1
(a) In accounting practice a distinction is drawn between the terms ‘reserves’ and ‘provisions’ and
between ‘accrued expenses’ and ‘creditors’.
Required:
Briefly define each of the four terms quoted and explain the effect of each on the preparation
of accounts.
(b) While preparing the final accounts for year ended 30 September 2007, the accountant of Lanep
Lighting Ltd had to deal with the following matters:
(i
) the exterior of the company’s premises was being repaired. The contractors had started
work in August but were unlikely to finish before the end of November 2007. The total
cost would not be known until after completion. Cost of work carried out to 30 September
2007 was estimated at £21,000;
(ii
) the company rented a sales showroom from Commercial Properties plc at a rental of
£6,000 per annum payable half yearly in arrears on 1 August and 1 February;
(iii
) on 3 October 2007 an invoice was received for £2,500 less a trade discount of 30 per cent,
from Lucifer Ltd for goods for resale supplied during September 2007;
(iv) the directors of Lanep Lighting Ltd have decided that an annual amount of £5,000 should
be set aside, starting with year ended 30 Sept 2007, for the purpose of plant replacement.
Required:
State the accounting treatment which should be accorded to each of the above matters in the
Lanep Lighting Ltd profit and loss account for year ending 30 September 2007 and balance
sheet at that date.
(Association of Chartered Certified Accountants)