CHAPTER 1 ALCIE Classification:
Similar transactions are classed into one category and recorded in one
ACCOUNTING BASICS place called a ‘nominal ledger’. There are different types of ledgers and
‘books’ mean the collection of all ledgers/accounts of the business.
TERMINOLOGY:
ALCIE Accounts:
Accounting terminology used by sole traders, partnerships and
companies will differ.
Assets Liabilities
Sole traders / Partnerships Companies
Cash at Bank/Petty cash/Cash in hand Cash and cash Equivalents Assets = something you own, Liabilities = something you owe. –
Capital Equity tangible (physical) or intangible eg. loans, trade debts. Depreciation
Creditors Payables (non-physical). – eg. machinery, is charged as an expense but will be
Creditors – amounts due for more than 1 year Non-Current Liabilities vehicles, cash at bank, trademark, listed as a liability.
Creditors – amounts due for 1 year or less Current Liabilities patent, goodwill.
Debtors Receivables Current liabilities = liabilities due to
Depreciation Impairment Fixed asset (non-current assets) = be paid within 1 year. – eg. short-
Fixed Assets Non-current assets assets held by the company for term loans, bank overdraft (must
Interest Finance Costs more than 1 year that provide a repay on demand), trade creditors
Profit and Loss Account Reserve Retained Earnings long-lasting benefit. (suppliers), trade debtors (buyers
Provision for Doubtful Debts Impairment of Receivables who are yet to pay)
Stock Inventory Current assets = items owned by/to
Total Shareholder Funds Total Equity the business which can be turned Long-term liabilities (non-current
into cash within 1 year. These liabilities) = liabilities due after 1
assets continually flowing through year. – eg. term loans
FINANCIAL STATEMENTS: the business – eg. cash (in accounts
or cash in hand), stock (inventory),
Accounts = debtors (people owing money to
1. Bookkeeping: Records of money transactions – eg. when the the business). Income
business receives money from a client, this will go into one of the This is income generate by the
company’s ‘accounts’. business coming from regular
2. Financial Statements: Periodic reports on the performance of a sources relating to business activity.
business – eg. Balance sheet and other reports to tell if the Capital – eg. product sales, service charges
business is bringing in a profit or losing money. This will be the etc.
focus of Business Accounts. Capital = an injection of money
from the owner or an investor. – eg.
Financial Statements = These reports are prepared in respect of each the owner of the business providing Expense
accounting period which usually covers 1 year. money to their business
Expenses = paying for services/
A business is free to choose its accounting period: For accounting purposes, even in items that the business will not hold
the case of sole traders, the for long, used to run the business. –
It can be eg. 1 Nov – 31 Oct every year. business and the owner are
But it is usually the tax year: 5 Apr – 4 Apr eg. heating and lighting, telephone,
separate. The owner pays himself postage bills etc. Expense does not
will do so by using a capital account include spending on long-term
Financial Statements: called ‘drawings’. assets (car/building) which are
• Profit and Loss Account (P&L Account) classed as a ‘capital expenditure’.
• Balance Sheet.
Solicitors must have an understanding of financial reports as:
• This will help solicitors understand the client’s concerns
• Their clients may be business owners TRIAL BALANCE:
• business decisions will have an effect on the accounts
• a solicitor must be able to follow what is going on in negotiation You will not need to prepare a Trial balance on the LPC but you should
meetings with accountants and financial advisors be able to understand how they work. A trial balance will usually form
• reviewing accounts can be an important part of the litigation the basis for the P&L Account and Balance Sheet.
process
Accounting transactions have a dual nature: for every debit entry there
Business Accounts and BLP: is a corresponding credit entry. Thus, the sum of all debit balances will
Business Accounts will be a part of your BLP exam, you will not receive a always be the same as the sum of all credit balances. – This is tested out
separate mark for Business Accounts. There will be questions only in the trial balance. If the totals don’t balance each other out, then
focusing on Business Accounts and there will be questions relating to BLP something has been missed out.
where you will need to use your knowledge regarding accounts to
properly advise your client. Example:
Debit Credit
BASIC PRINCIPLES: Capital £50,000
Equipment £50,000
Business accounts are calculated on a ‘going concern’. – i.e. the accounts Loan £2,000
are not calculated based on the price each asset. Cash £2,000
Total £52,000 £52,000
Businesses are treated as being separate from their owner(s). – eg. if an
owner provides capital to his business, the business will owe him that
amount.
P&L ACCOUNT:
Accountants use the entries from the trial balance to create the P&L
Financial Statements are created using double-entry bookkeeping. If Account and the Balance Sheet.
the owner pays money into the business, the business will owe him the
amount paid. This means that every business transaction will be The P&L Account records the income of a business throughout an
recorded twice in the accounts: one credit + one debit entry. accounting period minus expenses, to calculate a profit loss figure. It
records profit or loss of a business over a passage of time. The
Eg: if a machinery is purchased for £1,000 accounting period is recorded in the heading for the account, always
Cash: reduced by £1,000 with the words “for the period ending on [last day of the period]”.
Business Assets: increased by £1,000
Using the trial balance, only the income and expense entries are added
Accounting Period: into the P&L Account. – eg. Cash at bank is an asset account so it won’t
To understand a business’s financial performance, one must compare appear on the P&L Account.
the position year-on-year. This is done by ruling off the business’s
ledgers/accounts at the end of the accounting period to look at the Entries:
figures all together. Some businesses also prepare interim accounts.
The P&L Account has two halves. income entries from the trial balance
will be put at the top half while all expenses will go to the bottom half.
BLP - Business Accounts Workbook | Page 1 of 10
, TOP HALF: BALANCE SHEET:
Gross profit: The Balance Sheet is a snapshot of the company’s assets and liabilities
This entry is not taken from the trial balance but calculated as follows: at a given date listing every transaction. The P&L Account is different in
ALL BUSINESS INCOME – COST OF SALES = GROSS PROFIT that it reflects the company’s financial year from beginning till the end.
The ‘Gross profit’ figure tells us how much money the business has made After preparing the P&L Account, we can now prepare a Balance Sheet.
during the accounting period before other expenses are taken into
account. The Balance Sheet will tell the reader that:
1. The net worth or net asset value (NAV) of the business
Cost of sales: ASSETS – LIABILITIES = NAV
This entry is calculated as follows: 2. The capital invested in the business
OPENING STOCK + PURCHASES – CLOSING STOCK = COST OF SALES
These figures will be the same, unless there has been a miscalculation.
Cost of sales = all costs that are needed for the business to earn money
eg. cost of stocks. Each transaction will have two effects on the Balance Sheet:
‘Opening stock’ and ‘closing stock’ are asset accounts, so these two Debit = increase in asset or expense, decrease in liability
accounts are exceptions to the general rule that a P&L Account shows Credit = decrease in asset or expense, increase in liability
only income and expense accounts).
Business sells premises for £200,000
BOTTOM HALF: Effects:
Fixed assets (premises) decrease by £200,000
Net profit: Current assets (cash) increase by £200,000
This entry is calculated as follows:
GROSS PROFIT – ALL EXPENSES (EXCEPT PURCHASES) = NET PROFIT Loan of £10,000
Effects:
Net profit = profit for the year Current assets (cash at Bank) decrease by £10,000
Long Term Liabilities increase by £10,000
Example:
Purchase of new equipment for £5,000
Example of how a P&A Account looks like: Effects:
Current assets (cash at Bank) decrease by £5,000
Fixed Assets (equipment) increase by £5,000
AB Ltd
Profit and Loss Account for the year ended 31 October 2021 Purchase of new vehicle for £5,000
Effects:
12 £ £ Current assets (cash at Bank) decrease by £5,000
Income Fixed Assets (equipment) increase by £5,000
Revenue 300,000
Opening Inventory 50,000 Entries:
Purchases 50,000
100,000 The Balance Sheet shows all the liabilities (bottom half) deducted from
Less Closing Inventory (30,000) all the assets and capital (top half). These numbers are taken from the
Cost of Sales (70,000) P&L Account.
230,000
Expenses The Balance Sheet might show the position before or after the year-end
Rent 40,000 adjustments have been made. If the adjustments have not been made,
Wages and Salaries 50,000 it is usually because your question will ask you to make the adjustment.
Insurance 10,000
Electricity 20,000
Depreciation, vehicles 30,000 TOP HALF:
Bad and Doubtful debts 5,000
155,000 (155,000) Assets:
Operating Profits 45,000 Fixed and current assets have 2 distinct categories
Finance Costs (10,000) Fixed assets = held in the business long-term, such as land and buildings,
Profits before Taxation 65,000 machinery, etc.
Current assets = these come and go in the short term, these are usually
Taxation - converted into cash within 1 year.
Net Book Value of an asset = cost of acquiring the asset – depreciation
Profit for the year 65,000
Net Current Assets:
The logic behind P&A Accounts: CURRENT ASSETS – CURRENT LIABILITIES = NET CURRENT ASSETS
This is not clearly explained in the workbook and not shown on the actual Net Assets:
examples, but the figures that you will need for calculations that you are FIXED ASSETS + NET CURRENT ASSETS – LONG TERM LIABILITIES = NET
to carry out first, will need to go in the first column. This will usually give ASSETS
you a figure that will go in the second column so that you can use it for
the second calculation.
First Second Explanation BOTTOM HALF:
calculations calculations
Income Heading Liabilities:
Revenue £300,000 Goes in the 2nd column as will Liabilities are categorised as either current or long term.
be used to calculate the Total
Income
Opening £50,000 £50,000 is underlined because Current liabilities = due to be paid within one year
Inventory you will need to add up this Long term liabilities = due to be paid after at least a year.
Purchases £50,000 figure with the ones above.
£100,000 Total of £50,000 + £50,000 Capital:
Capital = financial contribution by the owners and/or profits
£100,000 Starting point for another calc accumulated from previous accounting periods.
Less Closing (£30,000) Brackets mean minus
Inventory Profit:
Cost of sales £70,000 (£70,000) Total of £100,000 - £30,000 Profit = taken from the P&L Account for the current accounting period.
This will be used for the 2nd
calcs so you will directly write
the total to the second column. Drawings:
Total £230,000 Total of £300,000 - £70,000 Drawings = the owners withdrawing money from the business. This will
income be shown as a deduction.
BLP - Business Accounts Workbook | Page 2 of 10
Similar transactions are classed into one category and recorded in one
ACCOUNTING BASICS place called a ‘nominal ledger’. There are different types of ledgers and
‘books’ mean the collection of all ledgers/accounts of the business.
TERMINOLOGY:
ALCIE Accounts:
Accounting terminology used by sole traders, partnerships and
companies will differ.
Assets Liabilities
Sole traders / Partnerships Companies
Cash at Bank/Petty cash/Cash in hand Cash and cash Equivalents Assets = something you own, Liabilities = something you owe. –
Capital Equity tangible (physical) or intangible eg. loans, trade debts. Depreciation
Creditors Payables (non-physical). – eg. machinery, is charged as an expense but will be
Creditors – amounts due for more than 1 year Non-Current Liabilities vehicles, cash at bank, trademark, listed as a liability.
Creditors – amounts due for 1 year or less Current Liabilities patent, goodwill.
Debtors Receivables Current liabilities = liabilities due to
Depreciation Impairment Fixed asset (non-current assets) = be paid within 1 year. – eg. short-
Fixed Assets Non-current assets assets held by the company for term loans, bank overdraft (must
Interest Finance Costs more than 1 year that provide a repay on demand), trade creditors
Profit and Loss Account Reserve Retained Earnings long-lasting benefit. (suppliers), trade debtors (buyers
Provision for Doubtful Debts Impairment of Receivables who are yet to pay)
Stock Inventory Current assets = items owned by/to
Total Shareholder Funds Total Equity the business which can be turned Long-term liabilities (non-current
into cash within 1 year. These liabilities) = liabilities due after 1
assets continually flowing through year. – eg. term loans
FINANCIAL STATEMENTS: the business – eg. cash (in accounts
or cash in hand), stock (inventory),
Accounts = debtors (people owing money to
1. Bookkeeping: Records of money transactions – eg. when the the business). Income
business receives money from a client, this will go into one of the This is income generate by the
company’s ‘accounts’. business coming from regular
2. Financial Statements: Periodic reports on the performance of a sources relating to business activity.
business – eg. Balance sheet and other reports to tell if the Capital – eg. product sales, service charges
business is bringing in a profit or losing money. This will be the etc.
focus of Business Accounts. Capital = an injection of money
from the owner or an investor. – eg.
Financial Statements = These reports are prepared in respect of each the owner of the business providing Expense
accounting period which usually covers 1 year. money to their business
Expenses = paying for services/
A business is free to choose its accounting period: For accounting purposes, even in items that the business will not hold
the case of sole traders, the for long, used to run the business. –
It can be eg. 1 Nov – 31 Oct every year. business and the owner are
But it is usually the tax year: 5 Apr – 4 Apr eg. heating and lighting, telephone,
separate. The owner pays himself postage bills etc. Expense does not
will do so by using a capital account include spending on long-term
Financial Statements: called ‘drawings’. assets (car/building) which are
• Profit and Loss Account (P&L Account) classed as a ‘capital expenditure’.
• Balance Sheet.
Solicitors must have an understanding of financial reports as:
• This will help solicitors understand the client’s concerns
• Their clients may be business owners TRIAL BALANCE:
• business decisions will have an effect on the accounts
• a solicitor must be able to follow what is going on in negotiation You will not need to prepare a Trial balance on the LPC but you should
meetings with accountants and financial advisors be able to understand how they work. A trial balance will usually form
• reviewing accounts can be an important part of the litigation the basis for the P&L Account and Balance Sheet.
process
Accounting transactions have a dual nature: for every debit entry there
Business Accounts and BLP: is a corresponding credit entry. Thus, the sum of all debit balances will
Business Accounts will be a part of your BLP exam, you will not receive a always be the same as the sum of all credit balances. – This is tested out
separate mark for Business Accounts. There will be questions only in the trial balance. If the totals don’t balance each other out, then
focusing on Business Accounts and there will be questions relating to BLP something has been missed out.
where you will need to use your knowledge regarding accounts to
properly advise your client. Example:
Debit Credit
BASIC PRINCIPLES: Capital £50,000
Equipment £50,000
Business accounts are calculated on a ‘going concern’. – i.e. the accounts Loan £2,000
are not calculated based on the price each asset. Cash £2,000
Total £52,000 £52,000
Businesses are treated as being separate from their owner(s). – eg. if an
owner provides capital to his business, the business will owe him that
amount.
P&L ACCOUNT:
Accountants use the entries from the trial balance to create the P&L
Financial Statements are created using double-entry bookkeeping. If Account and the Balance Sheet.
the owner pays money into the business, the business will owe him the
amount paid. This means that every business transaction will be The P&L Account records the income of a business throughout an
recorded twice in the accounts: one credit + one debit entry. accounting period minus expenses, to calculate a profit loss figure. It
records profit or loss of a business over a passage of time. The
Eg: if a machinery is purchased for £1,000 accounting period is recorded in the heading for the account, always
Cash: reduced by £1,000 with the words “for the period ending on [last day of the period]”.
Business Assets: increased by £1,000
Using the trial balance, only the income and expense entries are added
Accounting Period: into the P&L Account. – eg. Cash at bank is an asset account so it won’t
To understand a business’s financial performance, one must compare appear on the P&L Account.
the position year-on-year. This is done by ruling off the business’s
ledgers/accounts at the end of the accounting period to look at the Entries:
figures all together. Some businesses also prepare interim accounts.
The P&L Account has two halves. income entries from the trial balance
will be put at the top half while all expenses will go to the bottom half.
BLP - Business Accounts Workbook | Page 1 of 10
, TOP HALF: BALANCE SHEET:
Gross profit: The Balance Sheet is a snapshot of the company’s assets and liabilities
This entry is not taken from the trial balance but calculated as follows: at a given date listing every transaction. The P&L Account is different in
ALL BUSINESS INCOME – COST OF SALES = GROSS PROFIT that it reflects the company’s financial year from beginning till the end.
The ‘Gross profit’ figure tells us how much money the business has made After preparing the P&L Account, we can now prepare a Balance Sheet.
during the accounting period before other expenses are taken into
account. The Balance Sheet will tell the reader that:
1. The net worth or net asset value (NAV) of the business
Cost of sales: ASSETS – LIABILITIES = NAV
This entry is calculated as follows: 2. The capital invested in the business
OPENING STOCK + PURCHASES – CLOSING STOCK = COST OF SALES
These figures will be the same, unless there has been a miscalculation.
Cost of sales = all costs that are needed for the business to earn money
eg. cost of stocks. Each transaction will have two effects on the Balance Sheet:
‘Opening stock’ and ‘closing stock’ are asset accounts, so these two Debit = increase in asset or expense, decrease in liability
accounts are exceptions to the general rule that a P&L Account shows Credit = decrease in asset or expense, increase in liability
only income and expense accounts).
Business sells premises for £200,000
BOTTOM HALF: Effects:
Fixed assets (premises) decrease by £200,000
Net profit: Current assets (cash) increase by £200,000
This entry is calculated as follows:
GROSS PROFIT – ALL EXPENSES (EXCEPT PURCHASES) = NET PROFIT Loan of £10,000
Effects:
Net profit = profit for the year Current assets (cash at Bank) decrease by £10,000
Long Term Liabilities increase by £10,000
Example:
Purchase of new equipment for £5,000
Example of how a P&A Account looks like: Effects:
Current assets (cash at Bank) decrease by £5,000
Fixed Assets (equipment) increase by £5,000
AB Ltd
Profit and Loss Account for the year ended 31 October 2021 Purchase of new vehicle for £5,000
Effects:
12 £ £ Current assets (cash at Bank) decrease by £5,000
Income Fixed Assets (equipment) increase by £5,000
Revenue 300,000
Opening Inventory 50,000 Entries:
Purchases 50,000
100,000 The Balance Sheet shows all the liabilities (bottom half) deducted from
Less Closing Inventory (30,000) all the assets and capital (top half). These numbers are taken from the
Cost of Sales (70,000) P&L Account.
230,000
Expenses The Balance Sheet might show the position before or after the year-end
Rent 40,000 adjustments have been made. If the adjustments have not been made,
Wages and Salaries 50,000 it is usually because your question will ask you to make the adjustment.
Insurance 10,000
Electricity 20,000
Depreciation, vehicles 30,000 TOP HALF:
Bad and Doubtful debts 5,000
155,000 (155,000) Assets:
Operating Profits 45,000 Fixed and current assets have 2 distinct categories
Finance Costs (10,000) Fixed assets = held in the business long-term, such as land and buildings,
Profits before Taxation 65,000 machinery, etc.
Current assets = these come and go in the short term, these are usually
Taxation - converted into cash within 1 year.
Net Book Value of an asset = cost of acquiring the asset – depreciation
Profit for the year 65,000
Net Current Assets:
The logic behind P&A Accounts: CURRENT ASSETS – CURRENT LIABILITIES = NET CURRENT ASSETS
This is not clearly explained in the workbook and not shown on the actual Net Assets:
examples, but the figures that you will need for calculations that you are FIXED ASSETS + NET CURRENT ASSETS – LONG TERM LIABILITIES = NET
to carry out first, will need to go in the first column. This will usually give ASSETS
you a figure that will go in the second column so that you can use it for
the second calculation.
First Second Explanation BOTTOM HALF:
calculations calculations
Income Heading Liabilities:
Revenue £300,000 Goes in the 2nd column as will Liabilities are categorised as either current or long term.
be used to calculate the Total
Income
Opening £50,000 £50,000 is underlined because Current liabilities = due to be paid within one year
Inventory you will need to add up this Long term liabilities = due to be paid after at least a year.
Purchases £50,000 figure with the ones above.
£100,000 Total of £50,000 + £50,000 Capital:
Capital = financial contribution by the owners and/or profits
£100,000 Starting point for another calc accumulated from previous accounting periods.
Less Closing (£30,000) Brackets mean minus
Inventory Profit:
Cost of sales £70,000 (£70,000) Total of £100,000 - £30,000 Profit = taken from the P&L Account for the current accounting period.
This will be used for the 2nd
calcs so you will directly write
the total to the second column. Drawings:
Total £230,000 Total of £300,000 - £70,000 Drawings = the owners withdrawing money from the business. This will
income be shown as a deduction.
BLP - Business Accounts Workbook | Page 2 of 10
