and liabilities it has.
d Rate of inventory turnover: This ratio measures the number of times a business sells its
inventory and replaces it in a year. The ratio is measured in times. If a business has a high
rate of inventory turnover, it follows that it is selling a lot of products.
8 Any two of the following disadvantages:
• The business cannot take advantage of cash discounts for prompt payment.
• The business cannot take advantage of any new opportunities that may require
immediate liquidity.
• The business not be able to pay off its liabilities on time and thus lose its standing and
relationships with its trade payables.
• The business could end up in a liquidity crisis which may result in insolvency.
9
Profit before interest
Return on capital employed = x 100
(Owner ′ s equity + Non current liabilities)
($3 450 + $600
𝑥 100 = 11.98%
($23 800 + $10 000)
10
a
Trade receivables
Trade receivables turnover = x 365 (in days)
Credit sales
$3 600
= x 365 = 37 days
$36 000
b
Trade payables
Trade payables turnover = = 365 (in days)
Credit purchases
$5 900
= x 365 = 36 days
$60 000
c
Cost of sales
Rate of inventory turnover =
(Opening inventory + Closing inventory) ÷ 2
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠
13 =
($6 000 + $4 000) ÷ 2
Cost of sales = $65 000

Accounting Workbook
22 Interpretation of accounting ratios
1 B
2 B
3 D
4 Ratios can be used in the following ways:
• Ratios of a business for the current year can be compared with those of a previous year.
• Ratios of a business can be compared with those of another similar business in the same
industry.
• Ratios of a business for the current year can be compared with ratios derived from
budgets and forecasts to decide whether the targets in them were achieved.
5
a
Ratio Year ended 31 December
2018 2019
Gross margin 25% 32%
Profit margin 11% 12.40%
Current ratio 2.5:1 1.51:1
Liquid (acid test) ratio 0.9:1 1.03:1
b
i) Gross margin for 2019 at 32% is better than that for 2018 at 25%.
ii) Profit margin for 2019 at 12.40% is better than that for 2018 at 11%.
iii) The current ratio for 2019 at 1.51:1 is better than that for 2018 at 2.5:1 as the ideal
is between 1.5:1 and 2:1.
iv) The liquid (acid test) ratio for 2019 is better than that for 2018 as it has moved
closer to the ideal of 1:1.
c Kareena’s profitability has improved in 2019. She made $32 gross profit in 2019 compared
to $25 in 2018, for every $100 of sales. Her profit margin has also improved, though not by
much. She made $12.40 profit for the year 2019 compared to $11 in 2018, for every $100
of sales.
d The reasons are: i) She may have increased her selling price. ii) She may have reduced her
cost of sales.
e Year ended 31 December 2018
Reason: Kareena’s expenses as a percentage of sales were:
2018: 14% (25% – 11%)
2019: 19.6% (32% – 12.40%)
Answers to Workbook
Therefore, for every $100 of sales her expenses for 2018 were $18 compared to $19.6 in
2019.
f
Decrease Increase No effect
Kareena took inventory for her own use ✓
Kareena purchased some furniture on credit ✓
Kareen receives long-term loan ✓
g Satisfied? Yes.
Reason: Kareena’s current ratio has moved closer to the ideal. This means she has enough
liquidity to pay her current liabilities and some surplus to take care of emergencies and take
advantage of opportunities.
Kareena’s quick ratio has improved as well. In 2018, she was facing a liquidity crisis if all
her creditors asked for immediate payment, as she did not have enough liquidity to pay all
her debts at once.

Accounting Workbook
23 Inter-firm comparison
1 B
2 D
3 C
4 a 18.36 times
b 19.20%
c i) Better; ii) Better
d i) Any one of:
Hassan has a good marketing strategy that ensures quicker sales compared to the rest of
the industry.
Hassan only purchases inventory when it is required
Hassan has more efficient inventory control
ii) Any one of:
Hassan has a higher selling price compared to the rest of the industry
Hassan has a lower cost of sales compared to the rest of the industry.
5 Any two of the following answers:
• The business should be the same size.
• The business should have the same accounting policies.
• The business should have the same financial years.
• The business should have the same pricing strategies.
• The business should have the same operating policies (e.g. rent or purchase of
property, methods of production, methods of financing)

Accounting Workbook
24 Interested parties
1 B
2 D
3
a The owner would be interested to see what the profitability of the business was. A
prospective investor would also be interested in the profitability of the business.
b They would use the following ratios: profit margin and ROCE.
4
a Tax authorities: so that they can check whether taxes have been accurately calculated and
paid.
b Employees: (either of the following)
to ascertain whether they can ask for salary raises or bonuses if the business has been very
profitable.
to work out their job security and opportunities for future job promotions.
c Trade payables (creditors) would primarily be interested in the business’ liquidity position
and its ability to pay debts in the short term.
d Club members will want to know whether there are enough funds for facilities to be
maintained in a good state of repair and whether they can be expanded in the future
e The general public (any one of the following): students, researchers, job seekers and
financial analysts will make use of a business’ financial statements to help them with data
for their particular need.

Accounting Workbook
25 Limitations of accounting statements
1 B
2 B
3 D
4 Limitations due to:
i) Historic cost – is based on the original cost paid for an asset and therefore it does
not reflect the true market value of the asset. Therefore, the use of historic cost is a
limitation as it does not account for changes in the price level of the asset over the
period of its economic life.
ii) Definitions of accounting principles and concepts used worldwide can differ from
country to country. Therefore, if there were no global standard to follow,
difficulties would arise when businesses try to make comparisons with other
businesses in different countries. Due to globalisation, some businesses have now
established branches in many different countries and comparisons are essential to
discover the financial health and performance of the businesses.
iii) Non-financial aspects: financial statements normally do not include resources that
cannot be valued in money terms (e.g. customer loyalty, efficiency of staff).
Therefore the net worth of a business, measured by the net assets that it owns, is
underestimated.
5
Information ✓
The business has suppliers that deliver quality goods on time
Improved public roads to the business premises
The business owns premises in the centre of the city
Increase in efficiency following staff training
The business owns a motor vehicle ✓
6 The use of accounting frameworks such as IAS (International Accounting Standards) have
enabled globalised businesses to use one reporting language throughout. Definitions of
concepts and principles are now standardised so that financial statements can be transparent
and consistent from one business organisation to the next.

Accounting Workbook
Chapter 26 Accounting principles
1 A
2 A
3 B
4 C
5 B
6 D
7 The historic cost of an asset is reliable as it is a known fact and can be verified.
8 Materiality
9 Money measurement
10 Historic cost
11
a Matching: the matching principle requires a business to record in their financial
statements, revenues and any related expenses in the same accounting period.
b Prudence: the prudence principle ensures that liabilities and expenses are not
understated and assets and income are not overstated in the financial statements of
a business.
c Realisation: the realisation principle states that revenue can only be recognised
when it is earned.

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Cambridge IGCSETM and O Level Accounting

Answers to Cambridge IGCSETM and O Level

Non-financial data cannot be measured accurately in terms of money. It is not

Answers to Cambridge IGCSETM and O Level

g The business took a loan in cash increase (cash) increase (loan)

Answers to Cambridge IGCSETM and O Level

be sold, exhausted or consumed through the normal workings of a business with no

Motor vehicles account

Tip Top Motors account

Answers to Cambridge IGCSETM and O Level

Answers to Cambridge IGCSETM and O Level

7 Any of the following answers:

Sales returns account

b Cash discount or discount allowed

ii. Discounts received account

d Postage account will be debited with the column total of $10

Date Details Debit Credit

ii) Provide for depreciation of equipment $400

Date Details Debit Credit

iii) Closing inventory was $20 000

Date Details Debit Credit

iv) Provide for doubtful debts $200

Date Details Debit Credit

v) Opening inventory on 1 January 2019 was valued at $10 000

Answers to Cambridge IGCSETM and O Level

Answers to Cambridge IGCSETM and O Level

Error Effect on profit for the year

9 a Error of original entry

10 Two of the following reasons:

Answers to Cambridge IGCSETM and O Level

Answers to Cambridge IGCSETM and O Level

c Any two of the following:

9 a Customer has overpaid

Purchases ledger control account

Answers to Cambridge IGCSETM and O Level

Answers to Cambridge IGCSETM and O Level

Provision for depreciation – Machinery account

* Accumulated depreciation for machine sold = 10% x 4 000 x 2.5 (years)

Disposal of machinery account

11 Any two of the following

Answers to Cambridge IGCSETM and O Level

7 a Current assets – other receivable

Answers to Cambridge IGCSETM and O Level

c Any of the following answers:

Irrecoverable debts recovered account

Answers to Cambridge IGCSETM and O Level

c The prudence principle

Answers to Cambridge IGCSETM and O Level

Capital and liabilities

Answers to Cambridge IGCSETM and O Level

The balance on Rahila’s current account is $42 200 (cr)

d Students may use either of the following methods:

8 Any five of the following reasons:

Answers to Cambridge IGCSETM and O Level

Answers to Cambridge IGCSETM and O Level

6 Income and expenditure Receipts and payments

Subscriptions owing written off ✓

Purchases = 3 500 + 180 – 150 = $3 530

Answers to Cambridge IGCSETM and O Level

Answers to Cambridge IGCSETM and O Level