Accounting 4AC1 | Paper 1 Mock 01 | Written Paper 1

Under the accruals concept, income is credited to the period in which it is earned, regardless of whether the cash has been received. The caterer occupied the corner of the site for the whole year, so the festival earned the whole year's rent.

The rent income shown is $600, made up of the $450 actually received for the first three quarters plus the $150 earned for the final quarter. The unpaid $150 is carried down as a debit balance on the rent receivable account and reported as an other receivable in current assets, so nothing is lost from the records: the income appears in the income statement and the amount still owed appears in the statement of financial position.

$450 is the cash received, which is the answer you get by abandoning accruals and reverting to a receipts and payments basis. $150 is only the outstanding quarter. $750 double counts by adding the arrears to a full year that already includes them.

Examination point: accruals applies to income in exactly the same way as to expenses. Income earned but not received is added to the income figure and shown as a receivable; income received in advance is deducted and shown as a payable.

The school is the buyer. It has sent goods back to a supplier, so this is a return outwards, and the credit note received is the evidence for it. In a full set of day books it is entered first in the purchases returns journal, whose monthly total is later credited to purchases returns and debited to the purchases ledger control account.

The sales returns journal is for credit notes the business issues when its own customers return goods, which is the opposite direction. The purchases journal records invoices received, not reductions of them. The general journal is reserved for items that fit no other day book, such as corrections and the opening entries, and a routine return is not one of those.

A partnership that has never been registered as a company has no separate legal identity from its owners. The partners and the firm are one and the same in law, which is what unlimited liability means.

The suppliers are owed $58,000 and the business assets come to only $21,000, leaving $37,000 unsatisfied. Because liability is unlimited, the partners must meet that shortfall from their private resources, and their savings of $90,000 are more than enough to cover the $37,000 still outstanding. The suppliers may therefore recover the full $58,000.

Limiting the claim to the $21,000 of business assets would apply to a limited company, where the shareholders' liability is capped at the amount unpaid on their shares and those owed money by the company cannot reach the shareholders' private property. That protection comes from registration, which these partners never carried out. Halving the debt to $29,000 misreads the position: partners are jointly liable for the whole of the firm's debts, so a supplier may pursue either partner for the full amount and it is then for the partners to settle between themselves. Capping liability at the capital introduced is again a company idea and has no application to a partnership.

Exam reminder: unlimited liability is the standard drawback of the sole trader and the ordinary partnership, and it is the main reason a growing business considers incorporating.

Repairs keep a tram in its present condition, so the $560 is revenue expenditure and belongs in the repairs account. It was debited instead to the tram fleet account, a non-current asset, which is an error of principle. The credit to bank was right, so only the debit needs moving.

The correcting journal entry is debit repairs $560 and credit tram fleet $560. The credit removes the amount from the asset account where it does not belong, and the debit puts it into the expense account where it does.

Debiting the tram fleet and crediting repairs would push the error further in the wrong direction. Debiting repairs and crediting bank would record the payment a second time and make the bank balance wrong. Doubling to $1,120 is only needed for a complete reversal, and here nothing was placed on the wrong side, merely in the wrong account.

The document described is a periodic summary sent by a supplier to a credit customer, listing every invoice, credit note and payment recorded on the account during the month and showing the balance still outstanding. That is a statement of account.

Its purpose is to let Kestrel Mobile check the supplier's version of the account against its own purchases ledger record of Zenith Distribution, so that missing invoices, unrecorded credit notes or payments in transit can be identified before payment is made. No entries are made in the books from a statement of account; it is a checking document, and the ledger entries come from the invoices and credit notes themselves.

A remittance advice travels the other way, from Kestrel to Zenith, telling the supplier which invoices a payment covers. A pro forma invoice is issued before a sale is agreed, typically where goods are supplied on approval or where payment is required in advance, and it never creates a ledger entry. A goods received note is prepared internally when a delivery arrives, recording what was actually received so that it can be checked against the invoice.

The clue in the wording is the combination of a full month of activity and a closing balance; only a statement of account carries both.

This tests the double entry for a credit purchase, where goods or services are received now and paid for later. Two things happen at once: an expense is incurred, and a liability to the supplier is created.

The diesel is an expense of buying goods for the business, so the purchases account is debited with $2,400. Metroline does not pay yet, so it now owes Farid Fuels, and a liability is recorded by crediting the supplier's personal account. The correct pair is therefore debit purchases, credit Farid Fuels. The credit sits in the purchases ledger, and it will be cleared later by a debit when the invoice is settled.

Reversing the entries, debiting Farid Fuels and crediting purchases, would record the opposite: that Farid Fuels owes Metroline and that the company has sold something. Any entry involving bank is wrong at this date, because no money has moved on 12 June; bank only enters the records when the invoice is actually paid.

Examination reminder: the word "credit" in "credit purchase" tells you the timing of payment, not which side the purchase goes on. The purchase itself is still a debit.

The account was debited once with the $85 invoice and credited twice with $85, so the customer has paid $170 for an $85 order. The account is left with a credit balance of $85, and a credit balance in the sales ledger means the business owes the customer rather than the other way round. The $85 therefore represents an amount the shop must repay to that customer.

It cannot be an unpaid debt, because the invoice was cleared by the first payment. It is not a discount, since the entries are two full payments rather than a deduction from one. Nor is it an irrecoverable debt, which arises only where a customer with a debit balance cannot pay. In the statement of financial position this $85 is shown among current liabilities and is not netted off against the debit balances of the other customers.

The sale was debited to a personal account, and the account chosen was another credit customer's, so the entry is in the right class of account but the wrong account within it. That is an error of commission.

The sales account was credited correctly and the total debits still equal the total credits, so the trial balance is unaffected. It is not an error of principle, because that would require the debit to go to a fundamentally different class of account, such as an expense rather than a trade receivable. Nothing was left out, so it is not an error of omission, and the entries are on the correct sides, so there is no reversal. The consequence is that the sales ledger shows the debt against the wrong person, which is why customer statements are checked as well as the control account.

The sales ledger holds the personal accounts of credit customers. Reading a balance correctly means combining two facts: which side it sits on, and what kind of account it belongs to.

The balance of $265 is brought down on the debit side of an account in the sales ledger. A debit balance on a customer's account is an asset of the business, so the correct conclusion is that the customer still owes Rowan Grocers $265. This amount forms part of the trade receivables shown in the statement of financial position.

Saying Rowan owes the customer would require a credit balance, which is the reverse of what is shown. An overpayment would also produce a credit balance, because the customer would have paid more than was invoiced. If the debt had already been written off, the account would have been credited with $265 and would show no balance at all. The fact that nothing has been supplied since September does not change what the balance means; it only warns the owner that the debt is now old and may need to be reviewed for recoverability.

The general rule is worth memorising: assets and expenses carry debit balances, liabilities, capital and income carry credit balances.

The test for capital expenditure is whether the spending brings a non-current asset into the condition and location needed for its intended use. The shelving and roof rack were fitted before the van carried anything, so they are part of getting the van ready to work, not part of running it. The correct treatment is capital expenditure, added to the cost of the van, and the whole figure is then depreciated over the van's useful life.

Motor running expenses cover fuel, tax, insurance and similar costs of using the van once it is in service. The repairs account is for restoring an asset to its previous condition, which is not what a first fitting does. The van is a non-current asset held for use, not inventory held for resale, so nothing here can be added to inventory.

(a) Bread worth $210 taken home [4]

The bread was bought by the bakery, so its cost first went into purchases, but it was consumed by the owner and her family rather than sold to customers. Under the business entity concept the bakery and its owner are separate accounting units, so the cost must be taken out of the business's trading figures: credit purchases $210 and debit drawings $210. Cost of sales falls by $210, so the reported profit rises by $210, while drawings rise by the same $210 and capital ends up unchanged. The transfer is made at cost, not at selling price, because no sale has taken place.

(b) The $28,000 offered for the bakery's name [4]

The offer is one buyer's opinion of what the name is worth. No transaction has taken place, so there is no objective money amount that could be verified, and money measurement excludes items that cannot be reliably measured in money terms. Recording it would also take a gain into profit before it has been realised, which prudence forbids. Internally generated goodwill of this kind is therefore never shown; goodwill appears in accounts only when a business has actually been bought and a price paid for it.

(c) The $1,900 order for October delivery [4]

An order is a request, not a sale. Under realisation, revenue is recognised when the goods are delivered and ownership passes, and the bread will not be delivered until October, which falls in the next financial year. At 30 September the bakery has done nothing to earn the money, the hotel could still cancel, and no enforceable debt exists, so no sale and no trade receivable arise.

(d) Profit had the order been treated as a sale [3]

The whole $1,900 falls into profit because no matching cost of sales is recorded, so the overstatement is the full $1,900 rather than a margin. That is why realisation matters commercially as well as technically: taking uncompleted orders as sales would let a business report profit on work it may never do.

Total [15].

(a) Purchases journal for April [5]

Only credit purchases of goods for resale are listed here. The two returns are excluded because they belong in their own journal.

$1,450 + $980 + $620 + $1,340 = $4,390. Each individual amount is posted to the credit of the supplier's account in the purchases ledger; only the total goes to the general ledger.

(b) Purchases returns journal for April [4]

$130 + $215 = $345. The total is credited because returns cancel part of the debit already made to purchases, and each individual amount is debited to the supplier concerned, reducing what is owed.

(c) Etosha Cycle Parts account in the purchases ledger [6]

A supplier is a trade payable, so amounts owed are credits: $760 + $1,450 + $620 = $2,830. Everything that reduces the debt is debited: the $700 cheque, the $40 discount received for prompt payment, and the $215 of goods sent back, a total of $955. The balance carried down is $2,830 - $955 = $1,875, brought down on the credit side because the shop still owes it. A frequent error is entering the cheque at $740 by adding the discount to it; the bank column must show only the money that actually left, with the discount as a separate credit in the cash book and a separate debit here.

The column follows from what kind of account the balance is. Assets, expenses and drawings carry debit balances; liabilities, capital, income and the accounts that are deducted from assets carry credit balances.

Why each balance falls in that column:

1. Inventory of glassware is goods held for resale, a current asset, so it is a debit balance.
2. The allowance for irrecoverable debts is deducted from trade receivables, so it accumulates as a credit rather than being an asset in its own right.
3. Discount received is income earned by paying suppliers promptly, so it is a credit balance.
4. Carriage outwards is the cost of delivering goods to customers, an expense, so it is a debit balance.
5. A bank overdraft is money owed to the bank, a current liability, so it is a credit balance.

Three of these are commonly placed in the wrong column. The allowance for irrecoverable debts looks as though it belongs with trade receivables on the debit side, but it reduces that asset, so its own balance is a credit. Discount received is often confused with discount allowed: received is income and is credited, allowed is an expense and is debited. An overdraft is the bank account standing in credit, the opposite of the debit balance a bank account normally shows, because the business now owes the bank rather than the other way round.

Total .

Three separate accounts are in play and keeping them apart is what this question tests. Irrecoverable debts is an expense for balances known to be lost. Allowance for irrecoverable debts is a running estimate held against receivables in general. Irrecoverable debts recovered is income arising when a debt already written off is paid after all.

Why each line takes that form:

1. Writing off removes the asset, so trade receivables is credited, and recognises the loss, so the irrecoverable debts expense is debited. No cash entry is made because no money has moved.
2. Creating the allowance charges the estimated loss to the income statement and builds up a credit balance which is later deducted from trade receivables. The receivables account itself is untouched, because no individual school has been identified.
3. Increasing the allowance repeats that entry for the increase only. Charging the whole new allowance would count the earlier part twice.
4. Reducing the allowance releases part of a charge made in an earlier year, so the allowance account is debited and the income statement credited, which raises profit.
5. The recovery brings money in, so bank is debited. The credit cannot go to trade receivables, because that balance was cleared when the fee was written off; it goes to irrecoverable debts recovered as income of the current year.

For the allowance, only the movement is posted to the income statement, and the direction of that movement decides which side of the allowance account is used.

Total .

Rent receivable is income, so its account works as the mirror image of an expense account. Amounts owed to the business at the year end are assets and amounts collected for a period not yet supplied are liabilities. The credit to the income statement is the rent earned in the twelve months, not the cash banked.

(a) Rent receivable account for the year ended 30 September 2024

Working for the income statement figure: credits total $415 + $9,860 + $340 = $10,615; the known debits are $270 + $290 = $560; the balancing debit is $10,615 - $560 = $10,055.

(b) The closing balances [4]

• Rent in arrears $340 is a debit balance, an other receivable, shown under current assets. [2]
• Rent received in advance $290 is a credit balance, an other payable, shown under current liabilities. [2]

(c) Why the rent credited to the income statement differs from the rent banked [4]

1. The income statement is credited with the rent earned for the twelve months of plot use, whoever has actually handed the money over during that time. [1]
2. Rent still owed at 30 September 2024 is added even though no cash arrived, because the plots were used. [1]
3. Rent paid early for the coming season is taken out again, because the association has not yet supplied that use. [1]
4. The opening balances are released for the same reason, so no season is counted twice or missed. The net effect is that the credit of $10,055 exceeds the $9,860 banked by $195. [1]

Exam reminder: on an income account the arrears sit on the debit side (a receivable) and the amounts in advance on the credit side (a payable), which is the opposite of an expense account.

Three accounts must be kept apart. Irrecoverable debts is an expense for balances known to be lost. Allowance for irrecoverable debts is a running estimate against balances still outstanding. Irrecoverable debts recovered is income arising when a debt already written off is paid after all.

Each mark needs both halves of the entry to be right. Why each line takes that form:

1. Writing off $340 removes the asset, so the trader's personal account is credited, and recognises the loss, so the irrecoverable debts expense is debited. No cash entry is made because no money has moved.
2. Increasing the allowance by $180 charges only the increase to the income statement. The earlier balance was already charged in a previous year, so recharging it would count the same doubt twice. Trade receivables are untouched, because no individual customer has been identified.
3. The $95 recovery brings money in, so bank is debited. The credit cannot go to the customer's account, because that balance was cleared when the debt was written off; it goes to irrecoverable debts recovered as income of the current year.
4. Reducing the allowance by $60 releases part of an earlier charge, so the allowance account is debited and the income statement credited, which increases profit.
5. Transferring the $625 total closes the expense account at the year end: the income statement is debited and the irrecoverable debts account credited, leaving nothing to carry forward.

For the allowance, only the movement is posted, and the direction of that movement decides which side of the allowance account is used.

Total .

(a) The Blue Anchor Cafe account in the sales ledger of Hillside Provisions [10]

This is a credit customer's personal account, so it is an asset account. Amounts that increase the debt are debited, and anything that reduces it, whether goods returned, money received or discount allowed, is credited.

Working: debits are $340 plus $1,260 plus $520, which is $2,120. Credits before balancing are $180 plus $300 plus $1,000 plus $25, which is $1,505. The balance carried down is $2,120 less $1,505, that is $615, and because the debits are the larger side it is brought down on the debit side on 1 June.

Note the treatment of 29 May. The cafe settled $1,025 of its debt with only $1,000 of money because Hillside allowed a $25 cash discount, so both the bank entry and the discount allowed entry are credited to close that part of the account. Discount allowed is then debited to the discount allowed expense account in the general ledger.

(b) What the balance brought down represents [2]

The $615 debit balance on 1 June is the amount The Blue Anchor Cafe still owes Hillside Provisions for goods already supplied but not yet paid for. It is an asset of Hillside Provisions and forms part of trade receivables in the statement of financial position.

(c) One advantage of keeping a separate sales ledger [3]

Any one developed advantage earns the marks. For example: keeping every credit customer's personal account in one ledger, away from the general ledger, means the amount owed by any individual customer can be found immediately, so overdue debts can be chased and credit limits monitored. A sales ledger control account can then be prepared from the day book totals to check the arithmetic of the whole ledger independently. Other acceptable developments include the division of work between bookkeepers, which speeds up the recording and makes fraud harder to conceal, and the reduction in the size of the general ledger, which makes it easier to locate errors.

(a) Insurance account for the year ended 31 December [8]

An expense account collects what has been paid on the debit side, and at the year end the amount actually used up in the period is transferred to the income statement. Anything paid in advance is not an expense of this year, so it is carried down as a debit balance representing an asset.

Working: the debit side totals $360 plus $1,080 plus $1,140 plus $1,200, which is $3,780. Of that, $410 relates to cover for the year ahead, so the charge to the income statement is $3,780 less $410, that is $3,370. The balance of $410 is brought down on the debit side on 1 January.

(b) Where the closing balance appears [3]

The $410 is a prepayment, shown as a current asset in the statement of financial position, normally grouped with other receivables. It is an asset because Marisol has already paid for insurance cover that the shop has yet to receive, so the insurer owes her a service rather than money.

(c) How the accruals concept settles the charge [4]

The accruals concept requires expenses to be matched to the period whose revenue they help to earn, not to the period in which the money happened to leave the bank. Cash paid during the year came to $1,080 plus $1,140 plus $1,200, which is $3,420, but that is not the charge.

1. The $360 brought down was paid in the previous year yet covers part of this year, so it is added into this year's cost.
2. The $410 was paid this year but covers next year, so it is taken out and carried forward as a prepayment.
3. The charge is therefore $3,420 plus $360 less $410, that is $3,370, which is the cover actually consumed in the year.

Without this adjustment the profit for the year would be understated by $50, the net effect of the two prepayments, and the shop would appear to hold no asset for the cover it has already bought.