Construct A Trading Account

To construct the Trading Account, transfer the items marked T to the same side of the Trading Account as they appear in the Trial Balance. Consider which of the required adjustments have to be made in this account. Wages accrued but unpaid of £1570 must be added to the wages figure and also treated as a provision on the liabilities side of the balance sheet. It is also clear that depreciation of plant and machinery is a direct trading (or manufacturing) cost, so 10% of the value must appear as an expenditure in the Trading Account, and the amount deducted from the asset value of machinery when we come to prepare the balance sheet. Tot up the two sides of the Trading Account and you find you have to add £53,400 to the debit side to make the account balance. Bring this gross profit down to the credit side of the Profit and Loss Account.

To construct the Profit and Loss Account, deal with items marked P in a similar way, writing off depreciation at the prescribed rates from furniture and premises (remembering to adjust the asset values for the Balance Sheet). A further debit entry of £760 must be created for 'Provision for bad debts', and that amount added to the existing provision as a liability in the Balance Sheet. The balance remaining in the Profit and Loss Account is transferred to Capital Account (or Drawings a/c).

Financial Accounts - Exercise

Prepare a Trading Account (no separate Manufacturing Account) and Profit and Loss Account for the year ended 31 December 1979. Before closing the account make necessary adjustments for the following:

1. Depreciation is to be written off assets as follows:

Premises 5% per annum

Plant and machinery 10% per annum

Office furniture 10% per annum.

2. The 'provision for bad debts' is to be increased to £14,000.

3. Value of closing stock is £114,290.

4. Wages of £1570 have been earned and are accrued due but unpaid as at 31st December.Financial Accounts - Exercise

Refunds, Personal And Business Finance 2017

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