Ali started a new business on 1 January 2025, bringing in the following assets and liabilities. Item Amount ($) Motor vehicle 15 000 Office furniture 4 500 ...
Question 1 Report
Ali started a new business on 1 January 2025, bringing in the following assets and liabilities.
| Item | Amount ($) |
|---|---|
| Motor vehicle | 15 000 |
| Office furniture | 4 500 |
| Inventory | 2 800 |
| Bank | 3 200 |
| Trade receivable: K Tan | 680 |
| Trade receivable: M Wong | 520 |
| Trade payable: J Ahmed | 940 |
| Loan from bank | 5 000 |
(a) Calculate Ali's opening capital. [2]
(b) Prepare the opening journal entry to record Ali's assets and liabilities in the books. [10]
At 31 December 2025 the following adjustments need to be made in the general journal.
| No | Adjustment |
|---|---|
| i | Closing inventory valued at $3 100 |
| ii | Depreciation on motor vehicle at 20% per annum (straight-line method) |
| iii | A debt of $280 owed by P Singh is irrecoverable |
| iv | Rent of $500 has been prepaid |
(c) Prepare the journal entries for adjustments (i) to (iv). [8]
Answer Details
(a) Opening capital calculation
Opening capital is found using the accounting equation: Capital = Assets - Liabilities.
| Assets | |
| Motor vehicle | 15 000 |
| Office furniture | 4 500 |
| Inventory | 2 800 |
| Bank | 3 200 |
| Trade receivable: K Tan | 680 |
| Trade receivable: M Wong | 520 |
| Total assets | 26 700 |
| Liabilities | |
| Trade payable: J Ahmed | 940 |
| Loan from bank | 5 000 |
| Total liabilities | 5 940 |
| Opening capital | $20 760 [2] |
(b) Opening journal entry
The opening journal entry records all assets, liabilities, and the calculated capital when a business begins or when records are first established.
| Account | Dr ($) | Cr ($) |
|---|---|---|
| Motor vehicle | 15 000 [1] | |
| Office furniture | 4 500 [1] | |
| Inventory | 2 800 [1] | |
| Bank | 3 200 [1] | |
| K Tan | 680 [1] | |
| M Wong | 520 [1] | |
| J Ahmed | 940 [1] | |
| Bank loan | 5 000 [1] | |
| Capital | 20 760 [1] | |
| Totals | 26 700 | 26 700 |
Narration: Being assets and liabilities introduced by Ali on commencement of business. [1]
Assets are debited (they have debit balances), while liabilities and capital are credited (they have credit balances). The total debits must equal total credits.
(c) Year-end journal entries
(i) Closing inventory
| Account | Dr ($) | Cr ($) |
|---|---|---|
| Closing inventory (Statement of Financial Position) | 3 100 | |
| Income statement / Trading account | 3 100 |
Closing inventory is recognised as a current asset on the statement of financial position (debit) and credited to the income statement to reduce the cost of goods sold. [2]
(ii) Depreciation on motor vehicle
Depreciation = $15 000 x 20% = $3 000
| Account | Dr ($) | Cr ($) |
|---|---|---|
| Depreciation expense | 3 000 | |
| Provision for depreciation of motor vehicle | 3 000 |
The expense is charged to the income statement (debit), and the provision accumulates against the asset on the statement of financial position (credit). [2]
(iii) Irrecoverable debt
| Account | Dr ($) | Cr ($) |
|---|---|---|
| Irrecoverable debts | 280 | |
| P Singh | 280 |
P Singh's account is removed from the books (credited) and the loss is recognised as an expense (debited to irrecoverable debts). [2]
(iv) Prepaid rent
| Account | Dr ($) | Cr ($) |
|---|---|---|
| Prepaid rent (current asset) | 500 | |
| Rent expense | 500 |
The prepaid amount is removed from the rent expense for this year (credit reduces the expense) and carried forward as a current asset (debit) in the statement of financial position, to be charged as an expense in the next accounting period. [2]
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