Accounting Questions

[squidgster]

Had a finance exam today. Messed up the profit and loss account and balance sheet unfortunately. Couple of things on there I wasn't sure about, so out of curioisity, can anyone tell me....

1. If, say, �300 out of �1000 of motor vehicle expenses are from the owner's private use...how does this affect what goes into both the profit and loss account and the balance sheet? (A certain amount of the advertising expenses were also from private use, so am guessing it'd be the same process for both...)

2. In the trial balance, it showed allowance for bad debts as �1,000. A note at the bottom said a �500 bad debt is to be written off. New allowance for bad debts was to be �1,500. How should this be dealt with in the P&L and Balance sheet?

Any ideas? (In simple terms if possible - funnily enough finance isn't my strong point!) But interested to know what I should have done!

Thanks!

[Skyline D]

1 - I presume you actually mean �300 of the motor expenses were for private expendtiure by the business owner, unconnected to business rather than that he put in �300 funds from his own pocket for motor expenses? It's not entirely clear.

As ever in accounts there's no one correct answer to that. I'd tend to say it doesn't have any effect at all in the p&l account or balance sheet. The �300 would be disallowed for tax purposes in the tax return as it's not business expenditure but the profit and loss account itself doesn't actually need amended for that. I guess the textbook answer though would be to reduce motor expenses by �300 and increase personal drawings in the capital account on the balance sheet by the same amount. That's probably what they were looking for.

2 - Again not entirely clear what you mean without actually seeing the trial balance. I'm presuming that it actually means �1,000 bad debt had been written off as an expense in the p&l account but there was no further provision in the balance sheet and you are being told to make on for �500. In which case the bad debt charge in the p&l account should be raised to �1,500 and a bad debt provision account included as a creditor (long-term) in the balance sheet for �500.

[squidgster]

Thanks very much Skyline D. Sorry, didn't explain it very well, but yes, that is what I meant for the first part. I assumed they were after what you described (�300 being deducted from motor expenses in the p&l account, and increasing drawings in balance sheet).

The issue of the bad debt confused me more. 'Provision for bad debt' in the trial balance was given at �1000. A note in the question said (in so many word) that... "The company is to write off a debt of �500. The provision for bad debts is to now be �1500". That's all the information it gave. Can't remember exactly what I did now, but messed it up. Ah well.

Thanks for your help!