Question 5.3.6.2: The example of Liza Doolittle's market stall is continued, b...
The example of Liza Doolittle’s market stall is continued, by looking at the consequences of the following transactions in the week to 17 July 20X6. (See Section 3.5 for the situation as at the end of 10 July.)
(a) Liza Doolittle realises that she is going to need more money in the business and so she makes the following arrangements.
(i) She invests immediately a further $250 of her own capital.
(ii) She persuades her Uncle Henry to lend her $500 immediately. Uncle Henry tells her that she can repay the loan whenever she likes, but in the meantime, she must pay him interest of $5 each week at the end of the market day. They agree that it will probably be quite a long time before the loan is eventually repaid.
(b) She decides to buy a second hand van to pick up flowers and plants from her supplier and bring them to her stall in the market. She finds a car dealer, Laurie Loader, who agrees to sell her a van on credit for $700. Liza agrees to pay for the van after 30 days’ trial use.
(c) During the week, Liza’s Uncle George telephones her to ask whether she would sell him some garden gnomes and furniture for his garden. Liza tells him that she will look for a supplier. After some investigations, she buys what Uncle George has asked for, paying $300 in cash to the supplier. Uncle George accepts delivery of the goods and agrees to pay $350, but he asks if she can wait until the end of the month for payment. Liza agrees.
(d) Liza buys flowers and plants costing $800. Of these purchases $750 are paid in cash, with the remaining $50 on seven days’ credit. Liza decides to use Ethel’s services again as an assistant on market day, at an agreed wage of $40.
(e) On 17 July, Liza succeeds in selling all her goods earning revenue of $1,250 (all in cash). She decides to withdraw $240 for her week’s work. She also pays Ethel $40 in cash. She decides to make the interest payment to her Uncle Henry the next time she sees him.
(f) We shall ignore any van expenses for the week, for the sake of relative simplicity.
Required
State the accounting equation:
(i) After Liza and Uncle Henry have put more money into the business and after the purchase of the van
(ii) After the sale of goods to Uncle George
(iii) After the purchase of goods for the weekly market
(iv) At the end of the day’s market trading on 17 July, and after withdrawals have been appropriated out of profit.
There are a number of different transactions to account for here. This solution deals with them one at a time in chronological order. (In practice, it is possible to do one set of calculations which combines the results of all the transactions.)
(i) The addition of Liza’s extra capital and Uncle Henry’s loan
An investment analyst might call Uncle Henry’s loan a capital investment, on the grounds that it will probably be for the long term. Uncle Henry is not the owner of the business, however, even though he has made a loan to it. He would only become an owner if Liza offered him a partnership in the business, and she has not done so. To the business, Uncle Henry is a long-term payable, and it is more appropriate to define his investment as a liability of the business and not as business capital.
The accounting equation after $(250 + 500) = $750 cash is put into the business will be:
| Assets | = | Capital | + | Liabilities | ||||||
| $ | $ | $ | ||||||||
| Stall | 1,800 | As at end of 10 July | 2,690 | Loan | 500 | |||||
| Flowers and plants | 0 | Additional capital put in | 250 | |||||||
| Cash (890+750) | 1,640 | |||||||||
| 3,440 | = | 2,940 | + | 500 | ||||||
| The purchase of the van (cost $700) on credit | ||||||||||
| Assets | = | Capital | + | Liabilities | ||||||
| $ | $ | $ | ||||||||
| Stall | 1,800 | As at end of 10 July | 2,690 | Loan | 500 | |||||
| Van | 700 | Additional capital | 250 | Payables | 700 | |||||
| Cash | 1,640 | |||||||||
| 4,140 | = | 2,940 | + | 1,200 | ||||||
(ii) The sale of goods to Uncle George on credit ($350) which cost the business $300 (cash paid)
| Assets | = | Capital | + | Liabilities | |||
| $ | $ | $ | |||||
| Stall | 1,800 | As at end of 10 July | 2,690 | Loan | 500 | ||
| Van | 700 | Additional capital | 250 | Payables | 700 | ||
| Receivable | 350 | Profit on sale to | |||||
| Cash | Uncle George | ||||||
| (350 – 300) | 50 | ||||||
| (1,640 – 300) | 1,340 | ||||||
| 4,190 | = | 2,990 | + | 1,200 |
(iii) After the purchase of goods for the weekly market ($750 paid in cash and $50 of purchases on credit)
| Assets | = | Capital | + | Liabilities | |||
| $ | $ | $ | |||||
| Stall | 1,800 | As at end of 10 July | 2,690 | Loan | 500 | ||
| Van | 700 | Additional capital | 250 | Payables | |||
| Flowers and plants | 800 | Profit on sale to | (van) | 700 | |||
| Receivables | 350 | Uncle George | 50 | Payables | |||
| Cash | (goods) | 50 | |||||
| (1,340 – 750) | 590 | ||||||
| 4,240 | = | 2,990 | + | 1,250 |
(iv) After market trading on 17 July
Sales of goods costing $800 earned revenues of $1,250. Ethel’s wages were $40 (paid), Uncle Henry’s interest charge is $5 (not paid yet) and withdrawals on account of profits were $240 (paid). The profit for market trading on 17 July may be calculated as follows, taking the full $5 of interest as a cost on that day.
|
Sales |
$ | $ 1,250 |
| Cost of goods sold | 800 | |
| Wages | 40 | |
| Interest | 5 | |
| 845 | ||
| Profit earned on 17 July | 405 | |
| Drawings | 240 | |
| Retained profit | 165 |
| Assets | = Capital | + Liabilities | |||
| $ | $ | $ | |||
| Stall | 1,800 | As at end of 10 July | 2,690 | Loan | 500 |
| Van | 700 | Additional capital | 250 | Payable for | |
| Flowers and plants | 0 | Profit on sale to | van | 700 | |
| (800 – 800) | Uncle George | 50 | |||
| Receivables | 350 | ||||
| Profits retained | 165 | Payable for goods | 50 | ||
| Cash (590+ 1,250 − 40 − 240) | 1,560 | Payable for interest payment | 5 | ||
| 4,410 | 3,155 | 1,255 |