Question

1 (a) Explain the following

1. the causes of depreciation of an asset
2. substance over form
3. reasons for preparing bank reconciliation

(b) Trial balance of Paul Company as at 31 December 2019

	DR($)	CR($)
Capital		24,000
Drawings	5,240
Purchases and Sales	44,380	72,600
Returns	570	990
Rent and Rates	3,390
Salaries	6,400
General Expenses	950
Insurance	600
Receivables and Payables	11,500	8,880
Cash	2,360
Furniture and Fixtures	5,000
Motor vehicle	14,000
Motor vehicle expenses	3,370
Inventory at 01 January 2019	8,710

Additional information:

1. Inventory as at 31 December 2019 amounted to $7,900
2. Rates due $410
3. Insurance prepaid $100
4. General Expenses include $300 carriage on purchases

Required;

1. Prepare the Income Statement for Paul Company for the period ending 31 December 2019
2. Prepare the Statement of Financial position as at 31 December 2019

Answer 1

1. (a) (i)Causes of Depreciation are as follows:

A. Wear and Tear due to use or passage of time- Wear and tear means deterioration, and the consequent dimunition in an assets value, arising from its use in business operations for earning revenue. It reduces the assets's technical capacities to serve the purpose for which it has been meant. Another aspect of wear and tear is physical deterioration.

B. Expiration of legal rights- Certain assets lose their value after the agreement governing their use in business comes to an end aftfer the expiry of pre-determined period. Examples are patent, copyrights leases etc.

C. Obsolescene- It means the fact of being Out of date. It implies to an existing asset becoming out of date on account of availability of better type of asset. It arises from technological changes, improvement in production methods, change in market demand.

D. Abnornmal Factors- Decline in useful life of asset may be caused by abnormal factors such as accidents due to fire, earthquake, floods etc.

(ii) Subtance over form- If information is to represent faithfully the transactions and other events that it purports to represent, it is necessary that they are accounted for and presented in accordance with their substance and economic reality and not merely their legal form. The substance of transaction is not always consistent with that which is apparent from their legal from. examples where rights and beneficial interest in an immovable property are transferred but the documentations and legal formalities are pending, the recording of acquisition / disposal would in substance represent the transaction entered into.

(iii) Reason for prepapring bank reconcilition are as follows:
A. To reconcile the bank balance as per cash book with the balance as per passbook.
B. To help in detection of accounting errors in recording tranasaction or in detecting fraud that may be conducted by an employee of the organisation.
C. To help in detection of mistakes conducted by bank.

Particulars	Amount($)
Sales(net of returns)	72030
Less: COGS(Note 1)	44500
Gross profit(A)	27530
Expenses:
Rent and Rates	3390
Salaries	6400
General expense	650
Insurance	600
Motor vehicles expense	3370
Rates	410
Insurance prepaid	100
Total expense(B)	14920
Net Income(A-B)	12610

Notes: 1. Calculation of Cost of goods sold

Opening stock	8710
+Purchases(net of returns)	43390
+Carriage	300
-Closing stcok	-7900
COGS	44500

Statement of Financial Position
Liabilities	Amount
Capital	24000
Less:Drawings	5240
Add: Net Income	12610
Net capital	31370
Accounts Payable	8880
Rates Due	410
Assets
Motor vehicles	14000
Furniture and fixtures	5000
Cash	2260
Accounts receivables	11500
Closing stock	7900
Prepaid insurance	100

Cash=2360-100(prepaid insurance)=2260