Question 1
Two friends, Joe and Bill, both have carpentry skills and decide to go into business as partners together ?tting kitchen cabinets. Joe's uncle has agreed to provide £20,000 of capital, in the form of a loan. They have come to you as a chartered accountant working in professional practice for advice.
(a) Explain the different types of partnership that Joe and Bill might form. Make a recommendation as to which type of partnership might be most appropriate for Joe and Bill to form.
(b) Drawing on your knowledge of stakeholder theory, what information would Joe's uncle need about the business affairs of Joe and Bill's partnership?
(c) Why would Joe and Bill come to you as an accountant for advice?
(d) After starting in business, Joe and Bill decide to engage a young of?ce manager/book-keeper, Luz, who has just started a book keeping course at the local college. Luz advises them that she will be applying the following accounting terms:
l the accruals concept
l substance over form
l the historical cost concept
However Luz's explanations are unclear. Joe has come to you for further help. Explain each concept in turn, and its importance in accounting.
(e) Joe has also asked you to explain the terms 'assets' and 'liabilities'. Explain each term, giving the characteristics and type of each. Give relevant examples to support your explanations.
(f) After the business has been running for a few months, Joe has decided to take a greater interest in the accounting system. He is confused as to why the books of account include a receivables ledger control account and a receivables ledger. Provide Joe with an explanation.
Question 2
Jill owns and manages a small business which sells jewellery and accessories, for example scarves. Jill designs and produces goods for sale to local art galleries and shops. Jill is a sole trader who manages all aspects of the business. Jill balances the business accounts at the end of each month. Due to the seasonal nature of her business, she has an authorised bank overdraft facility. This facility allows her to borrow up to £500 at any time.
On 1 June the balances on her accounts were as follows:
Account name £ Debit/credit
Capital 1,200 Credit
Equipment 1,000 Debit
Bank 472 Credit
Receivables control 1,452 Debit
Payables control 780 Credit
On 1 June, the debit balances on the receivables ledger were:
Receivables ledger accounts £
Bill's Gallery 258
Pippa's Designs 60
Shadi Ltd 120
Peter Smith 1,014
On 1 June, the credit balances on the payables ledger were:
Payables ledger accounts £
Bates Supplies 36
West Ltd 144
Meena Price 600
During June, the following transactions took place:
Date Amount £ Transaction
6 60 Receives payment from Pippa's Designs.
7 138 Receives a credit note from Meena Price for torn scarf fabric.
8 36 Pays in full the amount outstanding on the account of Bates Supplies.
12 1,014 Receives payment from Peter Smith.
13 504 Delivers jewellery to a local shop and is paid in cash.
14 240 Receives payment from Bill's Gallery.
18 102 Pays cash on delivery for jewellery beads and gems, taking up 15% discount for prompt payment.
20 120 Receives in full the amount outstanding on the account of Shadi Ltd.
21 55 Buys fabric paint from Bates Supplies, agreeing 30 days credit terms.
22 78 Invoices Top Hats, a new customer, for jewellery.
25 40 Collects and pays cash for advertising brochures and is offered a £4 discount for immediate cash payment, which Jill takes up.
26 648 Invoices Peter Smith for fabric accessories delivered on 25 June.
28 462 Pays in full the amount outstanding on the account of Meena Price.
29 18 Issues a credit note to Peter Smith to correct an error on the invoice issued on 26 June to Peter Smith.