I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

PART C: THE USE OF DOUBLE-ENTRY AND ACCOUNTING SYSTEMS 

 

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4

   Balancing accounts and preparing financial statements 

The exercise which follows is by far the most important in this Interactive Text so far. It uses all the 

accounting steps, from entering up ledger accounts to preparing the financial statements. It is very 

important that you try to complete the question by yourself: if you do not, you will be missing out a 

vital part of this Interactive Text. 

QUESTION 

Financial statements

 

A business is established with capital of $2,000, and this amount is paid into a business bank account 

by the proprietor. During the first year's trading, the following transactions occurred. 

  

$ 

Purchases of goods for resale, on credit 

4,300 

Payments to trade accounts payable 

3,600 

Sales, all on credit 

5,800 

Payments from trade accounts receivable 

3,200 

Non-current assets purchased for cash 

1,500 

Other expenses, all paid in cash 

900 

The bank has provided an overdraft facility of up to $3,000. 

Required 

Prepare the ledger accounts, a statement of profit or loss for the year and a statement of financial 

position as at the end of the year. 

ANSWER 

The first thing to do is to open ledger accounts so that the transactions can be entered. The relevant 

accounts which we need for this example are: cash at bank; capital; trade accounts payable; purchases; 

non-current assets; sales; trade accounts receivable; and other expenses. 

The next step is to work out the double entry bookkeeping for each transaction. Normally you would 

write them straight into the accounts but, to make this example easier to follow, they are first listed 

below. 

  

Debit 

Credit 

(a)  Establishing business ($2,000) 

Cash at bank 

Capital 

(b)  Purchases ($4,300) 

Purchases 

Trade accounts payable 

(c)  Payments to trade accounts payable  

   ($3,600) 

Trade accounts  

   payable 

Cash at bank 

(d) Sales 

($5,800) 

Trade 

accounts receivable Sales 

(e)  Payments from trade accounts receivable  

   ($3,200) 

Cash at bank 

Trade accounts receivable

(f)  Non-current assets ($1,500) 

Non-current assets 

Cash at bank 

(g)  Other (cash) expenses ($900) 

Other expenses 

Cash at bank 

So far, the ledger accounts will look like this. 

CASH AT BANK 

 

$ 

 

$   

Capital 

2,000 

Trade accounts payable 

3,600 

Trade account receivables 

3,200 Non-current 

assets 

1,500 

  

Other 

expenses 

900 

CAPITAL 

 

$  

$ 

 

 

Cash at bank 

2,000 

BPP Tutor Toolkit Copy

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CHAPTER 6  

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  FROM TRIAL BALANCE TO FINANCIAL STATEMENTS