Vision Sdn Bhd set up the printing shop business on 02 January 2020. The owner is new to running a business and so has only been able to maintain some basic records, including those of his cash transactions. Vision Sdn Bhd has hired you for an agreed fees of $1,000 to prepare her end of year financial accounts and to explain some accounting principles which are puzzling her. The agreed fees will be paid after you have completed the accountancy work. The company owner has provided you with the following letter which contains information about the business activities during the year.

Dear sir,

Thank you for agreeing to act as my accounts preparer and also for agreeing to deal with some rather puzzling points which, I have to confess, have been making my brain hurt. I started the printing shop business with just $2,000 in cash, which I deposited in the business bank account on 2 January of this year. All cash transaction has gone through the business bank account. I was fortunate in obtaining loan of $28,000 from the United Bank 3 on 2 January. I immediately used the loan to purchase some essential desktop printing equipment for $20,000 in cash. I used the remainder of the loan to purchase a van, to be used to delivering printing orders to clients, for $8,000 in cash. I also purchased on 2 January a stock of paper on credit for $30,000. An experienced businesswoman friend of mine has explained that I need to depreciate both my printing equipment and a van. I do not understand this point at all, as I paid for both items in cash – surely that is the only cost that matters, as I have paid for both the assets in full? Anyway, my friend tells me that it is the standard practice in my line of business to depreciate the printing equipment evenly over its six-year life, and to depreciate the van at 25 % on the reducing balance method. I am told that the printing equipment has a scrap value of $2,000. I am not clear as to what all of this advice on depreciation means, but I am sure that you will be able to explain it and work it all out for me.

During the year, I have paid an assistant salary of $10,000 but I still owe her $1,000 for the overtime which she kindly agreed to work for me in December 2020. I have also drawn $25,000 in cash for myself out of the business bank account over the year. I obtained premises to rent at the start of the year, and paid rent of $12,000 in advance in cash on 2 January to cover me up to the end of June 2021.

There have been several van expenses which have arisen during the year and have been paid in cash. Petrol expenses amounted to $1,500. Also, there were van repairs which totaled $500 and additional payments for tax and insurance which came to $1,000.

Electricity expenses paid in cash during the year amounted to $1000. The figure for electricity included the last bill for $300 for three months: it covered months of November and December 2020 as well as the month of January 2021.

Business rates of $9,600 were paid in advance on 01 April 2020, and covered the 12 months up to 31 March 2021. The municipal council has agreed not to charge me the rates for the first three month of 2020.

At the end of the year, I was advised by friends to carry out a comprehensive stock take for the business. This revealed that I had a stock of paper worth $40,000. I also found that I had spent $60,000 in cash on purchase of paper during the year, and also owed creditors $50,000 for purchases of paper during the year. I have received cash from sales of printing work of $120,000 during 2020. I also discovered that I had debtors who owed me $40,000 for printing work, which I have carried out for them during the year.

I also appear to have a problem debtor. The bank has informed me that a cheque from one debtor, Shark Enterprise, which owes me $4,000, has bounced many times and so unfortunately, I am not likely to obtain any money from that firm now or in the future. The bank manager has also suggested that I should make a provision of 10 % of the remaining debtors in order to allow for possible problems with people who do not settle their debts in future. I am not clear as to how this might be done but hope that this suggestion make sense to you when you put all this business information together.

During the year, as you may want to know, I took a modest amount of paper for my own use out of the business. This paper was worth $1,000. Also, I was able to pay the total interest of $3,000 which was due on the loan in cash, and was able to repay $2,000 of the loan to the United bank.

I hope that you can make sense of all the information that I have provided for you above. I understand that you can prepare some accounts for me, although I am not sure if it is necessary to do this. If I can aim just to end up with a cash surplus at the end of the year, then is that not sufficient to show everyone that the business is doing well? Take care.

Questions:

1. Vision Sdn Bhd whether the firm is making profit or loss. (To support this outcome, you are required to assist to prepare an Income Statement)

2. Show Vision Sdn Bhd the net worth of her assets by representing them through the balance sheet preparation.

3. Explain to Vision Sdn Bhd the importance of depreciating the fixed assets.

4. Explain to Vision Sdn Bhd the purpose and importance of making provision for doubtful debts.

Answer rating: 100% (QA)

Answer 1 Vision Sdn Bhd is making a profit To calculate the profit we must prepare an Income Stateme... View the full answer