Prepare balance sheets from the following information taken from the books of a manufacturing company on 31 December, years 1998 and 1999.
a)If the proprietor withdrew £12,000 during the year, and no extra capital was introduced, what was the profit for 1999?
b)Briefly explain how it was possible for the business to owe more
to the bank at the end of the year than at the beginning, when it made
a profit during the year.
answers to testing your understanding - 3
£000
1999 £000
£000
1998 Fixed Assets
22 Land and Buildings
22
37.2 Machinery tools & MV
42.7
59.2 Current Assets
64.7
19.8 Stocks
26.5
19.3 Debtors
27
53.5
Current Liabilities
(16.7) Creditors
18
(6) Overdraft
8
26
Net Current Assets
27.5
92 .2
Loan
(12)
£63.6
80.2
Represented by:
£63.6 Capital
£80.2
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(b)
Profit would be the same for the year. Capital and Retained Profits would be reduced to £68,200.
(c)
Accounting Profit is not related to a movement in cash. It is not based on the income and expenditure model of recording but on the accruals concept. Therefore, sales recorded relates to the Sales Value of goods and services provided to customers and includes credit sales which may result in actual income being received at a much later date. Likewise, purchases as recorded is related to the cost of goods and services used in the Accounting period whether the business has actually paid cash for them or not. Therefore, profit may be recorded which is independent from the movement of cash.