Study guide
12.2 Mark-up, Margin & Account Reconstruction
AAT Level 3 Diploma in Accounting Q2022
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1 Chapter 1: Accounting Principles & Ethical Framework
1.1 Fundamental Accounting Concepts & Assumptions 1.2 Regulatory Framework & IAS/IFRS Terminology 1.3 Professional Ethics & the AAT Code of Conduct
2 Chapter 2: Advanced Double-Entry Bookkeeping & Control Accounts
2.1 Capital vs. Revenue Expenditure & Prime Entry Books 2.2 Control Accounts & Reconciliation Procedures 2.3 Period-End Routines, Verification & Accounting Software
3 Chapter 3: Accounting Errors & The Suspense Account
3.1 Types of Accounting Errors & Trial Balance Impact 3.2 Correcting Errors & Clearing the Suspense Account
4 Chapter 4: Non-Current Assets: Acquisition, Register & Disposal
4.1 Capitalising Non-Current Assets & The Asset Register 4.2 Disposal of Non-Current Assets & Part-Exchange
5 Chapter 5: Depreciation Methods & Accounting Entries
5.1 Straight-Line & Reducing Balance Depreciation 5.2 Depreciation Accounting Policies & Journal Entries
6 Chapter 6: Period-End Adjustments: Accruals, Prepayments & Inventory
6.1 Accrued & Prepaid Expenses and Income 6.2 Closing Inventory Valuation & IAS 2 Rules
7 Chapter 7: Period-End Adjustments: Irrecoverable Debts & Allowances
7.1 Writing Off Irrecoverable Debts & Debt Recovery 7.2 Allowance for Doubtful Receivables 7.3 Professional Scepticism, Ethics & Period-End Pressures
8 Chapter 8: The Extended Trial Balance (ETB)
8.1 Trial Balance Structure & Initial Preparation 8.2 Recording Adjustments & Completing the Extended Trial Balance
9 Chapter 9: Financial Statements: Sole Traders
9.1 Sole Trader Statement of Profit or Loss 9.2 Sole Trader Statement of Financial Position
10 Chapter 10: Financial Statements: Partnerships
10.1 Partnership Principles & The Partnership Act 1890 10.2 Partnership Appropriation Account & Capital/Current Accounts
11 Chapter 11: Financial Statement Analysis & Ratios
11.1 Profitability & Return on Capital Employed 11.2 Liquidity, Working Capital & Efficiency Ratios
12 Chapter 12: Incomplete Records & Reconstructing Accounts
12.1 The Capital Comparison Method & Cash/Bank Summaries 12.2 Mark-up, Margin & Account Reconstruction 12.3 Testing the Reasonableness of Reconstructed Figures
12.2 Mark-up, Margin & Account Reconstruction
Key Takeaways Explain This Topic AI
Mark-up expresses Gross Profit as a percentage of Cost of Sales (Gross Profit / Cost of Sales), whereas Gross Margin expresses Gross Profit as a percentage of Sales Revenue (Gross Profit / Revenue).
The fundamental mathematical relationship enables instant conversion: a mark-up of m / n corresponds to a margin of m / (n + m) (e.g., 25% mark-up on cost = 20% margin on revenue; 33.33% mark-up = 25% margin; 50% mark-up = 33.33% margin; 100% mark-up = 50% margin).
Sales Ledger Control Account (SLCA) and Purchases Ledger Control Account (PLCA) reconstructions solve for missing credit transactions by applying double-entry balancing logic across receivables, payables, receipts, payments, discounts, returns, bad debts, and contra settlements.
Estimating inventory destroyed in a disaster (fire, flood, burglary) utilizes the trading equation: Opening Inventory + Net Purchases + Carriage Inwards - Drawings of Goods at Cost - Normal Cost of Sales (derived from Revenue and Margin/Mark-up) = Theoretical Closing Inventory; deducting undamaged salvaged stock yields the Net Disaster Inventory Loss charged to the Statement of Profit or Loss.
In complete account reconstructions, derived credit and cash flows are synthesized into a formal statutory Statement of Profit or Loss, isolating the catastrophic inventory loss as an operating expense to determine underlying trading profit.
Last updated: August 2026
Mark-up, Margin & Account Reconstruction
When a business maintains incomplete records or suffers a catastrophe (such as a factory fire, warehouse flood, or cyber loss), the accountant cannot rely solely on the Capital Comparison Method if a detailed Statement of Profit or Loss (SPL) is required. To establish trading profitability, sales revenue, gross purchases, and closing inventory, the accountant must deploy analytical reconstruction techniques .
Within AAT Level 3 Financial Accounting: Preparing Financial Statements (FAPS) , mastering the mathematical relationship between Mark-up and Gross Margin , reconstructing Sales Ledger and Purchases Ledger Control Accounts , and calculating Disaster Inventory Losses are core assessment requirements.
1. Mark-up vs. Gross Margin: Mathematical Foundations
In trading businesses, pricing policy is expressed in terms of either mark-up or gross margin . Both ratios quantify the relationship between Cost of Sales, Gross Profit, and Sales Revenue, but they utilize different denominators. ┌─────────────────────────────────────────────────────────────────────────────┐
- │ THE CORE TRADING RELATIONSHIP │
- ├─────────────────────────────────────────────────────────────────────────────┤
- │ │
- │ COST OF SALES + GROSS PROFIT = REVENUE │
- │ │
- └─────────────────────────────────────────────────────────────────────────────┘
- Mark-up on Cost
Definition : Mark-up expresses Gross Profit as a percentage or fraction of Cost of Sales .
Base (100%) : Cost of Sales is 100%.
Formula : Mark-up % = (Gross Profit / Cost of Sales) x 100
- Cost of Sales = 100%
- Gross Profit = Mark-up %
- Selling Price = 100% + Mark-up %
- Gross Profit Margin (Margin on Sales)
Definition : Gross Margin expresses Gross Profit as a percentage or fraction of Sales Revenue .
Base (100%) : Sales Revenue is 100%.
Formula : Gross Margin % = (Gross Profit / Sales Revenue) x 100
- Sales Revenue = 100%
- Gross Profit = Margin %
- Cost of Sales = 100% - Margin %
- The Mathematical Conversion Rule: Fractions and Percentages
To move effortlessly between mark-up and margin without complex algebra, use the Fractional Conversion Rule : ┌─────────────────────────────────────────────────────────────────────────────┐
- │ FRACTIONAL CONVERSION MASTER RULE │
- ├─────────────────────────────────────────────────────────────────────────────┤
- │ │
- │ If Mark-up on Cost is: m / n │
- │ Then Gross Margin on Sales is: m / (n + m) │
- │ │
- │ If Gross Margin on Sales is: p / q │
- │ Then Mark-up on Cost is: p / (q - p) │
- │ │
- └─────────────────────────────────────────────────────────────────────────────┘
- Master Mark-up and Margin Conversion Reference Matrix
The following table is an indispensable reference for AAT Level 3 assessments:
Mark-up Fraction Mark-up % Margin Fraction Margin % Given Cost = £100 (Selling Price) Given Revenue = £120 (Cost of Sales)
- 1 / 10 10.0% 1 / 11 9.09% Cost £100 + GP £10 = £110 Rev £120 - GP £10.91 = £109.09
- 1 / 5 20.0% 1 / 6 16.67% Cost £100 + GP £20 = £120 Rev £120 - GP £20.00 = £100.00
- 1 / 4 25.0% 1 / 5 20.0% Cost £100 + GP £25 = £125 Rev £120 - GP £24.00 = £96.00
- 1 / 3 33.33% 1 / 4 25.0% Cost £100 + GP £33.33 = £133.33 Rev £120 - GP £30.00 = £90.00
- 1 / 2 50.0% 1 / 3 33.33% Cost £100 + GP £50 = £150 Rev £120 - GP £40.00 = £80.00
- 2 / 3 66.67% 2 / 5 40.0% Cost £100 + GP £66.67 = £166.67 Rev £120 - GP £48.00 = £72.00
- 3 / 4 75.0% 3 / 7 42.86% Cost £100 + GP £75 = £175 Rev £120 - GP £51.43 = £68.57
- 1 / 1 100.0% 1 / 2 50.0% Cost £100 + GP £100 = £200 Rev £120 - GP £60.00 = £60.00
- 3 / 2 150.0% 3 / 5 60.0% Cost £100 + GP £150 = £250 Rev £120 - GP £72.00 = £48.00
- 2. Control Account Reconstruction Techniques
When individual sales and purchases day books are missing, the accountant reconstructs the Sales Ledger Control Account (SLCA) and Purchases Ledger Control Account (PLCA) to derive missing credit turnover figures.
1. Sales Ledger Control Account (Trade Receivables) Reconstruction
The SLCA tracks the total indebtedness of credit customers. Any single missing item (most frequently Credit Sales ) can be solved as the balancing figure: SALES LEDGER CONTROL ACCOUNT
- Dr (Increases in Receivables) Cr (Decreases in Receivables)
- ──────────────────────────────────────────────────────────────────────────────────────────
- Details £ Details £
- Opening Receivables Balance b/d xxx Bank Receipts from Credit Customers xxx
- Credit Sales (BALANCING FIGURE) XXX Cash Receipts from Credit Customers xxx
- Dishonoured Customer Cheques xxx Discounts Allowed xxx
- Interest Charged on Overdue Accounts xxx Returns Inwards (Sales Returns) xxx
- Irrecoverable (Bad) Debts Written Off xxx
- Contra Settlements with PLCA xxx
- Closing Receivables Balance c/d xxx
- ──────────────────────────────────────────────────────────────────────────────────────────
- Total Debits XXX Total Credits XXX
────────────────────────────────────────────────────────────────────────────────────────── ┌─────────────────────────────────────────────────────────────────────────────┐
- │ CREDIT SALES RECONSTRUCTION FORMULA │
- ├─────────────────────────────────────────────────────────────────────────────┤
- │ │
- │ Credit Sales = Closing Receivables │
- │ + Bank & Cash Receipts from Credit Customers │
- │ + Discounts Allowed │
- │ + Returns Inwards (Sales Returns) │
- │ + Irrecoverable (Bad) Debts Written Off │
- │ + Contra Entries (Set-offs with PLCA) │
- │ - Opening Receivables │
- │ - Dishonoured Cheques / Interest Charged │
- │ │
- │ TOTAL SALES REVENUE = Reconstructed Credit Sales + Total Cash Sales │
- └─────────────────────────────────────────────────────────────────────────────┘
- 2. Purchases Ledger Control Account (Trade Payables) Reconstruction
The PLCA tracks the total liability owed to credit trade suppliers. Reconstructing this account deduces missing Credit Purchases : PURCHASES LEDGER CONTROL ACCOUNT
- Dr (Decreases in Payables) Cr (Increases in Payables)
- ──────────────────────────────────────────────────────────────────────────────────────────
- Details £ Details £
- Bank Payments to Credit Suppliers xxx Opening Payables Balance b/d xxx
- Discounts Received xxx Credit Purchases (BALANCING FIGURE) XXX
- Returns Outwards (Purchases Returns) xxx Interest Charged by Suppliers xxx
- Contra Settlements with SLCA xxx
- Closing Payables Balance c/d xxx
- ──────────────────────────────────────────────────────────────────────────────────────────
- Total Debits XXX Total Credits XXX
────────────────────────────────────────────────────────────────────────────────────────── ┌─────────────────────────────────────────────────────────────────────────────┐
- │ CREDIT PURCHASES RECONSTRUCTION FORMULA │
- ├─────────────────────────────────────────────────────────────────────────────┤
- │ │
- │ Credit Purchases = Closing Payables │
- │ + Bank Payments to Credit Suppliers │
- │ + Discounts Received │
- │ + Returns Outwards (Purchases Returns) │
- │ + Contra Entries (Set-offs with SLCA) │
- │ - Opening Payables │
- │ - Interest Charged by Suppliers │
- │ │
- │ TOTAL PURCHASES = Reconstructed Credit Purchases + Cash Purchases │
- └─────────────────────────────────────────────────────────────────────────────┘
- 3. Reconstructing the VAT Control Account and Adjusting for VAT
AAT names the VAT control account alongside the receivables and payables control accounts and the bank account as a ledger you may be required to rebuild, and it names "adjusting for VAT" as a distinct skill. Both matter because a VAT-registered trader's control accounts and ledger balances are gross , while everything reported in the Statement of Profit or Loss is net .
The two arithmetic rules. At the standard rate of 20%:
Net = Gross ÷ 1.2, and the VAT element = Gross × 20/120 = Gross ÷ 6 . A gross figure of £14,400 therefore contains £2,400 of VAT and £12,000 of net value.
Never put a gross figure into the trading account. Reconstructing credit sales from a gross SLCA and then reporting that figure as revenue overstates sales by exactly one sixth. This is one of the most heavily penalised errors in incomplete-records tasks.
Reconstructing the account. The VAT control account is rebuilt on the same balancing-figure logic as the SLCA and the PLCA. Output VAT is credited; input VAT, payments to HMRC and VAT bad debt relief (Section 7.1) are debited. VAT CONTROL ACCOUNT
- Dr (Reduces the amount owed to HMRC) Cr (Increases the amount owed to HMRC)
- ──────────────────────────────────────────────────────────────────────────────────────────
- Details £ Details £
- Input VAT on purchases and expenses 41,500 Balance b/d (owed to HMRC) 8,200
- VAT bad debt relief claimed 600 Output VAT on sales and disposals
- Payments to HMRC during the year 60,000 (BALANCING FIGURE) 103,300
- Balance c/d (owed at the year end) 9,400
- ──────────────────────────────────────────────────────────────────────────────────────────
- 111,500 111,500
- ──────────────────────────────────────────────────────────────────────────────────────────
Deriving revenue from the balancing figure:
- Output VAT (balancing figure) = £111,500 − £8,200 = £103,300
- Net sales revenue = £103,300 ÷ 0.20 = £516,500
- Gross sales (the figure that would appear in the SLCA) = £103,300 × 6 = £619,800
Why this matters as a cross-check. Sales can now be derived by two independent routes: from the SLCA and cash summary (Sections 12.1 and 12.2), and from the VAT control account above. If the two answers differ materially, one of the reconstructions contains an error, or takings have been omitted — which is exactly the kind of test covered in Section 12.3. Two routes that agree are far stronger evidence than one route that balances.
Contra Entries (Inter-Ledger Set-Offs)
A contra entry occurs when an entity sells goods to a customer who is also a supplier. Rather than exchanging cash, both parties agree to offset the smaller balance against the larger balance:
Double Entry : Debit Purchases Ledger Control Account (reducing liability) , Credit Sales Ledger Control Account (reducing asset) .
Impact on Reconstructions : Must be credited in the SLCA and debited in the PLCA.
3. Inventory Loss & Disaster Calculations (Fire, Flood, Theft)
One of the most frequent applications of incomplete records is quantifying trading inventory destroyed in a disaster (such as a warehouse fire or flood) or stolen in a major burglary.
The Forensic 6-Step Disaster Reconstruction Methodology
When physical stock is destroyed, no closing stock count is possible. The accountant calculates what stock should have been on the premises immediately before the disaster using the business's normal gross margin or mark-up percentage: ┌─────────────────────────────────────────────────────────────────────────────┐
- │ THE 6-STEP DISASTER INVENTORY LOSS RECONSTRUCTION │
- ├─────────────────────────────────────────────────────────────────────────────┤
- │ 1. Determine Net Sales Revenue: │
- │ Net Revenue = Gross Sales (Credit Sales + Cash Sales) - Returns Inwards │
- │ │
- │ 2. Calculate Theoretical (Normal) Cost of Sales: │
- │ • If Gross Margin % is known: Cost of Sales = Net Revenue x (1 - Margin%)│
- │ • If Mark-up % is known: Cost of Sales = Net Revenue / (1 + Markup%)│
- │ │
- │ 3. Compute Cost of Goods Available for Sale: │
- │ Available = Opening Inventory + Gross Purchases + Carriage Inwards │
- │ - Returns Outwards - Goods Taken for Personal Use (at Cost) │
- │ │
- │ 4. Compute Theoretical Closing Inventory (Stock before disaster): │
- │ Theoretical Stock = Cost of Goods Available for Sale - Normal Cost of Sales│
- │ │
- │ 5. Calculate Net Inventory Loss Destroyed / Stolen: │
- │ Gross Disaster Loss = Theoretical Closing Inventory - Salvaged Stock │
- │ (Salvaged stock = undamaged goods recovered and counted at cost) │
- │ │
- │ 6. Accounting Statement Presentation: │
- │ • Trading Section: Cost of Sales reflects ONLY normal goods sold. │
- │ (Destroyed stock is credited to Cost of Sales / Purchases). │
- │ • Operating Section: Inventory Loss is debited as an Operating Expense. │
- │ • Insurance Claim: If insured, Dr Insurance Receivable, Cr Loss in SPL. │
- └─────────────────────────────────────────────────────────────────────────────┘ COST OF SALES ACCOUNT
- Dr (Goods Inflow into Warehouse) Cr (Goods Outflow from Warehouse)
- ───────────────────────────────────────────────────────────────────────────────────────────────
- Details £ Details £
- Opening Inventory xxx Goods Taken for Own Use (at Cost) xxx
- Purchases (Gross Credit & Cash) xxx Returns Outwards (Purchases Returns) xxx
- Carriage Inwards xxx Normal Cost of Goods Sold (to SPL) xxx
- Salvaged Inventory on Hand (SFP Asset) xxx
- INVENTORY DESTROYED BY DISASTER (Loss) XXX
- ───────────────────────────────────────────────────────────────────────────────────────────────
- Total Debits XXX Total Credits XXX
- ───────────────────────────────────────────────────────────────────────────────────────────────
- 4. Master Comprehensive Case Study: Phoenix Timber Merchants Disaster
To master complete account reconstruction and post-disaster accounting, examine the comprehensive scenario of Phoenix Timber Merchants (Proprietor: Marcus Vance ). On the night of 31 December 20X5 , a catastrophic warehouse fire destroyed the bulk of the company's timber inventory.
Available Background & Incomplete Financial Data for 20X5:
Opening Balances at 1 January 20X5 :
- Trade Receivables: £38,000
- Trade Payables: £29,000
- Timber Inventory at Cost: £60,000
- Equipment at Cost: £50,000; Accumulated Depreciation: £15,000 (Carrying Amount: £35,000 )
Bank Summary Activity for 20X5 :
- Bank receipts from credit customers: £340,000
- Cash sales deposited into the bank: £50,000
- Bank payments to trade credit suppliers: £295,000
- Cash purchases paid via bank: £15,000
- Carriage Inwards paid via bank: £5,500
Operating overheads paid via bank: Rent & Rates £14,000 , Light & Power £5,200 , Delivery Van Expenses £6,800 , Admin Wages £42,000 .
Cash Till Takings Activity (Unbanked Cash) :
Marcus paid £6,000 in casual yard wages directly from cash sales before banking.
Marcus withdrew £9,000 in cash drawings directly from till takings.
Opening and closing cash in till remained constant at £1,000 .
Ledger Adjusting & Subsidiary Data for 20X5 :
- Closing Trade Receivables at 31 December 20X5: £51,000
- Closing Trade Payables at 31 December 20X5: £38,000
- Discounts allowed to credit customers: £5,000
- Discounts received from credit suppliers: £3,500
- Returns inwards (from credit customers): £6,000
- Returns outwards (to credit suppliers): £4,500
- Irrecoverable customer debts written off: £2,000
- Inter-ledger contra set-off between sales and purchases ledgers: £4,000
Goods withdrawn by Marcus for personal home construction: Cost £3,000 (normal retail selling price £3,750).
Equipment depreciation policy: 15% per annum on straight-line cost ( 15% x £50,000 = £7,500 ).
Pricing Policy & Salvage Information :
Standard Pricing: All timber is sold at a uniform mark-up of 25% on cost (which equals a 20% gross margin on revenue ).
Post-Fire Salvage Count: Undamaged timber salvaged from a fireproof rear bay was counted and valued at cost of £6,800 .
- Step 1: Reconstruct the Sales Ledger Control Account to Determine Credit Sales SALES LEDGER CONTROL ACCOUNT
- Dr Cr
- ────────────────────────────────────────────────────────────────────────────────
- Details £ Details £
- Balance b/d (1 Jan 20X5) 38,000 Bank Receipts from Customers 340,000
- Credit Sales (BALANCING FIGURE) 370,000 Discounts Allowed 5,000
- Returns Inwards (Sales Returns) 6,000
- Irrecoverable Debts Written Off 2,000
- Purchases Ledger Contra Set-Off 4,000
- Balance c/d (31 Dec 20X5) 51,000
- ────────────────────────────────────────────────────────────────────────────────
- 408,000 408,000
- ────────────────────────────────────────────────────────────────────────────────
Reconstructed Credit Sales = £340,000 + £5,000 + £6,000 + £2,000 + £4,000 + £51,000 - £38,000 = £370,000 .
Step 2: Determine Total Sales Revenue and Net Sales Revenue
Cash Sales = Cash Banked (£50,000) + Cash Casual Wages (£6,000) + Cash Drawings (£9,000) = £65,000 .
Gross Sales Revenue = Credit Sales (£370,000) + Cash Sales (£65,000) = £435,000 .
Net Sales Revenue = Gross Sales (£435,000) - Returns Inwards (£6,000) = £429,000 .
Step 3: Reconstruct the Purchases Ledger Control Account to Determine Credit Purchases PURCHASES LEDGER CONTROL ACCOUNT
- Dr Cr
- ────────────────────────────────────────────────────────────────────────────────
- Details £ Details £
- Bank Payments to Suppliers 295,000 Balance b/d (1 Jan 20X5) 29,000
- Discounts Received 3,500 Credit Purchases (BALANCING FIGURE) 316,000
- Returns Outwards (Purchases Returns) 4,500
- Sales Ledger Contra Set-Off 4,000
- Balance c/d (31 Dec 20X5) 38,000
- ────────────────────────────────────────────────────────────────────────────────
- 345,000 345,000
- ────────────────────────────────────────────────────────────────────────────────
Reconstructed Credit Purchases = £295,000 + £3,500 + £4,500 + £4,000 + £38,000 - £29,000 = £316,000 .
Total Purchases = Credit Purchases (£316,000) + Cash Purchases (£15,000) = £331,000 .
Step 4: Calculate Normal Cost of Sales and Theoretical Closing Inventory
Mark-up to Margin Conversion :
- Mark-up on Cost = 25% (1/4)
- Gross Margin on Sales = 1 / (4 + 1) = 1/5 = 20.0%
Normal Gross Profit & Cost of Sales :
Normal Gross Profit = 20% x Net Sales Revenue (£429,000) = £85,800
Normal Cost of Sales = Net Revenue (£429,000) - Gross Profit (£85,800) = £343,200 (or 80% x £429,000 = £343,200)
Cost of Goods Available for Sale :
- Opening Inventory: £60,000
- Add: Total Purchases: £331,000
- Add: Carriage Inwards: £5,500
- Less: Purchases Returns (Returns Outwards): (£4,500)
- Less: Goods Taken for Personal Use at Cost: (£3,000)
- Cost of Goods Available for Sale = £60,000 + £331,000 + £5,500 - £4,500 - £3,000 = £389,000
Theoretical Closing Inventory (Stock immediately prior to fire) :
Theoretical Stock = Cost of Goods Available (£389,000) - Normal Cost of Sales (£343,200) = £45,800
Gross Fire Inventory Loss :
- Theoretical Closing Inventory: £45,800
- Less: Undamaged Salvaged Stock counted at cost: (£6,800)
- Gross Timber Inventory Destroyed by Fire = £45,800 - £6,800 = £39,000
- Step 5: Draft the Statement of Profit or Loss for Phoenix Timber Merchants PHOENIX TIMBER MERCHANTS
- STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 20X5
- ─────────────────────────────────────────────────────────────────────────────
- £ £
- Revenue (Gross Sales: Credit £370k + Cash £65k) 435,000
- Less: Returns Inwards (Sales Returns) (6,000)
- ────────────────────────────────────────────────────────────
- Net Sales Revenue 429,000
Cost of Sales:
- Opening Inventory 60,000
- Purchases (£331,000 less £3,000 drawings at cost) 328,000
- Carriage Inwards 5,500
- Less: Returns Outwards (Purchases Returns) (4,500)
- ────────────────────────────────────────────────────────────
- Cost of Goods Available for Sale 389,000
- Less: Closing Inventory on Hand (Salvaged Stock) (6,800)
- Less: Inventory Destroyed by Fire (to Expenses) (39,000)
- ────────────────────────────────────────────────────────────
- Cost of Sales (Normal Goods Sold) (343,200)
- ─────────────────────────────────────────────────────────────────────────────
- GROSS PROFIT (Matching 20% Margin / 25% Mark-up) 85,800
Other Operating Income:
- Discounts Received 3,500
- ─────────────────────────────────────────────────────────────────────────────
- Total Operating Income 89,300
Operating Expenses:
- Wages & Salaries (£42,000 bank + £6,000 cash) 48,000
- Rent and Rates 14,000
- Light, Heat and Power 5,200
- Delivery Van Running Costs 6,800
- Depreciation: Equipment (15% on £50,000 cost) 7,500
- Irrecoverable Bad Debts Written Off 2,000
- Disaster Loss: Inventory Destroyed by Fire 39,000
- ────────────────────────────────────────────────────────────
- Total Operating Expenses (122,500)
- ─────────────────────────────────────────────────────────────────────────────
- OPERATING NET LOSS FOR THE YEAR (33,200)
- ═════════════════════════════════════════════════════════════════════════════
Insurance Note : If the insurer confirms settlement of £30,000 against the fire loss: Debit Insurance Claim Receivable (Current Asset) £30,000 and Credit Disaster Loss in the SPL £30,000, reducing the net disaster expense from £39,000 to £9,000, and resulting in an adjusted Net Loss of only £3,200.