Reference no: EM132506649

Michael Robertson is a sole trader whose accounts you have prepared for the previous two years.

Michael has recently attended a two-day course entitled 'Finance for non-accountants' where he began to learn the fundamentals of double-entry bookkeeping as well as to gain a greater understanding of his financial statements.

Since his return from this course Michael has spent some time reviewing last year's accounts and he is rather confused about some areas.

Michael's queries are as follows:

Question (1) "On the course that have just attended two types of expenditure were mentioned, capital expenditure and revenue expenditure. If revenue is income how can it also be used to describe a type of expenditure?"

Question (2) "Looking at the trial balance concerned that trade payables, which are bad news, and profit, which is good news, are both credit balances. How can this be so?"

Question (3) " notice that some of my expense accounts have accruals which is a current liability and prepayments which is a current asset and some of my income accounts also have accruals but thats a current asset and prepayments which is a current liability, why is that so?"

Question (4) "One of the credit entries in the statement of profit or loss is entitled 'Allowance for receivables'. This must surely be a mistake as credits in the statement of profit or loss are income or profits."

Question (5) " have come across entries in both customer and supplier accounts called discounts. What is the difference between trade discount and cash discount and how are they shown in the accounts?