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  2. Will it be correct to say other income like interest received, rent received…….. etc is extra ord. income considering that revenue is income generated in the normal operations of the business?

    Thanks always

    • We do not use the term extra ordinary income. However any other income is shown separately – I do say this in the lecture when I talk through the layout of the Income statement that is in Chapter 2 of the Course Notes (you will see there that they are shown separately under gross profit).

  3. I think it is correct to Cr Drawings and Dr Cash when the owner returns the cash taken out of the business or the cash equivalent of the goods he took?

    How do i classify office air conditional, fridge, tv etc in one word? Is it correct to say office machines?

    Thanks always for the time taken to reply!

    • Yes – that would be correct if the owner were to return cash taken out (although I would be very surprised if that happened in the exam 馃檪 )

      With regard to air conditioning etc., there is no special name (the only ‘rule’ is that obviously they must come under the heading ‘non-current assets’.
      Office machines is fine, or furniture and fittings would be fine also.

  4. A situation where the owner supplies the office furniture for the business; will the office furniture be part of capital?
    If the owner takes goods from inventory how is going be treated in the B/S and Income Statement?

    • If the owner supplies furniture himself, then the double entry is Dr Furniture (which appears as a non-current asset in the SOFP) Cr Capital.

      If the owner takes goods from inventory, then the entry is Dr Drawings Cr Purchases.
      (most want to Cr inventory, but the reason this would not be correct is that the inventory figure on the SOFP is the inventory counted at the very end of the year which will be after the owner has taken any. When the business bought goods they will have Debited purchases – if the owner takes some then Cr purchases (which is sensible because only the remainder were actually used within the business) and Dr drawings (to charge the owner, in just the same way as we would Dr drawings if the owner had taken cash).

  6. prepayments comes under non-current assets. would you classify rent as a prepayment and if yes what if the rent was paid two years in advance then it should come under current assets because its over one year. how would you treat two years advance payment on rent in the statement of financial position.

    Thanks

    • Prepayments certainly do not come under non-current assets – they are current assets.

      Rent is a prepayment if it has been paid in advance and will be classified as a current asset (even if it is paid for two years in advance).

      Although we usually say that non-current assets are assets lasting more than one that is not the strict definition of them (the one-year rule is only a strict rule when it comes to current and non-current liabilities)

      Two years advance payment of rent is exactly the same as a prepayment of rent.

  8. Hi John, very useful lectures, thank you! Just a quick silly question: after taking large amounts of drawings and capital and the profit is fully repaid to the owner… how do we record the rest of wages/drawings if any, taking out by the owner? Is he allowed to withdraw more than he is owed?

    • A few things.
      Firstly, anything taken by the owner is called drawings (a sole trader does not pay wages to the owner – it is drawings).
      Secondly, there is no law stopping the owner taking as much drawings as they want (there is for limited companies but not for sole traders).
      However, in practice they will not take out more that they are owed (capital plus profits) because it would mean selling all the assets and having an overdraft with the bank. The bank is not going to let them have an overdraft if the business has no assets left 馃檪

    • Expenses are costs of running the business..

      Drawings are not an expense – it is money taken out of the business by the owner.

      An accrual is an expense for the period that has not yet been paid and is still owing.

  13. Hi – One thing I didn’t get, why would we consider wages and salaries as (drawings)? Just because it was taken by the owner? From what I know wages and salaries are considered to be business expense called salaries expense or so and yes they are deducted from the capital but they are not called “drawings”, drawings are what the owner takes out the capital for his own personal use, can you explain please?

  20. Good tuition. I have a question. The financial year ends June 30, 2011. I have received an invoice for $1,200 for insurance which runs from May 1 2011 to 30 April 2012. What is the treatment of this invoice in the income statement and statement of financial position for the year ended June 30, 2011?

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