Test your understanding -1

Task.  Jayne started to trade as an agent for the sale of canal cruisers on 1 January.  During her first month of trading she:

• sold boats for £53,000, comprising £10,000 for cash and the remainder on credit terms.
• introduced £20,000 of her own money into the business.
• An aunt lent her a further £10,000.
• rented premises on 1 January
• and paid £500 as two months rent in advance on that day.

Required:
Calculate the profit Jayne made during January.
Calculate how much money she has left in the business bank account.
Prepare Jayne's balance sheet as at 31 January.

Hint: start by identifying all cash receipts and payments and adjusting the bank balance accordingly.
Do this by identifying cash transactions classifying as either income which increases the bank balance OR expenditure which decreases the bank balance
 
Do not forget that you have to add together cash sales and credit sales to arrive at the sales figure in the Trading account.

 
Answer to Test your understanding - 1
                                         £                        £
 Sales                                                      53,000
 Purchases                   47,000
 Less: Closing Stock  (15,000 )             32,000
 Gross Profit                                           21,000
 
 Less Overheads:
 Rent                               250
 Wages                            980
 Electricity                        50
 Insurance                      100
                                                              ( 1,380 )
 Net Profit                                             £19,620
                                                                =====
(b) JAYNE'S BANK ACCOUNT
 
 Cash Sales of Boats                              10,000
 Cash Paid in at start                              20,000
 Money received from aunt                   10,000
                                                               40,000

 Rent paid out                  500
 Wages                              980
 Insurance                       1,200
 Paid to suppliers            7,000               9,680
                                                             £30,320

If you are having difficulty with this, look back carefully at the definitions to check phrasing.  This may give you a clue as to what should be included in the bank account and what does not belong in there.

(c) Jayne's Balance Sheet:  now that the cash position has been calculated the items  need to be separated into assets, liabilities and capital.
 
 Stock              15,000
 Debtors          43,000
 Prepayments    1,100
                             250
 Bank               30,320   89,670
 Creditors       40,000
 Accrual                 50   (40,050)  49,620
 Loan                                           (10,000)
                                                      39,620
                                                      ======
 Capital                                         20,000
 Profit                                            19,620
                                                      39,620
 
remember what all these lines mean?

• the one under the bank figure of  30,320 means add up the collumn of figures above the line. Well strictly speaking it means to compute the above figures. The difference is that figures in brackets must be deducted and not added to the total.  This total  of 89,670 is moved to the right to make the totals stand out.
• the line under the accrual figure of 50 means add up the above collumn until you reach another line which means stop and go no further . In other words it means add up 40,000 and 50.
• the one below the figure of 40,050 which is the total of current liabilities means deduct total current liabilities from the total current asset figure (89,670)
• and so on. The double underline is another way to say there is no more adding up to do in this bit.

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