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Incomplete Records On 01/01/2017, T - Leaving Cert Accounting - Question 3 - 2018
Question 3
Incomplete Records On 01/01/2017, T. Walsh purchased a business for €425,000 consisting of the following tangible assets and liabilities: premises €300,000, equipme... show full transcript
Worked Solution & Example Answer:Incomplete Records On 01/01/2017, T - Leaving Cert Accounting - Question 3 - 2018
Step 1
Prepare the trading, profit and loss account for the year ended 31/12/2017
Answer
Trading and Profit & Loss Account for the Year Ended 31/12/2017
Sales (N1)
Credit Sales:
- Debtors: €52,000
- Stock Goods: €28,300
Cash Sales:
- Cash Lodgements: €141,000
Total Sales:
Less Cost of Sales (N2)
- Opening Stock: €22,600
- Purchases: €76,000
- Less Closing Stock: €34,200
Total Cost of Sales:
Gross Profit:
Less Expenses:
- General Expenses: €43,200
- Light and Heat: €11,500
- Insurance: €19,600
- Interest: €2,700
- Rent: €24,000
- Standing Order: €2,000
- Depreciation on Equipment (14% of €42,000): €5,880
Total Expenses:
Net Profit:
Step 2
Explain why Walsh should keep records of the amounts taken as drawings
Answer
Walsh should maintain accurate records of the amounts taken as drawings because:
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Profit Accuracy: If drawings are not recorded correctly, the profit figure may be understated, leading to inaccurate financial statements.
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Financial Management: It allows for monitoring personal withdrawals from the business which is necessary for financial management and tax reporting.
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Compliance with Accounting Principles: Keeping track of drawings helps adhere to the fundamental accounting principle that distinguishes between personal and business expenses.
Step 3
Explain the importance of double entry bookkeeping for Walsh
Answer
Double entry bookkeeping is essential for Walsh because:
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Accuracy: It ensures that all transactions are accurately recorded, reducing the chances of errors in the financial records.
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Comprehensive Financial Reporting: It provides a complete picture of Walsh's financial situation, enhancing understanding of profit and loss, assets, and liabilities.
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Audit Trail: It creates a systematic audit trail which is crucial for internal and external audits, ensuring transparency.
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Preparation of Financial Statements: Double entry bookkeeping is fundamental in preparing reliable financial statements which are useful for decision-making.