2023 O Level 7087 Answer

Suggested Solution O-Level 2023 Principles of Accounts Paper 1 Q1(a)  A business buys sufficient goods to keep on hand to prevent a stock -out situation, which often results in loss of sales.  However, if the business buys too much goods, it will incur higher storage costs and increase the risk of the goods becoming obsolete. (b)  Keep proper computerised records to track changes in inventory balances using the perpetual inventory system so that the quantity of inventories are updated on a continuous basis to avoid buying too little or too many goods.  Keep inventories in the shops and warehouse to avoid stock-out situation.  Buy insurance to insure the inventory against risks of potential loss caused by damaged goods. Insurance claims are then made to seek compensation. (c) (i) 18 Aug 2023 – The business purchased goods worth $3 700 on credit from Handy Co. (ii) 22 Aug 2023 – Customer return goods costing $2 200. (iii) 27 Aug 2023 – The owner withdrew goods worth $180 for his personal use. (d) Profit will be overstated by $400 [Total: 8]

Q2 (a) Trade discount is reduction to the list price. (b) To encourage:  customers to buy in bulk  customer patronage  customer loyalty (c) Journal Date Particulars Debit Credit 2023 $ $ Mar 11 Cash at bank (98% x 5 700) 5 586 Discount allowed (2% x 5 700) 114 Trade receivable – Ahmed 5 700 (d) Bank loan Bank overdraft Amount of borrowing Amount borrowed is fixed. Amount borrowed is not fixed but it must not exceed limit agreed with the bank. Transference of cash Cash is transferred to the business. No cash is transferred to the business. Business withdrew more than what is deposited in its bank account. Repayment Usually regular fixed cash repayments to reduce the amount borrowed. Sometimes the business is allowed to pay off entire amount only at the end of loan period. No cash repayment. Any deposit into the bank account reduces the amount borrowed. Double entry recording Loan from bank account is credited Reflected as a credit balance of the cash at bank account Classification in statement of financial position Shown as long term borrowing under non-current liabilities. Shown as bank overdraft under current liabilities. [Total: 10]

Q3 (a) No effect Amount of increase $ Amount of decrease $ $ Profit for the year before correction of errors 26 270 Error 1 800 Error 2 150 Error 3 ✔ Error 4 10 000 Adjusted profit for the year 15 620 (b) The activities of a business are separate from the actions of the owner. All transactions are recorded from the point of view of the business. (c) Account to be debited Account to be credited Income summary Capital (d) (i) Being straightforward and honest in all professional and business relationships (ii) Not letting bias,