Accounting · 2016-11-23 · Preface This Solutions CD has been compiled to be used in conjunction...

Accounting: A n I n t r o d u c t o r y F r a m e w o r k

Third Edition

Solutions CD T Stanley BCom, DipEd, MSc, FCPA

C Ryan BCom, DipEd, MFinMan, PhD, FCPA

J Falt BEcon, MEd

L Kirkwood BCom, BEd, MEdSt

Sydney, Melbourne, Brisbane and Perth

http://www.pearsoned.com.au/schools

Pearson Education Australia A division of Pearson Australia Group Pty Ltd Level 9, 5 Queens Road Melbourne 3004 Australia www.pearsoned.com.au/schools Offices in Sydney, Brisbane and Perth, and associated companies throughout the world. Copyright © Pearson Education Australia (a division of Pearson Australia Group Pty Ltd) First published 2007 Reproduction and Communication for educational purposes The Australian Copyright Act 1968 (the Act) allows a maximum of one chapter or 10 per cent of the pages of this work, whichever is the greater, to be reproduced and/or communicated by any educational institution for its educational purposes provided that the educational institution (or the body that administers it) has given remuneration notice(s) to Copyright Agency Limited (CAL) under the Act. For details of the CAL licence for educational institutions contact Copyright Agency Limited (www.copyright.com.au). Reproduction and Communication for other purposes Except as permitted under the Act (for example a fair dealing for the purposes of study, research, criticism or review) no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All inquiries should be made to the publisher at the address above. Edited by Edward Caruso Designed by Rebecca Yule and Promptset Pty Ltd. Cover image by Kim Ferguson Produced by Pearson Education Australia Every effort has been made to trace and acknowledge copyright. However, should any infringement have occurred, the publishers tender their apologies and invite copyright holders to contact them.

Contents Preface iv

1 The accounting environment 1

2 Foundations of accounting 5

3 The accounting process to the trial balance 37

4 End of period reports—preparation, analysis and interpretation 77

5 Computers in accounting 128

6 Accounting for cash 171

7 Accounting for accounts receivable and accounts payable 203

8 Accounting for inventories 252

9 Accounting for non-current assets 278

10 Internal controls 326

11 Electronic business 342

12 Financial reports 352

13 Cash flow statement 393

14 Analysis and interpretation of financial reports 420

15 Managerial decision-making 455

16 Budgeting 465

17 Understanding company reports 492

18 Personal financing and investing 505

19 Accounting for grazing enterprises 513

20 Accounting for mining enterprises 531

Appendix: Accounting forms masters 557 iii

Preface This Solutions CD has been compiled to be used in conjunction with the third edition of Accounting: An Introductory Framework.

Complete solutions to all the practical questions and case studies in the text have been included as guidance for teachers and students. Most answers to the theoretical questions have also been provided, although it is generally felt that these are adequately dealt with in the text immediately before each question.

Extra questions with solutions for this title can also be found on the Pearson Education Australia Companion Website at <www.pearsoned.com.au/schools> (navigate to the secondary web page).

TS CR JF LK

iv

Chapter 1 The accounting environment

1.1 Accounting is the discipline that measures, records and processes financial and other information about an entity, and reports and interprets that information to interested parties to enable them to make appropriate decisions. This definition presents accounting as a body of knowledge and skills, shows what it does, who for, and its general uses. Compare this with other definitions to show similarities and differences, and emphasise and/or explain these.

1.2 The accounting profession is comprised of people who carry out the role of accountants in a wide variety of specialist areas, such as cost accounting, auditing or taxation. Accountants are normally members of an association, such as CPA Australia or the Institute of Chartered Accountants in Australia. These organisations try to advance the profession, assist members in carrying out their work, set standards of performance and ethical conduct, and negotiate and consult with governments and other bodies. Entry qualifications include degrees and diplomas from universities and colleges, along with experience requirements in the profession to achieve various levels of membership.

1.3 Pronouncements on standards of performance and good accounting practice take two main forms: • Accounting standards are set by the Australian Accounting Standards Board (AASB) under the oversight of the Financial

Reporting Council (FRC); given the force of law under the Corporations Act for companies; and followed by members of accounting bodies and most entities. Examples include: AASB 101 Presentation of Financial Statements; AASB 102 Inventories; and AASB 107 Cash Flow Statements.

• Statements of accounting concepts are also set by the AASB, but are more general than the specific Accounting Standards, forming a conceptual and definitional umbrella under which the Accounting Standards are set. Examples include: SAC 1 Definition of the Accounting Entity and SAC 2 Objective of General Purpose

Financial Reporting. These pronouncements are generally in harmony with those of the International Accounting Standards Board, as part of the move towards establishing global accounting standards.

1.4 The AASB website at <www.aasb.com.au> for investigation of current media releases; lists of standards; current exposure drafts; and the student enquiries section.

1.5 Poster of career possibilities in accounting—possibly words and illustrations in diagrammatic form.

1.6 Investigation and guest speaker.

1.7 The objectives or functions of modern accounting include: • General objective: assist with corporate or organisational governance or control of an entity’s usage of resources, its financial

position, its financing and investing activities, and its compliance with external requirements of law and government regulations.

• Specific objectives: provide information through general and special purpose reports to interested parties for decision-making; assist in discharging accountability of all members of the entity in meeting their responsibilities; and assist the evaluation of performance of management through the provision of reports, budgets, comparisons and analysis.

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1.8 Almost any definition of accounting or list of objectives for accounting will include the idea of providing information for decision-making by interested parties, so this could easily be seen as the main or basic objective of accounting.

Two main groups wish to use this information to make a range of decisions: internal users, such as management and other governing bodies; and external users, such as investors and other resource providers, along with governments and other parties performing a review or oversight function.

Management and other governing bodies, such as boards of directors and executives of clubs, are continually making general decisions about corporate or organisational governance, and more specific decisions concerning financing, personnel, production and marketing.

Investors and other resource providers, such as creditors, lenders, employees and suppliers, are making decisions about the organisation’s performance in terms of profitability, financial stability, return on investment, and efficient use of resources.

Governments and other parties performing a review or oversight function, such as labour unions, the media and environmental and consumer groups, are making decisions about whether the organisation is complying with external requirements, and whether the organisation is meeting its social obligations.

1.9 Some of the main factors that have significantly affected the development of accounting and its practices include: • Historical development has changed the functions and practices of accounting from stewardship of resources to more modern functions of financial and managerial accounting for larger and more modern organisations such as companies. • Legal factors impinge on accounting practices and the profession through the Corporations Act, Partnership Act, Tax Law, and the application of accounting standards and reporting requirements. • Economic factors and trends, such as government economic policies, changes in the value of the dollar, interest rates, etc., have influenced the information provided by accountants and how this is interpreted and used in decision-making. • Technological trends, such as the use of computers and electronic communication, have revolutionised the way accounting is practised in all its areas from recording to reporting and interpreting information. • Ethical considerations and business conduct by both accountants and by the organisations they account for have meant great changes in accounting and auditing practices to ensure more honest and open dealings. The demand for a wider diversity of accounting services from a much wider group of clients has meant the development of many more specialist areas and a wider range of required skills for the modern accountant, in areas such as financial planning, consultancy and advisory services.

1.10 Report on the history of accounting, which would show changes over time from Egyptian and Roman times, through the Industrial Revolution to modern times, bringing out many of those points in 1.9 above.

1.11 Unlimited liability refers to the liability of a person in terms of a business’s debts. Sole traders and partners are liable for all the debts incurred by their businesses, whether because of normal business dealings or legal matters. If debts of the business exceed its assets, many of the owner’s personal assets can be seized to meet these debts. This contrasts with the situation in most companies where a shareholder’s liability is limited, usually to the face value of the shares they hold.

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1.12 Business ownership can take a number of forms, including: sole traders, partnerships, companies, non-profit organisations, public sector organisations and trusts.

Sole traders are owned by one person, who benefits from all the profits of the business, and who has almost complete control over its operation, but may be disadvantaged by limited capital and the application of the concept of unlimited liability for debts.

Partnerships are owned by two or more people, who benefit jointly from the profits of the business, share capital and operational requirements, but may still be somewhat limited in growth potential and face the disadvantages implied by unlimited liability, as well as possible differences and conflict between partners.

Companies usually have a larger number of owners (called shareholders) who have limited liability, more growth potential, can pass over the running of the business to directors and managers, and who receive a share of the company’s profits through dividends. However, the owners therefore may not have much influence on the running of the company and the amount of the company’s profits that they receive.

Non-profit or not-for-profit organisations are owned by members or groups of people with common interests, who benefit from the services provided or because of altruistic motives, but who may feel they put in a great deal of effort for little return and much frustration due to lack of funds and public or government support.

Public sector organisations are owned by governments and semi-government bodies, and are established to provide public services to the public. They generally have the comfort of government support and funding, although many are criticised for lack of efficiency, and feel the degree of support and funding they receive is not sufficient.

Trusts are legal arrangements, whereby assets such as money or property are transferred to the control of trustees to administer for the benefit of a number of beneficiaries. Property and unit share trusts allow the pooling of large amounts of funds for investment purposes and control by specialist managers. In certain circumstances, trusts may have taxation benefits, and allow control and benefit to be separated, which may be seen as both an advantage and a disadvantage.

1.13 Chapter summary.

1.14 Financial reporting case—Woolworths Limited a The 52 weeks ending 25 June 2006. Interestingly, this policy of working in weeks can sometimes result in a ‘year’ of 53 weeks,

as occurred in 2002. b Management, government departments such as the ATO, creditors, lenders, suppliers, prospective shareholders, employees

and unions, environmental and consumer groups. c Mainly retail selling, e.g. Woolworths supermarkets, Big W, BWS, Dick Smith Electronics, and an alliance with Caltex to sell

petrol. d Among the key responsibilities of a Board of Directors are: strategic direction and initiatives; Chief Executive Officer and key

personnel selection, remuneration and succession planning; monitoring of performance; reporting and corporate governance, including audit, risk and compliance with laws, social responsibilities, policies and procedures.

e The Chairman stresses Woolworths’ continued attention to high standards of governance. The section on Corporate Governance on page 60 of the 2006 Annual Report emphases its core position in attempts to match ‘best practice’ in areas such as ethical decision-making, reporting, disclosure and compliance.

f Woolworths has achieved record results during this year: sales are up 20%; dividends are up 15%; and for the first time, net profit after tax reached $1 billion.

1.15 Communication and critical thinking case Newspaper article. a They are in the news, on television. b Manipulation of results. c Auditors check the financial records to see if they reflect a true and fair view of the results and position. d Shareholders, hairdressers. e Moved from deal makers and salesmen to accountants. f Yes. g Your opinion.

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1.16 Research assignment Internet.

1.17 Group communication activity Brainstorm.

1.18 Group communication activity Debate.

1.19 Research and communication activity Business organisations.

1.20 Research and communication activity Franchising.

4

Chapter 2 Foundations of accounting

2.1 Assets: cash, cash at bank, clothes, furniture, electrical equipment, CDs, DVDs, bicycle, motor vehicle, etc.

2.2 Grocery store: stock of groceries, furniture and fittings (shelves, trollies, refrigerated cabinets, etc.), land and buildings (if not leased), equipment (cash registers, computers, etc.).

Used cars: stock of vehicles, tools and equipment (for repairs, polishing, etc.), furniture, land and some buildings (if not leased), computer equipment.

Differences due to type of activity—both trading concerns, but different stock and methods of selling.

2.3 Liabilities: loans or other money owing, credit card.

2.4 Liabilities of a business: bank overdraft, loans, amounts owing for purchases of goods or services (accounts payable).

2.5 Points that might be included to define owner’s equity: owner’s interest or investment in the business, net worth of business, a special type of liability, calculated by finding difference between assets and liabilities.

2.6 The accounting entity convention separates the owner from the business for accounting purposes. The business is an entity or body separate from the owner(s). Transactions are recorded from the viewpoint of the business, and the owner is treated as an outsider providing funds. The business is the accounting entity; the owner is usually the legal entity, and (in sole traders and partnerships) responsible for the debts and actions of the business.

2.7 a Liability b Liability c Owner’s equity d Liability e Asset f Asset g Asset h Asset i Liability j Asset k Asset l Asset m Asset n Asset

2.8 Owner’s equity = Assets - Liabilities OE = Assets (Cash in hand $1000 + Accounts receivable $8000 + Inventories $2000 + Furniture

$3500) - Liabilities (Loan from bank $4000 + Accounts payable $500) OE = 14 500 - 4500 OE = $10 000

2.9 Assets = Liabilities + Owner’s equity 8000 + 1000 + 3000 + 15 000 = (1000 + 1000) + 25 000 Assets = $27 000

2.10 Assets = Liabilities + Owner’s equity a 2000 = 200 + 1800 b 1300 = 400 + 900 c 3700 = 500 + 3200 d 4800 = 1800 + 3000 e 1150 = 200 + 950 f 1200 = 550 + 650 g 2800 = 900 + 1900 h 9030 = 1750 + 7280

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2.11 a Owner’s equity = Assets - Liabilities

$5000 = ($1000 + 500 + 750 + 3000) - $250 b Assets = Liabilities + Owner’s equity

$5250 = $250 + $5000

2.12 a The accounting entity assumption is the conventional way accountants treat records for the owner(s) in a business’s set of

books. The assumption separates the owner from the business for accounting purposes, i.e. the owner is seen as a separate entity to the business. Accountants record business transactions from the viewpoint of the business, and treat the owners as outsiders—a special type of liability.

b The accounting equation is usually stated as A = L + OE. Assets are items of value owned or controlled by a business. Liabilities are amounts owed by a business to external parties. Owner’s equity is the owner’s interest or investment in the business. It is the difference between assets and liabilities. The accounting equation is the relationship between the total assets, liabilities and owner’s equity of the business. The relationship is always one of equality—funds contributed by owners or external parties must be used only to purchase or to remain as business assets. This means Assets = Liabilities + Owner’s equity.

c The connection between the assumption and the equation is owner’s equity. It is the assumption that gives us the concept of owner’s equity. (Owner’s equity only exists because the owner is regarded as separate from the business, and thus the business regards the owner as another liability.) Owner’s equity completes the equality A = L + OE. It is the difference between assets and (other/external) liabilities.

2.13 Total assets must always equal total liabilities plus total owner’s equity. This accounting equation must always be true, because assets are all the funds or items of value purchased with those funds that the business owns or controls. These funds can only come from either or both of two sources: external sources, such as accounts payable or various forms of loans (together known as liabilities); or internal sources, meaning the owner’s contribution of capital, plus any profits accumulated in the business over time (known as owner’s equity).

The uses or forms the funds take (assets) can never be greater than the amount supplied from the various sources (liabilities and owner’s equity). The business cannot have more assets than it has funds to purchase them. If all the funds are not used, they remain as an asset cash for the business. The business cannot owe more than the funds it has borrowed from the various sources. The relationship between A, L and OE must always be an equality.

2.14 It is true that, for accounting purposes, owner’s equity is a special liability. This is true because of the accounting entity assumption. This assumption is the basis of modern (double-entry) accounting. It is assumed that the owner is separate from the business. Any funds contributed by the owner, or accumulated for the owner, are accounted for in the same way as for other suppliers of funds. They are regarded as a liability for the business. But, because the owner, in legal and real terms, is internal to the business rather than external, they are a special type of liability. (They are recorded in the same way as other sources of equity or funds, but in separate accounts and in a separate section of the accounting books.)

2.15 a K West b $13 810 c J Johnson and J Loxton d Debtors e S Fall and T Stevens, loan from bank, mortgage on premises f Creditors g Stock of goods to be sold h Premises given as security for a loan i ‘T’ form

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j West Traders

Balance Sheet as at 30 June 2008

Assets Cash in hand 10 Cash at bank 100 Accounts receivable

J Johnson 500 J Loxton 200 700

Inventories 800 Furniture 2 000 Premises 14 000 17 610

Less Liabilities Accounts payable

S Fall 300 T Stevens 500 800

Loan from bank 1 000 Mortgage on premises 2 000 3 800 Net assets $13 810

Owner’s equity Capital $13 810

k OE = A - L

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2.16 a

S Clunes

Balance Sheet as at 1 July 2008

Assets Cash at bank Inventories Furniture Vehicle Equipment 10 000 20 500

Less Liabilities Loan from bank 4 000 Net assets $16 500

Owner’s equity Capital $16 500

b

Balance Sheet as at 1 July 2008

Assets Liabilities Cash at bank 1 000 Loan from bank 4 000 Inventories 2 000 Furniture 1 500 Owner’s equity Vehicle 6 000 Capital 16 500 Equipment 10 000

$20 500 $20 500

8

1 000 2 000 1 500 6 000

2.17 S Green


Assets Owner’s Equity Cash at bank 10 000 Capital 10 800 Inventories 800

$10 800 $10 800


Assets Liabilities Cash at bank 9 600 Furnitureland Co 600 Inventories 800 Furniture 1 000 Owner’s equity

Capital 10 800

$11 400 $11 400


Assets Liabilities Cash at bank 12 600 Furnitureland Co 600 Inventories 800 Loan from bank 3 000 3 600 Furniture 1 000

Owner’s equity Capital 10 800

$14 400 $14 400


Assets Liabilities Cash at bank 12 600 Furnitureland Co 600 Inventories 800 Loan from bank 3 000 Furniture 1 000 Finance Co Ltd 10 000 13 600 Land 10 000


$24 400 $24 400 9


Assets Liabilities Cash at bank 12 400 Furnitureland Co 400 Inventories 800 Loan from bank 3 000 Furniture 1 000 Finance Co Ltd 10 000 13 400 Land 10 000


$24 200 $24 200

2.18 On 2 December 2007 C Whell was paid $1000 cash. On 8 December 2007 furniture was purchased for $2000 on credit from Furniture Traders. On 10 December 2007 the owner introduced an extra $2000 cash into the business.

2.19 See the chart of accounts at the back of the text (page 795) to check your list.

2.20 Ledger accounts, in which records of financial transactions are kept, have two main columns in which details are recorded. For historical reasons, these are called the debit and credit columns, the debit column normally being on the left, and the credit column on the right. A fundamental assumption of accounting from very early times, based on the meaning of assets, was that assets had a debit nature. From an understanding of the accounting equation and the sources and uses of business funds, liability accounts are seen as opposite to assets. Thus, having assumed that assets have a debit nature, liabilities (and owner’s equity), being on the opposite side of the accounting equation, have a credit nature.

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2.21 a Furniture account b Asset c Debit d Account increased due to purchase of furniture e Debit f Account decreased due to sale/disposal of furniture g Credit h Debit i Credit j $1300

2.22

Andrews Trading Store Balance Sheet as at 30 June 2008

Assets Liabilities Cash at bank 3 000 L Lanazzi (Accounts payable) 5 000 P Potter (Accounts receivable) 20 000 Inventories 11 500 Owner’s equity Shares in ABC Ltd 27 000 Capital—J Andrews 100 000 Furniture 3 500 Motor vehicles 40 000

$105 000 $105 000

2.23

June 1 Service fees revenue $1000 15 Service fees revenue $1200 25 Rent revenue $500 30 Interest revenue $1000

Service fees revenue total for the month $2200.

2.24

June 1 Consumable supplies expense $1500 4 Wages and salaries $1000 9 Rates $2000

15 Consumable supplies expense $2000 21 Electricity $400 28 Telephone $800 30 Consumable supplies expense $1500

Consumable supplies expense total for the month $5000.

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2.25 Revenues are the inflows of resources into a business, as it carries out its operations. Such operations are generally undertaken in an endeavour to make a profit for the benefit of the owner(s). These inflows can come from the sale of inventories, services performed, or other general operational activities. Examples include: sales, service fees revenues, and interest or rent received. If sufficient revenues are earned, they will have the effect of increasing owner’s equity, and they therefore have a credit nature.

Expenses are outflows of resources from a business, as it carries out its operations. These outflows can result from the cost of goods sold, services performed or other general operational activities. Examples include: cost of goods sold, cost of services, and wages or rent paid. Such payments or outflows are intended to be used within a short period of time, and not to be confused with payments for the purchase of assets that are intended to be kept in the business for a long period of time. Expense items reduce profit made, and therefore have the effect of reducing owner’s equity, and therefore have a debit nature.

2.26 G Trivani

Income Statement for the year ended 30 June 2008

Revenue Service fees revenue 100 000

Less Expenses Consumable supplies expense 20 000 Advertising 4 000 Office expenses 5 000 Rent expense 3 000 Stationery 1 500 Sundry expenses 3 500 Telephone 900 37 900

Net profit $62 100 2.27 a Asset, debit b Asset, debit c Revenue, credit d Liability, credit e Asset, debit f Expense, debit g Owner’s equity, credit h Expense, debit i Asset, debit j Asset, debit k Expense, debit l Asset, debit m Liability, credit n Liability, credit o Expense*, debit p Expense, debit q Revenue, credit r Revenue, credit s Asset, debit t Expense*, debit

* Could be an asset Inventories. However, for ease of learning, in this text it is recorded as part of cost of goods sold. See page 292 and page 322 of text for details.

2.28 a

Capital

5 000 40 000 50 000 15 000

b A profit of $15 000 was made during the year, so that the owner has a $50 000 interest (balance in the account) at the end of the year.

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2.29 Source document activity.

2.30 Source document activity.

2.31 Source documents are needed because they provide: • evidence as to the validity of transactions • details of transactions (or data), which are bases of entries in the accounting records • information about transactions from an independent source not directly associated with the accounting department.

2.32 A journal is ‘the book of original entry’ for information being put into the accounting records. Journals are a record of the various transactions of a business in chronological order. They are a basic step in most manual accounting systems (though not as common in computer systems, where input into the records can be done straight from the source documents). Entering information into journals is the step in the accounting process between obtaining the basic data from the source documents and entry of information on transactions into the ledger accounts. Common examples of journals are the General journal, the Cash Receipts journal and the Purchases journal. (The last two being known as specialised journals.)

The main functions of a journal are to: • provide a formal and permanent record of transactions in date order • act as an aid for posting to the ledger by analysing transactions into their debit and credit elements • enable easy reference forward in the process to the ledger or back to appropriate source documents • help classify and summarise details of transactions of similar types, and thus cut down on detail in the ledger (if specialised

journals are employed).

2.33 General Journal

Date Particulars Folio Debit Credit Feb 5 Equipment 20 000

M Jones 20 000 (Purchased equipment from M Jones)

15 Electricity 200 Cash at bank 200

(Paid electricity by cash)

24 P Peters 1 450 Service fees revenue 1 450

(Charged P Peters service fees)

27 M Jones 20 000 Cash at bank 20 000

(Paid M Jones’s account)

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2.34

Date Transaction Accounts Type of Nature of Inc/Dec Dr/Cr Amount involved account account $

Mar 1 Owner introduced Motor vehicle A Dr Inc Dr 1 000 vehicle and cash Cash at bank A Dr Inc Dr 500 as capital Capital—H Jones OE Cr Inc Cr 1 500

2 Bought furniture Furniture A Dr Inc Dr 500 from V Jones V Jones L Cr Inc Cr 500 (on credit)

4 Sold vehicle to S Smith A Dr Inc Dr 1 000 S Smith (on credit) Motor vehicle A Dr Dec Cr 1 000

7 Paid V Jones cash V Jones L Cr Dec Dr 500 Cash at bank A Dr Dec Cr 500

9 Received cash from Cash at bank A Dr Inc Dr 1 000 S Smith S Smith A Dr Dec Cr 1 000

Retailers and Co General Journal G1

Date Particulars Folio Debit Credit Mar 1 Motor vehicle 1 000

Cash at bank 500 Capital—H Jones 1 500

(Owner introduced vehicle and cash as capital)

2 Furniture 500 V Jones 500

(Purchased furniture from V Jones)

4 S Smith 1 000 Motor vehicle 1 000

(Sold vehicle to S Smith)

7 V Jones 500 Cash at bank 500

(Paid M Jones’s account)

9 Cash at bank 1 000 S Smith 1 000

(Received cash from S Smith) 14

2.35 Constant and Sons

General Journal G1 Date Particulars Folio Debit Credit Nov 11 Cash at bank 10 000

Capital—C Constant 10 000 (Owner introduced cash as capital)

12 Motor vehicle 2 000 Equipment 3 000 Furniture 1 000

Cash at bank 6 000 (Purchased assets for cash)

13 Land 10 000 B Finance Co 9 000 Cash at bank 1 000

(Purchased land, paying $1000 deposit)

Bank charges 20 Cash at bank 20

(Paid bank charges)

20 Cash at bank 500 Service fees revenue 500

(Received cash for services rendered)

30 B Finance Co 100 Cash at bank 100

(Paid first instalment to B Finance Co for land)

2.36 a Sold land for $4000 cash. b Bought furniture from Acme Furniture Co for $500. c Sold furniture to T Ellem for $2000. d Owner introduced inventories worth $100 into the business. e Sold equipment for $2000 cash. f Paid J Ball $200 cash. g Obtained a $1000 loan from the bank. h Bought land worth $10 000 from Realty Land Co, paying $1000 as a deposit and agreeing to pay the balance

later. i Received $500 cash from S Green. j Paid M Henry $1000 cash. k Received $400 from L Allen. l Repaid $500 on the bank loan. m Paid wages of $2200. n Charged T Smith service fees of $5000.

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2.37 a Wages and salaries, Expense, 2421 b Inventories, Asset, 3106 c Capital, Owner’s equity, 5101 d Cash in hand, Asset, 3102 e Delivery vehicle expenses, Expense, 2303 f Accounts payable, Liability, 4101 and an individual accounts payable will be 4101.1 g Accounts receivable, Asset, 3104 and an individual accounts payable will be 3104.1 h Loan from AFG Finance Co, Liability, 4201 i Furniture, Asset, 3301 j Bank charges, Expense, 2502

2.38

Retailers and Co Ledger

Dr Cr

Date Particulars Folio Amount Date Particulars Folio Amount

2008 $ 2008 $

Asset accounts Cash at Bank No 3103

Mar 1 Capital G1 500 Mar 7 V Jones G1 500

9 S Smith G1 1 000

S Smith No 3104.1

Mar 4 Motor vehicle G1 1 000 Mar 9 Cash at bank G1 1 000

Furniture No 3301

Mar 2 V Jones G1 500

Motor vehicles No 3303

Mar 1 Capital G1 1 000 Mar 4 S Smith G1 1 000

Liability accounts V Jones No 4102.3

Mar 7 Cash at bank G1 500 Mar 2 Furniture G1 500

Owner’s equity accounts Capital—H Jones No 5101

Mar 1 Motor vehicle and Cash G1 1 500

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2.39 Constant and Sons Ledger

Dr Cr


2008 $ 2008 $

Revenue accounts Service Fees Revenue No 1102

Nov 20 Cash at bank G1 500

Expense accounts Bank Charges No 2502

Nov 13 Cash at bank G1 20


Nov 11 Capital G1 10 000 Nov 12 Vehicle, equipment

20 Service fees and furniture G1 6 000 revenue G1 500 13 Land G1 1 000

Bank charges G1 20

30 B Finance Co G1 100

Furniture No 3301

Nov 12 Cash at bank G1 1 000

Motor Vehicles No 3303


Equipment No 3304


Land No 3306

Nov 13 Cash and B Finance Co G1 10 000

Liability accounts B Finance Co No 4102.3

Nov 30 Cash at bank G1 100 Nov 13 Land G1 9 000

Owner’s equity accounts Capital—C Constant No 5101


17

2.40 Motor Vehicle No 3303

Jan 1 Capital 20 000 Jan 4 Cash at bank 10 000

19 Vehicle traders 9 000 31 Balance c/d 29 000

25 Cash at bank 10 000

$39 000 $39 000

Feb 1 Balance b/d 29 000

2.41 a

Cash at Bank No 3103

Mar 1 Capital 50 000 Mar 3 Furniture 10 000

10 Sales 5 000 5 Motor vehicles 20 000

15 Equipment 12 000 19 J Black 5 000

28 F Green 9 000 22 Wages 1 600

31 Balance c/d 39 400

$76 000 $76 000

Apr 1 Balance b/d 39 400

b

Mar 1 Owner introduced $50 000 cash as capital 3 Purchased $10 000 worth of furniture for cash 5 Purchased a motor vehicle for $20 000 cash

10 Sold goods for $5000 cash (similar to service fees revenue) 15 Sold equipment for $12 000 cash 19 Paid J Black $5000 cash 22 Paid wages $1600 in cash 28 Received $9000 cash from F Green 31 The balance of the Cash at Bank account is $39 400

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2.42

J Nella General Journal G

Date Particulars Folio Debit Credit Feb 1 Furniture 3301 14 000

T Mylonas 4102.3 14 000 (Purchased furniture from T Mylonas)

3 Furniture 3301 15 000 Capital—J Nella 5101 15 000

(Owner introduced furniture as capital)

8 T Mylonas 4102.3 14 000 Cash at bank 3103 14 000

(Paid account of T Mylonas)

28 Motor vehicles 3303 19 000 F Kindt 4102.4 19 000

(Purchased motor vehicle from F Kindt)

19

J Nella Ledger

Dr Cr


$ $


Feb 28 Balance c/d 14 000 Feb 8 T Mylonas G 14 000

$14 000 $14 000

Mar 1 Balance b/d 14 000

Furniture No 3301

Feb 1 T Mylonas G 14 000 Feb 28 Balance c/d 29 000

3 Capital G 15 000

$29 000 $29 000



Feb 28 F Kindt G 19 000 Feb 28 Balance c/d 19 000

$19 000 $19 000


Liability accounts T Mylonas No 4102.3

Feb 8 Cash at bank G 14 000 Feb 1 Furniture G 14 000

F Kindt No 4102.4

Feb 28 Balance c/d 19 000 Feb 28 Furniture G 19 000

$19 000 $19 000


Owner’s equity accounts Capital—J Nella No 5101

Feb 28 Balance c/d 15 000 Feb 3 Furniture G 15 000

$15 000 $15 000

Mar 1 Balance b/d 15 000 20

2.43

Retailers and Co Ledger

Date Particulars Folio Debit Credit Balance $ $ $

Asset accounts


Mar 1 Capital G1 500 500 Dr 7 V Jones G1 500 0 9 S Smith G1 1 000 1 000 Dr

S Smith No 3104.1

Mar 4 Motor vehicle G1 1 000 1 000 Dr 9 Cash at bank G1 1 000 0

Furniture No 3301

Mar 2 V Jones G1 500 500 Dr

Motor Vehicle No 3303

Mar 1 Capital G1 1 000 1 000 Dr 4 S Smith G1 1 000 0

Liability accounts

V Jones No 4102.3

Mar 2 Furniture G1 500 500 Cr 7 Cash G1 500 0

Owner’s equity accounts

Capital—H Jones No 5101

Mar 1 Cash and motor vehicle G1 1 500 1 500 Cr

21

2.44 Constant and Sons

Ledger


Revenue accounts

Service Fees Revenue No 1102

Nov 20 Cash at bank G1 500 500 Cr

Expense accounts

Bank Charges No 2502

Nov 13 Cash at bank G1 20 20 Dr

Asset accounts


Nov 11 Capital G1 10 000 10 000 Dr 12 Vehicle, Equipment and Furniture G1 6 000 4 000 Dr 13 Land G1 1 000 3 000 Dr

Bank charges G1 20 2 980 Dr 20 Service fees revenue G1 500 3 480 Dr 30 B Finance Co G1 100 3 380 Dr

Furniture No 3301

Nov 12 Cash at bank G1 1 000 1 000 Dr



Equipment No 3304


Land No 3306

Nov 13 Cash and B Finance Co G1 10 000 10 000 Dr

Liability accounts

B Finance Co No 4102.3

Nov 13 Land G1 9 000 9 000 Cr 30 Cash at bank G1 100 8 900 Cr


Capital No 5101

Nov 1 Cash at bank G1 10 000 10 000 Cr

2.45 The trial balance is a list of ledger account balances on a particular date, used to help check the accuracy of the ledger. It is prepared by listing all ledger balances in either a debit or credit column, and totalling each of these columns. If these two columns are equal, it does not necessarily guarantee that the ledger is correct, because a number of possible errors in the ledger will not be disclosed by the preparation of a trial balance. But it does help to check that the ledger is arithmetically correct, and that double entry has taken place.

If any errors are disclosed at this stage (by the fact that the totals of the debit and credit columns are not equal), this will save valuable time and prevent problems with the later stages of the accounting process, where the ledger accounts are formally closed and balanced and final accounts and reports are prepared. Such a method of checking the ledger is thus a very useful (sub)step in the accounting process.

22

2.46 Retailers and Co

Trial Balance as at 31 March

Account no Account Debit Credit $ $

3103 Cash at Bank 1 000 3301 Furniture 500 5101 Capital—H Jones 1 500

$1 500 $1 500

2.47

Constant and Sons Trial Balance as at 30 November


1102 Service Fees Revenue 500 2502 Bank Charges 20 3103 Cash at Bank 3 380 3301 Furniture 1 000 3303 Motor Vehicles 2 000 3304 Equipment 3 000 3306 Land 10 000 4102.3 B Finance Co 8 900 5101 Capital 10 000

$19 400 $19 400

23

2.48


Aug 9 Owner introduced Equipment A Dr Inc Dr 1 000 equipment and Cash at bank A Dr Inc Dr 1 500 cash as capital Capital—R Shaw OE Cr Inc Cr 2 500

10 Bought equipment Equipment A Dr Inc Dr 500 for cash Cash at bank A Dr Dec Cr 500

11 Bought furniture Furniture A Dr Inc Dr 1 000 from J Jones J Jones L Cr Inc Cr 1 000 (on credit)

17 Paid J Jones cash J Jones L Cr Dec Dr 500 Cash at bank A Dr Dec Cr 500

23 Supplied services A Smith A Dr Inc Dr 400 to A Smith Service fees revenue R Cr Inc Cr 400

31 Received cash from Cash at bank A Dr Inc Dr 400 A Smith S Smith A Dr Dec Cr 400

R Shaw General Journal G1

Date Particulars Folio Debit Credit Aug 9 Cash at bank 3103 1 500

Equipment 3304 1 000 Capital—R Shaw 5501 2 500

(Owner introduced cash and equipment as capital)

10 Equipment 3304 500 Cash at bank 3103 500

(Purchased equipment for cash)

11 Furniture 3301 1 000 J Jones 4102.3 1 000

(Purchased furniture on credit)

17 J Jones 4102.3 500 Cash at bank 3103 500

(Paid J Jones on account)

23 A Smith 3104.1 400 Service fees revenue 1102 400

(Supplied services on credit)

31 Cash at bank 3103 400 A Smith 3104.1 400

(Received cash from A Smith on account)

24

R Shaw Ledger

Dr Cr


$ $


Aug 23 A Smith G1 400


Aug 9 Capital G1 1 500 Aug 10 Equipment G1 500

31 A Smith G1 400 17 J Jones G1 500

A Smith No 3104.1

Aug 23 Service fees Aug 31 Cash at bank G1 400 revenue G1 400

Furniture No 3301

Aug 11 J Jones G1 1 000

Equipment No 3304

Aug 9 Capital G1 1 000

10 Cash at bank G1 500

Liability accounts J Jones No 4102.3

Aug 17 Cash at bank G1 500 Aug 11 Furniture G1 1 000

Owner’s equity accounts Capital—R Shaw No 5101

Aug 9 Cash and equipment G1 2 500

R Shaw Trial Balance as at 31 August


1102 Service Fees Revenue 400 3103 Cash at Bank 900 3301 Furniture 1 000 3304 Equipment 1 500 4102.3 J Jones 500 5101 Capital 2 500

$3 400 $3 400

25

2.49


June 1 Performed services Cash at bank A Dr Inc Dr 1 000 for cash Service fees R Cr Inc Cr 1 000

revenue 3 Paid wages in cash Wages and salaries E Dr Inc Dr 1 500

Cash at bank A Dr Dec Cr 1 500 4 Purchased Consumable

consumable supplies expense E Dr Inc Dr 1 000 supplies from Ampol Ltd L Cr Inc Cr 1 000 Ampol (on credit)

7 Received rent Cash at bank A Dr Inc Dr 2 000 in cash Rent revenue R Cr Inc Cr 2 000

10 Supplied services Cash at bank A Dr Inc Dr 2 500 for cash and on Jim’s Truckers A Dr Inc Dr 1 000 credit to Service fees R Cr Inc Cr 3 500 Jim’s Truckers revenue

20 Paid account of Ampol Ltd L Cr Dec Dr 1 000 Ampol Ltd Cash at bank A Dr Dec Cr 1 000

23 Paid wages Wages and salaries E Dr Inc Dr 1 500 Cash at bank A Dr Dec Cr 1 500

30 Paid electricity Electricity E Dr Inc Dr 500 Cash at bank A Dr Dec Cr 500

26

Smith’s Vehicle Repairs

General Journal G Date Particulars Folio Debit Credit June 1 Cash at bank 3103 1 000

Service fees revenue 1102 1 000 (Performed services for cash)

3 Wages and salaries 2421 1 500 Cash at bank 3103 1 500

(Paid wages in cash)

4 Consumable supplies expense 2201 1 000 Ampol Ltd 4101.1 1 000

(Purchased consumable supplies on credit)

7 Cash at bank 3103 2 000 Rent revenue 1106 2 000

(Received rent for unused premises)

10 Cash at bank 3103 2 500 Jim’s Truckers 3104.1 1 000

Service fees revenue 1102 3 500 (Supplied services for cash and on credit)

20 Ampol Ltd 4101.1 1 000 Cash at bank 3103 1 000

(Paid account of Ampol Ltd)


(Paid wages)

30 Electricity 2407 500 Cash at bank 3103 500

(Paid electricity) 27

Smith’s Vehicle Repairs Ledger


Revenue accounts


June 1 Cash G 1 000 1 000 Cr 10 Cash and Jim’s Truckers G 3 500 4 500 Cr

Rent Revenue No 1106

June 7 Cash G 2 000 2 000 Cr

Expense accounts

Consumable Supplies Expense No 2201

June 4 Ampol G 1 000 1 000 Dr

Electricity No 2407

June 30 Cash G 500 500 Dr

Wages and Salaries No 2421

June 3 Cash G 1 500 1 500 Dr 23 Cash G 1 500 3 000 Dr

Asset accounts


June 1 Service fees revenue G 1 000 1 000 Dr 3 Wages and salaries G 1 500 500 Cr 7 Rent revenue G 2 000 1 500 Dr

10 Service fees revenue G 2 500 4 000 Dr 20 Ampol Ltd G 1 000 3 000 Dr 23 Wages and salaries G 1 500 1 500 Dr 30 Electricity G 500 1 000 Dr

Jim’s Truckers No 3104.1

June 10 Service fees revenue G 1 000 1 000 Dr

Liability accounts

Ampol Ltd No 4101.1

June 4 Consumable supplies expense G 1 000 1 000 Cr 20 Cash G 1 000 0

Smith’s Vehicle Repairs Trial Balance as at 30 June


1102 Service Fees Revenue 4 500 1106 Rent Revenue 2 000 2201 Consumable Supplies Expense 1 000 2407 Electricity 500 2421 Wages and Salaries 3 000 3103 Cash at Bank 1 000 3104.1 Jim’s Truckers 1 000

$6 500 $6 500

28

2.50 Briggs Traders

Income Statement for the period ended 31 October


Less Expenses Consumable supplies expense 10 000 Advertising 4 000 Insurance 2 000 Office expenses 1 500 Rates 1 000 Wages and salaries 3 000 21 500 Net profit $78 500


2.52 a Service fees Revenue b Cost of goods sold Expense c Sales Revenue d Inventories Asset e Accounts payable Liability f Accounts receivable Asset g Capital Owner’s equity h Cash at bank Asset i Cartage on sales Expense j Delivery vehicles Asset

2.53 A = L + OE OE = A – L L = A – OE

2.54 The concept of owner’s equity, the consequent formulation of the accounting equation and the development of a system of double-entry recording are all consequences of the adoption of the accounting entity assumption. Once the assumption has been adopted (that is, for accounting purposes, the owner and the business will be treated as two separate entities), all of these other things follow. The owner is treated as a source of funds, just like any other for the business. The owner is seen as an ‘internal’ supplier of funds; the others (such as creditors and lenders) are seen as ‘external’ suppliers. Both are owed money by the business, i.e. they have an interest or equity in the business. In the business’s records, one is designated as a liability, the other as owner’s equity. Assets used to operate the business are thus provided by both external suppliers of funds (liabilities) and the owner(s). From this follows the idea of the accounting equation A = L + OE. The accounting equation provides the basis of the rules for double-entry recording—assets are assumed to be debit items, therefore, liabilities and owner’s equity (on the opposite side of the equation) are credit items. All other rules flow from these basic concepts.

29

2.55

C Kearne’s account Jan 1 Purchased office equipment from C Kearne $1000

1 Paid C Kearne $100 cash 10 Purchased furniture worth $2000 from C Kearne

C Kearn’s account has a credit balance of $2900. Cash at Bank account Mar 1 The owner introduced $10 000 cash as capital

2 Sold goods for cash $500 3 Received $200 cash from J Wall 5 Paid Furnitureland Co $100 cash

10 Bought equipment for $1000 cash The Cash at Bank account has a debit balance of $9600.

2.56 a Bought consumable supplies from A Kelt b Paid office expenses in cash c Bought furniture on credit from Office Supplies Ltd d Performed services for T Vander e Received interest in cash f Purchased furniture for cash g Received cash from B Freeman h Paid W Daunt cash i Bought equipment for cash j Owner introduced motor vehicle as capital

30

2.57 Types of errors that a trial balance will not disclose include:

• incorrect amounts of the same value that have been entered on both sides of the ledger. If $100 were entered on both the debit and credit sides of the ledger accounts, instead of $150, the trial balance would still add to the same in each column, and might appear to be correct, but it would actually be incorrect by $50 in two accounts.

• entries of an equal amount made to the wrong side of each account. If the entry was the opposite to what it should have been—e.g. Cash debited, B Brown credited with $500 instead of B Brown debited and Cash credited—debit and credit columns would be equal, but both Cash and Brown’s account would be incorrect by $1000.

• entries of an equal amount made in the wrong accounts, but on the correct sides. If an entry is made to the correct sides of any accounts (even if one or more of the accounts is incorrect, e.g. B Brown instead of C Brown), but the amounts entered are the same, the trial balance will still add to the same amount in both the debit and credit columns. The ledger is not correct, however, because at least two accounts will be wrong by the amount wrongly inserted in those accounts.

• transactions omitted entirely or put in twice. If any entry (e.g. Cash debited and Capital credited for $1000) is missed entirely, debits and credits in the trial balance will still add to the same amount, but the ledger will obviously be incorrect by $1000 in both the Cash and Capital accounts, and both columns of the trial balance should really be $1000 higher. If the entry had been entered twice, again the trial balance would appear to be correct, but both Cash and Capital and the debit and credit columns of the trial balance would have an extra $1000 entered in them.

• compensating errors of many types, whose effect is to cancel each other out as far as the trial balance totals are concerned, e.g. two errors in the one account, which cancel each other out. Another example is two errors in the trial balance, which cancel each other out. Furniture, for example, might be $1000 less than it should be. If Motor vehicles were $1000 more than they should be, or Sales (in the other column of the trial balance) $1000 less than should be, the trial balance totals would be equal, but, of course, incorrect.

A procedure for discovering such errors would be: • re-add the trial balance • check that each account has a balance of its ‘normal’ nature. If it does not, it could still be correct but should be examined

carefully. • compare the balance in each ledger account with the balance shown in the trial balance to check that:

a each balance is listed b each balance is listed on the correct side and with the correct amount

• subtract the total debit from the total credit and look for: a the difference—this indicates an omitted posting b half the difference—this indicates a posting to the wrong side of an account c a difference divisible by 9—this indicates a transposed figure, e.g. 649 instead of 946 • check the balance in each ledger account by:

a re-adding the debits and credits b checking the subtraction to determine the account balance

• check all the postings back to the journal and source documents.

31

2.58

J Shears General Journal G1

Date Particulars Folio Debit Credit Feb 1 Motor vehicle 3303 10 000

Tools 3307 5 000 Capital—J Shears 5101 15 000

(Owner introduced utility and tool as capital)

4 Cash at bank 3103 1 000 Service fees revenue 1102 1 000

(Performed services for cash)

7 D Nair 3104.1 850 Service fees revenue 1102 850

(Performed services on credit)

10 Consumable supplies expense 2201 500 W Hardware Supplies 4101.1 500

(Purchased consumable supplies on credit)

12 Motor vehicle expenses 2409 150 Cash at bank 3103 150

(Paid registration on utility)

13 Cash at bank 3103 850 D Nair 3104.1 850

(Received cash from D Nair on account)

18 W Hardware Supplies 4101.1 500 Cash at bank 3103 500

(Paid W Hardware Supplies on account)

19 Cash at bank 3103 1 000 Service fees revenue 1102 1 000

(Performed services for cash)

21 Tools 3307 200 Cash at bank 3103 200

(Purchased new tools for cash)

28 Subscriptions 2423 100 Cash at bank 3103 100

(Paid subscription to Electricians Association)

C Nugent 3104.2 800 Service fees revenue 1102 800

(Performed services on credit)

32

J Shears Ledger

Dr

Date Particulars Folio

2008

Revenue accounts Expense accounts

Feb 10 W Hardware Supplies

Feb 12 Cash at bank G1


Asset accounts

Feb 4 Service fees G1

13 D Nair G1

19 Service fees G1



Feb 1 Capital G1

Feb 1 Capital G1

21 Cash at bank G1

Liability accounts



Amount Date Particulars

$ 2008

Service Fees Revenue

Feb 4 Cash at bank

7 D Nair

19 Cash at bank

28 C Nugent

Consumable Supplies Expense

G1 500

Motor Vehicle Expenses

150

Subscriptions

100

Cash at Bank

1 000 Feb 12 Motor vehicle expenses

850 18 W Hardware

1 000 Supplies

21 Tools 28 Subscriptions

D Nair

850 Feb 13 Cash at bank

C Nugent

800

Motor Vehicle

10 000

Tools

5 000

200

W Hardware Supplies

500 Feb 10 Consumable supplies

Capital—J Shears

Feb 1 Motor vehicle and tools

Cr

Folio Amount

$

No 1102

G1 1 000

G1 850

G1 1 000

G1 800

No 2201

No 2409

No 2423

No 3103

G1 150

G1 500 G1 200 G1 100

No 3104.1

G1 850

No 3104.2

No 3303

No 3307

No 4101.1

G1 500

No 5101

G1 15 000 33

J Shears

Trial Balance as at 28 February 2008


1102 Service Fees Revenue 3 650 2201 Consumable Supplies Expense 500 2409 Motor Vehicle Expenses 150 2423 Subscriptions 100 3103 Cash at Bank 1 900 3104.2 C Nugent 800 3303 Motor Vehicle 10 000 3307 Tools 5 200 5101 Capital 15 000

$18 650 $18 650

J Shears Income Statement for the period ended 28 February 2008


Less Expenses Consumable supplies expense 500 Motor vehicle expenses 150 Subscriptions 100 750

Net profit $2 900

J Shears Balance Sheet as at 28 February 2008

Assets Owner’s equity Cash at bank 1 900 Capital—J Shears 15 000 C Nugent (Accounts receivable) 800 Add Net profit 2 900 17 900 Motor vehicle 10 000 Tools 5 200

$17 900 $17 900 34

2.59 Financial reporting case—Woolworths Ltd a $13 346 400 000 b $9 088 800 000 c $4 257 600 000 d $13 346 400 000 - $9 088 800 000 = $4 257 600 000 e $8 775 100 000 - $6 774 900 000 = $2 000 200 000 f $37 734 200 000 g $1 026 700 000

2.60 Interpretation cases a Such things as clothes, stereos, bikes. b $10 000, which is the historical cost or purchase price. c The excess of assets over liabilities—net worth. d Because it is an amount owed to the bank on the credit card. e Sole trader because of the capital section. f It may rent or lease these and so they would not appear on the Balance Sheet. g It may not have had enough cash to purchase the premises, but still wants to invest in assets, and so has purchased the furniture and fittings. h It is difficult to say from the Balance Sheet alone, but they have 50 per cent of their funds owed to outside parties, and the cash balance appears very low for a retail store—would depend on sales and cash flow. i Because they are owed back to the depositors. j These are the amounts customers of the bank owe to the bank. k It must invest its money to earn a return. l Usually banks are companies, owned by a large number of shareholders. m Differences:

• the different name for owner’s equity • loans are assets to the bank, liabilities to others. Similarities: • each Balance Sheet has cash and other assets (i.e. liquid and not liquid) • setout is similar, each Balance Sheet has A, L and OE.

35

2.61 Problem solving and interpretation case 1 Provided services for $100 000 cash. 2 Purchased consumable supplies for $40 000 cash. 3 Paid other expenses $50 000 cash. 4 Sold a vehicle for $20 000 cash. 5 Paid J Jones $4000 cash. 6 Bought buildings for $30 000, paying a deposit of $10 000 and obtaining a mortgage of $20 000.


2007

July 1 Balance b/d 4 000 During Consumable year supplies G 40 000

During Service fees G 100 000 Other expenses G 50 000 year Motor vehicle G 20 000 Buildings G 10 000

J Jones G 4 000

2008

June 30 Balance c/d 20 000 $124 000 $124 000

July 1 Balance b/d 20 000

2.62 Problem solving and interpretation case

B Bright Ledger

Date Amount


Aug 1 A Brown 200 5 Cash 1 000


Aug 10 J Smith 50 12 Cash 300

Electricity No 2407

Aug 8 Cash 100


Aug 5 Service fees 1 000 Aug 8 Electricity 100 15 A Brown 200 12 Consumable supplies 300

18 J Smith 25

A Brown No 3104.1

Aug 1 Service fees 200 Aug 15 Cash 200

J Smith No 4101.1

Aug 18 Cash 25 Aug 10 Consumable supplies 50

36

Chapter 3 The Accounting process to the trial balance

3.1 i The goods and services tax (GST) is a broad-based tax of 10 per cent on the supply of most goods and service consumed

in Australia. It is designed to be collected by enterprises but eventually paid by consumers. ii Under GST legislation, supplies are goods and services sold by an enterprise. Most supplies are taxable, but some are free of

tax, while others are input taxed supplies. iii Taxable supplies are those goods and services that are subject to the GST. Examples of taxable supplies include: furniture,

clothing, computers, stationery, telephone, electricity, food eaten in a restaurant, insurance, commercial rent, accountancy and legal fees, investment advice and taxi fares. Therefore, most goods and services are in this category.

iv GST-free supplies are those supplies that are not taxed. They are defined by the legislation and examples include basic food, education, water and sewerage, exports, eligible childcare, businesses bought as going concerns, non-commercial activities of charitable institutions, religious services, international air and sea travel, inwards duty-free items, international mail, grants of freehold by government, cars for use by disabled people and most health services.

v Input taxed supplies include financial supplies (e.g. most transactions relating to money, including interest and bank charges), sale of residential premises, residential rent, and the sale of food in school tuckshops and canteens. The GST is not charged on input taxed supplies and input tax credits cannot be claimed.

vi Acquisitions or inputs are those goods and services bought by an enterprise in order to conduct its business activities. They include purchases of goods or services, expenses and capital expenditure items. They also include transactions such as obtaining advice or information, taking out a lease of business premises or hiring business equipment. An input tax credit can be claimed for the purchase of all taxable supplies and GST-free supplies.

vii Input tax credits are amounts claimed back from the government for the GST paid on acquisitions used by a GST-registered business (except for input taxed supplies). When the time comes for the enterprise to meet its GST obligations, such credits will reduce the amount of GST owing. Any claim for credits must be supported by a tax invoice showing the expenditure details, but a tax invoice is not required for purchases of a GST exclusive value of $50 or less.

3.2 a The GST taxing system works on the basis that supplies are taxed and tax credits are given for acquisitions or inputs, as goods

or services are moved along the supply chain. With GST to be included in the transaction, goods with a sales value of $100 would be invoiced from the manufacturer to

the wholesaler at a price of $110, with $10 being the GST collected by the manufacturer to pass on to the government. The wholesaler would then sell the goods to the retailer for sufficient to cover costs, and earn a reasonable profit—in this case $250 plus the 10 per cent GST of $25, a total price of $275. Businesses that are not the final consumer of the product can claim a tax credit for the amount of the GST included in the price of any acquisitions they purchase to conduct their business. Thus, the wholesaler can claim the $10 paid to the manufacturer as a tax credit, and reduce the amount to be paid to the government to $15.

b The retailer then sells the goods to the consumer for $450 plus $45 GST, i.e. a price of $495. The retailer pays this $45 GST to the government less an input tax credit of $25 on their purchases—a net amount of $20. So the manufacturer has paid $10 GST to the government, the wholesaler $15 and the retailer $20—a total of $45.

The total of the tax paid to the government is always 10 per cent of the final price, no matter how many times the goods are bought or sold before they are in the hands of the consumer. However, it is always the consumer who finally pays the tax. As the goods flow from manufacturer to wholesaler to retailer, the GST is charged and input tax credits claimed. The consumer is at the end of the supply chain and is not able to claim back any GST paid.

37

3.3 An entity is required to register for the GST if it is carrying on an enterprise and has, or is expected to have, an annual turnover of $50 000 or more ($100 000 for not-for-profit entities). However, an entity may voluntarily register for the GST if its annual turnover is less than these figures. Only registered entities are able to charge customers GST, and only registered entities are able to claim back the GST they have paid on their inputs. Entities register for the GST by completing a registration form, providing all the details of their business, showing it to be an entity carrying on an enterprise in Australia, and, if they have not already done so, applying for an Australian Business Number.

3.4 To help the ATO keep track of taxation matters for business entities, an Australian Business Number (ABN) is used. This is a unique 11-digit identifier used by each business entity in Australia in all its dealings with the ATO. It does not replace the Tax File Number (TFN) of the entity, which must still be used on taxation forms, shareholder registration forms, etc.

Having an ABN does not automatically mean that an entity is registered for the GST. The two are separate issues. Thus, you can have an ABN without being registered for the GST, but you cannot be registered for the GST without having an ABN. A supplier who is not registered for the GST cannot charge the GST on supplies made, nor claim input tax credits on the acquisition of supplies from others.

3.5 a i $7 ii $100 iii $626 b Nil c Nil

3.6 a i $7 ii $7.70 iii $110 iv $688.60

Yes, input tax credits are claimable on acquisitions used to supply these goods or services. b Nil; but input tax credits can still be claimed on acquisitions used to supply tax-free goods or services. c Nil; and no input tax credits are claimable on input taxed supplies.

3.7

Taxable supply GST-free supply Input taxed supply Commercial rent Basic food Residential rent Furniture Exports School canteen food Telephone Health services Bank charges Restaurant food International mail Interest Accounting fees Charities’ non-commercial activities Sale of residential premises

Cars for disabled International travel

3.8

Type of supply Charge GST? Claim back Input Tax (Yes/No) Credits? (Yes/No)

Taxable Yes Yes GST-free No Yes Input taxed No No

38

3.9 Larger enterprises (with an annual turnover of $20 million or more) must complete their business activity statement and make any necessary payments on a monthly basis. Smaller enterprises with smaller turnover and lower GST, and other tax commitments, have more flexibility as to their tax period and can elect to report and pay tax instalments on a quarterly, or even half-yearly or yearly basis. Most will consult their tax or financial advisor or the ATO to choose the most appropriate period for them.

3.10 The most important of the documents for GST purposes are tax invoices, which are documents issued by the supplier, showing details of the cost of any goods or services supplied. These are generally similar to any other invoice, but differ in that they also show details of any GST included in the transaction. If a supplier makes a taxable supply of more than $50, then they should issue a tax invoice at the time of supply. If asked to provide a tax invoice by a customer, a supplier is required to do so within 28 days from the date of the request. (Note that goods taken by a business owner for private use would usually be recorded on private internal memorandums.)

If an adjustment occurs in relation to a taxable supply, it is required that the customer be issued with an adjustment note. As with the tax invoice, a supplier must issue an adjustment note within 28 days of a request by a customer, or on becoming aware of an adjustment, such as a sales return. Adjustment notes are sometimes called credit advices or credit notes. They are the opposite of the tax invoice for accounting and tax purposes, but obviously contain similar details. Adjustment notes are thus generally issued by a supplier to give details of changes to the amount due for payment for a supply.

Such documents could be issued without GST details where the supply is for $50 or less, or when no GST is payable, because the supply is either GST-free or input taxed, or where the business issuing the document is not registered for the GST.

3.11 Examples of increasing adjustments include: • purchases returns and allowances. These reduce the cost of the goods purchased for resale and input tax credits. • purchases discounts received. These reduce the amount payable for goods purchased for resale and tax credits • recovery of bad debts written off. A debt we did not expect to receive is paid, so GST is again owing • goods taken/used for the owner’s private purposes. The owner is the final consumer and must pay GST. Examples of decreasing adjustments include: • sales returns and allowances. These reduce sales and GST collected and payable to the ATO • sales discounts allowed. These reduce the amount receivable for sales and GST collected • bad debts written off. A debt we expected to receive for sales will not be received, so GST is not payable.

3.12 The two basic GST accounts generally used to record GST are: • GST Collected, which is a liability for a business, and records the GST collected on sales and supplies, which is payable to

the ATO. (This account is sometimes called a GST Payable account.) The balance in this account would normally be on the credit side, as the account is a liability.

• GST Credits Received, which is a negative liability for a business, as it reduces the amount owing to the ATO. It records the input tax credits claimed on purchases or acquisitions. (This account is sometimes called an Input Tax Credit Receivable account or GST Paid on Inputs account.) Its balance would be on the debit side, being a negative liability.

3.13 At the end of each period GST Collected and GST Credits Received are usually transferred to a GST Clearing account or some other similar account. This account can be used to calculate the net amount payable (or refundable) for the GST. For most businesses there will be GST payable to the ATO, so in most cases this will be a liability account.

3.14 Some businesses that are dealing with both GST-taxable and GST-free supplies may find it necessary to have two Sales accounts, to enable them to more easily complete the BAS, and to keep track of which supplies are taxable and which are not. One account would therefore be titled ‘Sales—GST-Taxable’, and the other ‘Sales—GST-Free’.

39

3.15 a

Bailey’s Hardware General Journal G1

Particulars Folio Dr C $ $

Cash at bank 10 000 Capital—B Bailey 10 000

(Owner commenced business with cash at bank)

b

Vincent Enterprises General Journal G1

Particulars Folio Dr Cr $ $

Cash at bank 19 000 Baker Pty Ltd 2 200 Jackson and Sons 1 600 Inventories 4 000 Motor vehicles 27 000

Brown and Company 6 600 Capital—V Vincent 47 200

(Owner commenced business with assets and liabilities)

3.16 $5, found by subtracting the GST credits received from the GST collected on behalf of the ATO.

40

3.17 B Vincenzo

General Journal G1 Date Particulars Folio Dr Cr June 1 Cash at bank 3103 5 000

Motor vehicle 3303 30 000 Equipment 3304 5 000

Capital—B Vincenzo 5101 40 000 (Commenced business with assets)

5 Consumable supplies expense 2201 550 GST credits received 4102.2A 55

Robins Electrical Wholesalers 4101.1 605 (Purchased consumable supplies as per tax invoice 5501)

14 Insurance 2408 80 GST credits received 4102.2A 8

Cash at bank 3103 88 (Paid insurance as per cheque 0001)

22 J Brown 3104.1 1 650 GST collected 4102.2 150 Service fees revenue 1102 1 500

(Charged service fees as per tax invoice 2001)


Cash at bank 3103 770 (Purchased consumable supplies, cheque 0002)

30 Cash at bank 3103 484 GST collected 4102.2 44 Service fees revenue 1102 440

(Charged service fees as per receipt 601)

41

B Vincenzo Ledger

Dr Cr

Date Particulars Folio Amount Date Particulars Folio Amount $ $


June 22 J Brown G1 1 500


Expense accounts Consumable Supplies Expense No 2201

June 5 Robins Electrical Wholesalers G1 550


Insurance No 2408

June 14 Cash at bank G1 80


June 1 Capital G1 5 000 June 14 Insurance and GST G1 88

30 Service fees 26 Consumable supplies and GST G1 484 and GST G1 770

J Brown No 3104.1

June 22 Service fees and GST G1 1 650


June 1 Capital G1 30 000

Equipment No 3304


Liability accounts Robins Electrical Wholesalers No 4101.1

June 5 Consumable Supplies and GST G1 605

GST Collected No 4102.2

June 22 J Brown G1 150

30 Cash at Bank G1 44

GST Credits Received No 4102.2A

June 5 Robins Electrical Wholesalers G1 55



Owner’s equity accounts Capital—B Vincenzo No 5101

June 1 Sundry accounts G1 40 000

42

B Vincenzo

Trial Balance as at 30 June


1102 Service Fees Revenue 1 940 2201 Consumable Supplies Expense 1 250 2408 Insurance 80 3103 Cash at Bank 4 626 3104.1 J Brown 1 650 3303 Motor Vehicle 30 000 3304 Equipment 5 000 4101.1 Robins Electrical Wholesalers 605 4102.2 GST Collected 194 4102.2A GST Credits Received 133 5101 Capital—B Vincenzo 40 000

$42 739 $42 739

3.18

F Chino General Journal G1

Date Particulars Folio Dr Cr July 1 Cash at bank 3103 2 000

Motor vehicle 3303 20 000 Plumbers Warehouse 4101.1 500 Capital—F Chino 5101 21 500

(Commenced business with assets and liabilities)


Plumbers Warehouse 4101.1 550 (Purchased supplies as per tax invoice 501)

11 Advertising 2301 700 GST credits received 4102.2A 70

Cash at bank 3103 770 (Paid advertising as per cheque 1001)

21 N Monday 3104.1 1 100 GST collected 4102.2 100 Service fees revenue 1102 1 000

(Charged service fees as per tax invoice 5001)


(Paid wages as per cheque 1002)


(Charged service fees as per receipt 441)

31 Plumbers Warehouse 4101.1 750 Cash at bank 3103 750


43

F Chino Ledger

Dr Cr



July 21 N Monday G1 1 000


Expense accounts Consumable Supplies Expense No 2201

July 4 Plumbers Warehouse G1 500

Advertising No 2301

July 11 Cash at bank G1 700


July 25 Cash at bank G1 1 360


July 1 Capital G1 2 000 July 11 Advertising and GST G1 770

28 Service fees and 25 Wages G1 1 360 GST G1 220 31 Plumbers

Warehouse G1 750

N Monday No 3104.1

July 21 Service Fees and GST G1 1 100


July 1 Capital G1 20 000

Liability accounts Plumbers Warehouse No 4101.1

July 31 Cash at bank G1 750 July 1 Capital G1 500

4 Consumable supplies and GST G1 550


July 21 N Monday G1 100



July 4 Plumbers Warehouse G1 50


Owner’s equity accounts Capital—F Chino No 5101

July 1 Sundry Accounts G1 21 500 44

F Chino Trial Balance as at 31 July


1102 Service Fees Revenue 1 200 2201 Consumable Supplies Expense 500 2301 Advertising 700 2421 Wages and Salaries 1 360 3103 Cash at Bank 660 3104.1 N Monday 1 100 3303 Motor Vehicle 20 000 4101.1 Plumbers Warehouse 300 4102.2 GST Collected 120 4102.2A GST Credits Received 120 5101 Capital—F Chino 21 500

$23 780 $23 780

3.19

Tennyson Traders General Journal G

Date Particulars Folio Dr Cr Mar 13 Inventories 750

GST credits received 75 Realtime Ltd 825

(Purchased GST-inclusive inventories on invoice 8795)

15 Realtime Ltd 55 GST credits received 5 Inventories 50

(Purchases returns as per adjustment note 1934)

16 Inventories 870 GST credits received

Cash at bank 957 (Purchased GST-inclusive inventories as per cheque 3325)

18 Cash at bank 44 GST credits received Inventories 40

(Purchases returns as per adjustment note and cheque 1956)

45

87

4

3.20 G Chowloon

General Journal G Date Particulars Folio Dr Cr Aug 23 Frank and Co 990

GST collected 90 Sales 900

(Sold GST-inclusive inventories on tax invoice 1479)

Cost of goods sold 500 Inventories 500

(Cost of goods sold on tax invoice1479)

25 Sales returns and allowances 80 GST collected 8

Frank and Co 88 (Sales returns as per adjustment note 1934)

Inventories 50 Cost of goods sold 50

(Cost of goods returned on adjustment note 1934)

26 Cash at bank 275 GST collected 25 Sales 250

(Sold GST-inclusive inventories as per receipt 3252)

Cost of goods sold 150 Inventories 150

(Cost of goods sold as per receipt 3252)

28 Sales returns and allowances 50 GST collected

Cash at bank 55 (Sales returns as per adjustment note and cheque 3326)

Inventories 30 Cost of goods sold 30

(Cost of goods returned as per adjustment note and cheque 3326)

3.21 $55 ($205 - $150)

46

5

3.22 V Barnes

General Journal G Date Particulars Folio Dr Cr Apr 3 Inventories 3106 1 500

GST credits received 4102.2A 150 Wholesale Ltd 4101.1 1 650

(Purchased GST-inclusive inventories on invoice 879)

11 Wholesale Ltd 4101.1 110 GST credits received 4102.2A 10 Inventories 3106 100


19 Cash at bank 3103 500 Sales 1101 500

(Sold GST-free inventories, as per cash register summary)

Cost of goods sold 2105 300 Inventories 3106 300

(Cost of goods sold, as per CRS)

20 Inventories 3106 1 740 GST credits received 4102.2A 174

Cash at bank 3103 1 914 (Purchased GST-inclusive inventories as per cheque 332)

24 Cash at bank 3103 88 GST credits received 4102.2A 8 Inventories 3106 80

(Purchases returns, as per receipt 326)

28 Hennings Ltd 3104.1 1 980 GST collected 4102.2 180 Sales 1101 1 800

(Sold GST-inclusive inventories, as per tax invoice 880)

Cost of goods sold 2105 1 000 Inventories 3106 1 000

(Cost of goods sold on tax invoice 880)

30 Sales returns and allowances 1101A 160 GST Collected 4102.2 16

Hennings Ltd 3104.1 176 (Hennings Ltd returned GST-inclusive goods as per tax adjustment note 193)

Inventories 3106 100 Cost of goods sold 2105 100

(Cost of goods returned on tax adjustment note 193)

47

V Barnes Ledger

Dr Date Particulars Folio

Revenue accounts

Apr 30 Hennings Ltd G

Expense accounts

Apr 19 Inventories G

28 Inventories G

Asset accounts

Apr 19 Sales G

24 Inventories and

GST G

Apr 28 Sales and GST G

Apr 3 Wholesale Ltd G

20 Cash at bank G

30 Cost of goods sold G

Amount Date Particulars $

Sales

Apr 19 Cash at bank

28 Hennings Ltd

Sales Returns and Allowances

160

Cost of Goods Sold

300 Apr 30 Inventories

1 000

Cash at Bank

500 Apr 20 Inventories

and GST

88

Hennings Ltd

1980 Apr 30 Sales returns and GST

Inventories

1 500 Apr 11 Wholesale Ltd

1 740 19 Cost of goods sold

100 24 Cash at bank

Cr

Folio Amount $

No 1101

G 500

G 1 800

No 1101A

No 2105

G 100

No 3103

G 1 914

No 3104.1

G 176

No 3106

G 100

G 300 G 80

Liability accounts

Apr 11 Inventories and GST G

Apr 30 Hennings Ltd G

Apr 3 Wholesale Ltd G

20 Cash at bank G

28 Cost of goods sold G

Wholesale Ltd

110 Apr 3 Inventories and GST G

GST Collected

16 Apr 28 Hennings Ltd G

GST Credits Received

150 Apr 11 Wholesale Ltd G

174 24 Cash at bank G

1 000

No 4101.1

1 650

No 4102.2

180

No 4102.2A

10

8

48

V Barnes Trial Balance as at 30 April


1101 Sales 2 300 1101A Sales Returns and Allowances 160 2105 Cost of Goods Sold 1 200 3103 Cash at Bank 1 326 3104.1 Hennings Ltd 1 804 3106 Inventories 1 860 4101.1 Wholesale Ltd 1 540 4102.2 GST Collected 164 4102.2A GST Credits Received 306

$5 330 $5 330

49

3.23 J Harrison

General Journal G1 Date Particulars Folio Dr Cr June 1 Cash at bank 3103 40 000

Inventories 3106 5 000 Delivery vehicles 3302 25 000

Capital—J Harrison 5101 70 000 (Commenced business with assets)

3 Inventories 3106 3 000 Manufacturers Ltd 4101.1 3 000

(Purchased GST-free inventories on invoice 1079)

10 Manufacturers Ltd 4101.1 220 Inventories 3106 220


14 Electricity 2407 150 GST credits received 4102.2A 15

Cash at bank 3103 165 (Paid electricity using cheque 831)


(Sold GST-free inventories, as per receipt 320)


(Cost of goods sold, as per receipt 320)

21 Sales returns and allowances 1101A 110 Cash at bank 3103 110

(Cash received for GST-free sales returns as per adjustment note and cheque 832)

Inventories 3106 70 Cost of goods sold 2105 70

(Cost of goods returned as per adjustment note and cheque 832)


Cash at bank 3103 1 100 (Purchased GST-inclusive inventories as per cheque 833)

28 H Jones 3104.1 165 GST collected 4102.2 15 Sales 1101 150

(Sold GST-inclusive goods as per tax invoice 140)


(Cost of goods sold on tax invoice 140)

30 Manufacturers Ltd 4101.1 1 000 Cash at bank 3103 1 000

(Paid Manufacturers Ltd on account, using cheque 834)

50

J Harrison Ledger

Dr Cr


Revenue accounts Sales No 1101

June 19 Cash at bank G1 880 28 H Jones G1 150

Sales Returns and Allowances No 1101A


Expense accounts Cost of Goods Sold No 2105

June 19 Inventories G1 500 June 21 Inventories G1 70 28 Inventories G1 100

Electricity No 2407



June 1 Capital G1 40 000 June 14 Electricity and GST G1 165

19 Sales G1 880 21 Sales returns G1 110

22 Inventories and GST G1 1 100

30 Manufacturers Ltd G1 1 000

H Jones No 3104.1

June 28 Sales and GST G1 165

Inventories No 3106

June 1 Capital G1 5 000 June 10 Manufacturers Ltd G1 220 3 Manufacturers Ltd G1 3 000 19 Cost of goods sold G1 500

21 Cost of goods sold G1 70 28 Cost of goods sold G1 100 22 Cash at bank G1 1 000

Delivery Vehicles No 3302


Liability accounts Manufacturers Ltd No 4101.1

June 10 Inventories G1 220 June 3 Inventories G1 3 000 30 Cash at bank G1 1 000


June 28 H Jones G1 15


June 14 Cash at bank G1 15 22 Cash at bank G1 100

Owner’s equity accounts Capital—J Harrison No 5101

June 1 Sundry accounts G1 70 000 51

J Harrison Trial Balance as at 30 June


1101 Sales 1 030 1101A Sales Returns and Allowances 110 2105 Cost of Goods Sold 530 2407 Electricity 150 3103 Cash at Bank 38 505 3104.1 H Jones 165 3106 Inventories 8 250 3302 Delivery Vehicles 25 000 4101.1 Manufacturers Ltd 1 780 4102.2 GST Collected 15 4102.2A GST Credits Received 115 5101 Capital—J Harrison 70 000

$72 825 $72 825

52

3.24 T Curuso

General Journal G Date Particulars Folio Dr Cr June 1 Cash at bank 3103 2 000

Furniture 3301 15 000 Buildings 3305 50 000 Land 3306 30 000

Capital—T Curuso 5101 97 000 (Commenced business with assets)


Motoroil Ltd 4101.1 3 300 (Purchased GST-inclusive inventories on tax invoice 108)

6 Cash at bank 3103 4 466 GST collected 4102.2 406 Sales 1101 4 060

(Sold GST-inclusive inventories, as per receipt 300)



9 Wages and salaries 2421 750 Cash at bank 3103 750


Cash at bank 3103 550 GST collected 4102.2 50 Service fees revenue 1102 500

(Performed services as per receipt 301)

11 Inventories 3106 770 Freshfood Ltd 4101.2 770

(Purchased GST-free inventories on invoice 446)

13 Freshfood Ltd 4101.2 200 Inventories 3106 200



(Sold GST-free inventories, as per receipt 302)



20 Equipment 3304 8 000 GST credits received 4102.2A 800

Cash at bank 3103 8 800 (Purchased equipment, as per cheque 202)

23 Motoroil Ltd 4101.1 2 000 Cash at bank 3103 2 000

(Paid Motoroil Ltd on account, cheque 203)

53

24 Insurance 2408 500 GST credits received 4102.2A 50

Cash at bank 3103 550 (Paid insurance, cheque 204)

Stationery 2416 70 GST credits received 4102.2A 7

Cash at bank 3103 77 (Paid stationery, cheque 205)


Cash at bank 3103 198 (Purchased consumable supplies, cheque 206)

28 J Jones 3104.1 220 Sales 1101 220

(Sold GST-free inventories, as per tax invoice 111)


(Cost of goods sold, as per invoice 111)

30 Interest expense 2504 110 Cash at bank 3103 110

(Paid interest on overdraft, as per bank statement)

Wages and salaries 2421 750 Cash at bank 3103 750

(Paid wages, cheque 207)

Drawings 5101A 330 GST credits received 4102.2A 30 Inventories 3106 300

(Owner withdrew inventories for personal use, as per journal voucher 001)

54

T Curuso Ledger

Dr Cr



June 6 Cash at Bank G 4 060 14 Cash at Bank G 675 28 J Jones G 220


June 9 Cash at bank G 500


June 6 Inventories G 2 500

14 Inventories G 400




Insurance No 2408


Stationery No 2416




30 Cash at bank G 750

Interest Expense No 2504



June 1 Capital G 2 000 June 9 Wages and salaries G 750 6 Sales and GST G 4 466 20 Equipment and GST G 8 800 9 Service fees and 23 Motoroil Ltd G 2 000

GST G 550 14 Sales G 675 24 Insurance and GST G 550

Stationery and GST G 77 28 Supplies and GST G 198 30 Interest expense G 110

Wages and salaries G 750

J Jones No 3104.1

June 28 Sales G 220 55

Inventories No 3106

June 4 Motoroil Ltd G 3 000 June 6 Cost of goods sold G 2 500

11 Freshfood Ltd G 770 13 Freshfood Ltd G 200

14 Cost of goods sold G 400


30 Drawings G 300

Furniture No 3301

June 1 Capital G 15 000

Equipment No 3304

June 20 Cash at bank G 8 000

Buildings No 3305


Land No 3306


Liability accounts Motoroil Ltd No 4101.1

June 23 Cash at bank G 2 000 June 4 Inventories and GST G 3 300

Freshfood Ltd No 4101.2

June 13 Inventories G 200 June 11 Inventories G 770



9 Cash at bank G 50


June 4 Motoroil Ltd G 300 June 30 Drawings G 30



Cash at bank G 7


Owner’s equity accounts Capital—T Curuso No 5101

June 1 Sundry accounts G 97 000

Drawings No 5101A

June 1 Inventories and GST G 330 56

T Curuso Trial Balance as at 30 June


1101 Sales 4 955 1102 Service Fees Revenue 500 2105 Cost of Goods Sold 3 040 2201 Consumable Supplies Expense 180 2408 Insurance 500 2416 Stationery 70 2421 Wages and Salaries 1 500 2504 Interest Expense 110 3103 Cash at Bank 5 544 3104.1 J Jones 220 3106 Inventories 230 3301 Furniture 15 000 3304 Equipment 8 000 3305 Buildings 50 000 3306 Land 30 000 4101.1 Motoroil Ltd 1 300 4101.2 Freshfood Ltd 570 4102.2 GST Collected 456 4102.2A GST Credits Received 1 145 5101 Capital—T Curuso 97 000 5101A Drawings 330

$110 325 $110 325

57

3.25 H Hoo

General Journal G Date Particulars Folio Dr Cr Aug 5 Furniture 4 000

GST credits received 400 J Richards 4 400

(Purchased furniture on credit as per tax invoice 589)

15 Drawings 220 GST credits received 20 Inventories 200

(Owner withdrew inventories for personal, use as per inter-office memo 247)

31 Drawings 600 Cash at bank 600

(Owner withdrew cash for personal use, as per cheque 6724)

58

3.26

Date Transactions Accounts Type of Nature of Inc/Dec Dr/Cr Amount involved account account $

May 3 Purchased motor Motor vehicles A Dr Inc Dr 20 000 vehicle for $22 000 GST credits received -L Dr Inc Dr 2 000 cash (GST-inclusive) Cash at bank A Dr Dec Cr 22 000

9 Owner withdrew Drawings -OE Dr Inc Dr 500 $500 for personal Cash at bank A Dr Dec Cr 500 use

23 Owner withdrew Drawings -OE Dr Inc Dr 77 GST-inclusive GST credits received -L Dr Dec Cr 7 inventories worth Inventories A Dr Dec Cr 70 $77 for personal use

3.27 Brown’s Foods would receive a refund of GST of $115 ($174 - $59). This may happen with a commencing business, because in its early stages a business must purchase many assets and pay many expenses on which GST credits are received. Few sales are normally made in the very early stages, until the business becomes established, so little GST is collected to pay to the ATO.

59

3.28 A Storey

General Journal G Date Particulars Folio Dr Cr Sept 1 Cash at bank 3103 30 000

Furniture 3301 5 000 Capital—A Storey 5101 35 000

(Commenced business with assets)

4 Rent expense 2414 1 900 GST credits received 4102.2A 190

Cash at bank 3103 2 090 (Paid rent, cheque 001)

10 Inventories 3106 1 200 Wholesale Food Ltd 4101.1 1 200

(Purchased GST-free inventories, as per tax invoice 247)

Cash at bank 3103 850 Sales 1101 850

(Sold GST-free inventories, as per CRS)



13 Furniture Seconds Ltd 3105.1 5 500 GST Collected 4102.2 500 Furniture 3301 5 000

(Sold furniture, as per tax invoice 301)


Wholesale Food Ltd 4101.1 5 280 (Purchased inventories, tax invoice 255)

17 Wholesale Food Ltd 4101.1 550 GST credits received 4102.2A 50 Inventories 3106 500

(Returned inventories, adjustment note 75)


(Paid wages, cheque 002)

19 Cash at bank 3103 3 300 Sales 1101 3 300




21 N Nash 3104.1 880 GST collected 4102.2 80 Sales 1101 800

(Sold GST-inclusive goods, tax invoice 302)


(Cost of goods sold, as per tax invoice 302)

60

26 Cash at bank N Nash (Received payment of account in full, receipt 801)

3103 3104.1

880 880

27 Advertising GST credits received Mail newspapers (Purchased advertising, tax invoice 993)

2301 4102.2A 4101.2

380 38

418

28 P Peters GST collected Sales (Sold inventories, tax invoice 303)

3104.2 4102.2 1101

594 54 540

Cost of goods sold Inventories (Cost of goods sold on tax invoice 303)

2105 3106

300 300

29 Sales returns and allowances GST collected P Peters (Sales returns, adjustment note 501)

1101A 4102.2 3104.2

160 16

176

Inventories Cost of goods sold (Cost of goods returned on adjustment note 501)

3106 2105

100 100

30 Drawings Cash at bank (Owner’s drawings, cheque 003)

5101A 3103

500 500

61

A Storey Ledger

Dr Cr



Sept 10 Cash at bank G 850

19 Cash at bank G 3 300

21 N Nash G 800

28 P Peters G 540


Sept 29 P Peters G 160


Sept 10 Inventories G 500 Sept 29 Inventories G 100

19 Inventories G 2 000



Advertising No 2301

Sept 26 Mail Newspapers G 380

Rent Expense No 2414

Sept 4 Cash at bank G 1 900


Sept 18 Cash at bank G 1 330


Sept 1 Capital—A Storey G 30 000 Sept 4 Rent and GST G 2 090

10 Sales G 850 18 Wages and salaries G 1 330

19 Sales G 3 300 30 Drawings G 500

26 N Nash G 880

N Nash No 3104.1

Sept 21 Sales and GST G 880 Sept 26 Cash G 880

P Peters No 3104.2

Sept 28 Sales and GST G 594 29 Sales returns and GST G 176

62

Furniture Seconds Ltd No 3105.1

Sept 13 Furniture and GST G 5 500

Inventories No 3106

Sept 10 Wholesale Food Ltd G 1 200 Sept 10 Cost of goods sold G 500

15 Wholesale Food Ltd G 4 800 17 Wholesale Food Ltd G 500

29 Cost of goods sold G 100 19 Cost of goods sold G 2 000



Furniture No 3301

Sept 1 Capital G 5 000 Sept 13 Furniture Seconds G 5 000

Liability accounts Wholesale Food Ltd No 4101.1

Sept 17 Inventories and GST G 550 Sept 10 Inventories G 1 200

15 Inventories and GST G 5 280

Mail Newspapers No 4101.2

Sept 27 Advertising and GST G 418


Sept 29 P Peters G 16 Sept 13 Furniture Seconds G 500

21 N Nash G 80

28 P Peters G 54


Sept 4 Cash at bank G 190 Sept 17 Wholesale Food Ltd G 50

15 Wholesale Food Ltd G 480

27 Mail Newspapers G 38

Owner’s equity accounts Capital—A Storey No 5101

Sept 1 Cash and Furniture G 35 000

Drawings No 5101A

Sept 30 Cash at bank G 500

63

A Storey

Trial Balance as at 30 September


1101 Sales 5 490

1101A Sales Returns and Allowances 160

2105 Cost of Goods Sold 3 200

2301 Advertising 380

2414 Rent Expense 1 900

2421 Wages and Salaries 1 330

3103 Cash at Bank 31 110

3104.2 P Peters 418

3105.1 Furniture Seconds Ltd 5 500

3106 Inventories 2 300

4101.1 Wholesale Food Ltd 5 930

4101.2 Mail Newspapers 418

4102.2 GST Collected 618

4102.2A GST Credits Received 658

5101 Capital—A Storey 35 000

5101A Drawings 500

$47 456 $47 456

64

3.29

B Garronne General Journal G

Date Particulars Folio Dr Cr May 1 Cash at bank 3103 25 000

Capital—B Garronne 5101 25 000 (Commenced business with bank deposit, as per receipt 801)

8 Rent expense 2414 500 GST credits received 4102.2A 50

Cash at bank 3103 550 (Paid rent, cheque 401)

Inventories 3106 1 210 Cash at bank 3103 1 210

(Purchased GST-free inventories, as per cheque 402)


(Performed services for cash, receipt 802)

16 Furniture 3301 1 320 GST credits received 4102.2A 132

Harvey Jones Ltd 4102.3 1 452 (Purchased furniture, tax invoice 388)

17 Inventories 3106 480 GST credits received 4102.2A 48

T Terry 4101.1 528 (Purchased inventories, tax invoice 556)

20 T Terry 4101.1 55 GST credits received 4102.2A 5 Inventories 3106 50

(Returned inventories, adjustment note 775)

21 Advertising 2301 300 GST credits received 4102.2A 30

Cash at bank 3103 330 (Paid advertising, cheque 403)





N Brown 3104.1 440 GST collected 4102.2 40 Sales 1101 400




65

24 Cash at bank N Brown (Received payment of account in full, receipt 803)

3103 3104.1

440 440

29 Wages and salaries Cash at bank (Paid wages, cheque 404)

2421 3103

1 209 1 209

30 P Donald GST collected Sales (Sold GST- inclusive inventories, as per tax invoice 764)

3104.2 4102.2 1101

198 18 180

Cost of goods sold Inventories (Cost of goods sold on tax invoice 764)

2105 3106

100 100

Sales returns and allowances GST collected P Donald (Sales returns, adjustment note 111)

1101A 4102.2 3104.2

80 8

88

Inventories Cost of goods sold (Cost of goods returned on adjustment note 111)

3106 2105

60 60

31 Drawings GST credits received Inventories (Owner withdrew inventories for personal use, as per inter-office memo 05)

5101A 4102.2A 3106

440 40 400

Bank charges Cash at bank (Paid bank charges, as bank statement)

2502 3103

20 20

66

B Garronne Ledger

Dr Cr



May 22 Cash at bank G 330

N Brown G 400

30 P Donald G 180


May 30 P Donald G 80




May 22 Inventories G 200 May 30 Inventories G 60

Inventories G 300


Advertising No 2301





May 29 Cash at bank G 1 209

Bank Charges No 2502



May 1 Capital—B Garronne G 25 000 May 8 Rent and GST G 550

14 Service fees and Inventories G 1 210 GST G 880

22 Sales G 330 21 Advertising and GST G 330

24 N Brown G 440 29 Wages and salaries G 1 209

31 Bank charges G 20

N Brown No 3104.1

May 22 Sales and GST G 440 May 24 Cash G 440

67

P Donald No 3104.2

May 30 Sales and GST G 198 May 30 Sales returns and GST G 88

Inventories No 3106

May 8 Cash at bank G 1 210 May 20 T Terry G 50

17 T Terry G 480 22 Cost of goods sold G 200

30 Cost of goods sold G 60 Cost of goods sold G 300


31 Drawings G 400

Furniture No 3301

May 16 Harvey Jones Ltd G 1 320

Liability accounts T Terry No 4101.1

May 20 Inventories and GST G 55 May 17 Inventories and GST G 528


May 30 P Donald G 8 May 14 Cash at bank G 80

22 N Brown G 40

30 P Donald G 18


May 8 Cash at bank G 50 May 20 T Terry G 5

16 Harvey Jones Ltd G 132 31 Drawings G 40

17 T Terry G 48


Harvey Jones Ltd No 4102.3

May 16 Furniture and GST G 1 452

Owner’s equity accounts Capital—B Garronne No 5101

May 1 Cash at bank G 25 000

Drawings No 5101A

May 31 Inventories and GST G 440 68

B Garronne

Trial Balance as at 30 May


1101 Sales 910 1101A Sales Returns and Allowances 80 1102 Service Fees Revenue 800 2105 Cost of Goods Sold 540 2301 Advertising 300 2414 Rent Expense 500 2421 Wages and Salaries 1 209 2502 Bank Charges 20 3103 Cash at Bank 23 331 3104.2 P Donald 110 3106 Inventories 700 3301 Furniture 1 320 4101.1 T Terry 473 4102.2 GST Collected 130 4102.2A GST Credits Received 215 4102.3 Harvey Jones Ltd 1 452 5101 Capital—B Garronne 25 000 5101A Drawings 440

$28 765 $28 765

3.30 Use of computer accounting package.


3.32 The two basic GST accounts generally used are: GST collected, which is a liability for a business; and GST credits received, which is a negative liability for a business. Another account that will be used is the GST clearing account, which is usually a liability account, as most businesses will have to pay GST.

As numbering systems vary from business to business, there are no set numbers in the chart of accounts for these accounts. The GST clearing account can be included with the liabilities as account number 4102.1; the GST collected account would then be 4102.2; and the GST credits received account number 4102.2A. This last number indicates the fact that GST credits received is an adjustment to a liability.

69

3.33 Pale Industries

General Journal G Date Particulars Folio Dr Cr Apr 2 Cash at bank 3103 220

GST collected 4102.2 20 Sales 1101 200

(Sold GST-inclusive inventories for cash, as per receipt 48)



Inventories 3106 300 GST credits received 4102.2A 30

B Racey 4101.1 330 (Purchased GST-inclusive inventories, as per tax invoice 101)

Loan from bank 4201 500 Cash at bank 3103 500

(Paid $500 off loan, cheque 272)

Cash at bank 3103 110 GST collected 4102.2 10 Sales 1101 100

(Sold GST-inclusive goods for cash, as per CRS)



3 Drawings 5101A 44 GST credits received 4102.2A 4 Inventories 3106 40

(Owner withdrew inventories for personal use, as per inter-office memo 5)

4 Cash at bank 3103 3 300 GST collected 4102.2 300 Motor vehicles 3303 3 000

(Sold vehicle for cash, receipt 49)

Inventories 3106 200 G Wall 4101.2 200

(Purchased GST-free inventories, tax invoice 202)

Cash at bank 3103 150 Sales 1101 150




5 Cash at bank 3103 50 T Blake 3104.1 50

(Received payment of account, as per receipt 50)

70

6 B Racey Cash at bank (Made full payment of account as at 1 April, as per cheque 273)

4101.1 3103

500 500

L Gibson GST collected Sales (Sold GST-inclusive inventories, as per tax invoice 59)

3104.2 4102.2 1101

110 10 100

Cost of goods sold Inventories (Cost of goods sold, as per tax invoice 59)

2105 3106

60 60

7 Inventories GST credits received G Wall (Purchased mixed inventories, as per tax invoice 707)

3106 4102.2A 4101.2

102 8

110

8 G Wall GST credits received Inventories (Returned inventories, adjustment note 51)

4101.2 4102.2A 3106

55 5 50

10 Cash at bank GST collected Sales (Sold GST-inclusive inventories, as per CRS)

3103 4102.2 1101

1 100 100 1 000

Cost of goods sold Inventories (Cost of goods sold, as per CRS)

2105 3106

700 700

Interest expense Cash at bank (Paid interest on loan, cheque 274)

2504 3103

50 50

17 G Wall Inventories (Returned GST-free inventories, as per adjustment note 52)

4101.2 3106

5 5

19 Sales returns and allowances GST collected L Gibson (Sales returns, as per adjustment note 97)

1101A 4102.2 3104.2

10 1

11

Inventories Cost of goods sold (Cost of sales returned, as adjustment note 97)

3106 2105

6 6

20 Cash at bank Sales (Cash sales of GST-free goods, as CRS)

3103 1101

80 80

Cost of goods sold Inventories (Cost of goods sold, as CRS)

2105 3106

40 40

Cash at bank L Gibson (Received cash on account, as receipt 51)

3103 3104.2

100 100

71

23 Land 3306 3 000 GST credits received 4102.2A 300

Cash at bank 3103 1 000 ABC Finance Co 4102.3 2 300

(Purchased land, as per receipt and tax invoice 606)

25 T Blake 3104.1 66 GST collected 4102.2 6 Sales 1101 60




27 Inventories 3106 100 Cash at bank 3103 100

(Purchased GST-free inventories, cheque 275)

Stationery 2416 100 GST credits received 4102.2A 10

Cash at bank 3103 110 (Paid GST-inclusive stationery, cheque 276)

30 Travel expenses 2420 100 Stationery 2416 100

(Correction of error recording travel expenses as stationery, as per inter-office memo 6)

72

Pale Industries Ledger

Dr Cr

Date Particulars Folio Amount Date Particulars Folio Amount $$


Apr 2 Cash at bank G 200

Cash at bank G 100


6 L Gibson G 100

10 Cash at bank G 1 000


25 T Blake G 60


Apr 19 L Gibson G 10


Apr 2 Inventories G 150 Apr 19 Inventories G 6

Inventories G 70

4 Inventories G 90

6 Inventories G 60


20 Inventories G 40

25 Inventories G 40

Stationery No 2416

Apr 27 Cash at bank G 100 Apr 30 Travel expenses G 100

Travel Expenses No 2420

Apr 30 Stationery G 100


Apr 10 Cash at bank G 50

Asset accounts Cash in Hand No 3102



Apr 1 Balance b/d 400 Apr 2 Loan from Bank G 500

2 Sales and GST G 220 6 B Racey G 500

Sales and GST G 110 10 Interest expense G 50

4 Motor vehicles 23 Land G 1 000

and GST G 3 300 27 Inventories G 100

Sales G 150 Stationery and GST G 110

5 T Blake G 50

10 Sales and GST G 1 100

20 Sales G 80

L Gibson G 100

T Blake No 3104.1

Apr 1 Balance b/d 50 Apr 5 Cash G 50

25 Sales and GST G 66

L Gibson No 3104.2

Apr 1 Balance b/d 110 Apr 19 Sales returns and GST G 11

6 Sales and GST G 110 20 Cash at bank G 100

Inventories No 3106

Apr 1 Balance b/d 900 Apr 2 Cost of goods sold G 150

2 B Racey G 300 Cost of goods sold G 70

4 G Wall G 200 3 Drawings G 40

7 G Wall G 102 4 Cost of goods sold G 90

19 Cost of goods sold G 6 6 Cost of goods sold G 60

27 Cash at bank G 100 8 G Wall G 50


17 G Wall G 5




Apr 1 Balance b/d 3 000 Apr 4 Cash at bank G 3 000

Equipment No 3304


Buildings No 3305


Land No 3306


23 Cash and ABC Finance Co G 3 000

74

Liability accounts B Racey No 4101.1

Apr 6 Cash G 500 Apr 1 Balance b/d 500 2 Inventories and GST G 330

G Wall No 4101.2

Apr 8 Inventories and GST G 55 Apr 1 Balance b/d 100

17 Inventories G 5 4 Inventories G 200

7 Inventories and GST G 110


Apr 19 L Gibson G 1 Apr 2 Cash at bank G 20

2 Cash at bank G 10


6 L Gibson G 10


25 L Blake G 6


Apr 2 B Racey G 30 Apr 4 Drawings G 4

7 G Wall G 8 8 G Wall G 5

23 Cash and ABC Finance Co G 300


ABC Finance Co No 4102.3

Apr 23 Land and GST G 2 300

Loan from Bank No 4201

Apr 2 Cash at bank G 500 Apr 1 Balance b/d 2 000

Owner’s equity accounts Capital—M Pale No 5101


Drawings No 5101A

Apr 3 Inventories and GST G 44

75

Pale Industries Trial Balance as at 30 April


1101 Sales 1 690

1101A Sales Returns and Allowances 10

21055 Cost of Goods Sold 1 144

2420 Travel Expenses 100

2504 Interest Expense 50

3102 Cash in Hand 100

3103 Cash at Bank 3 250

3104.1 T Blake 66

3104.2 L Gibson 109

3106 Inventories 363

3304 Equipment 5 000

3305 Buildings 11 000

3306 Land 14 000

4101.1 B Racey 330

4102.2 G Wall 350

4102.2 GST Collected 445

4102.2A GST Credits Received 339

4102.3 ABC Finance Co 2 300

4201 Loan from Bank 1 500

5101 Capital—M Pale 28 960

5101A Drawings 44

$35 575 $35 575

76

Chapter 4 End of period reports—preparation, analysis and interpretation

4.1 The accounting period assumption assumes that the life of a business is divided into arbitrary time periods. This is done in accounting because although an absolutely accurate determination of profits can be made only after the liquidation of a business, many parties interested in the financial results of an organisation, e.g. owners, creditors or the ATO, cannot wait until liquidation occurs. They wish to know how the business is progressing on a more regular periodic basis.

Thus, accountants aim to calculate a profit figure for each accounting period that is as accurate as possible (and to determine a financial position that is as accurate as possible at the end of that accounting period).

Profit is obtained by applying what is known as the matching principle, i.e. matching revenue for the period with the expenses incurred in earning that revenue (Profit = Revenue - Expenses).

But because some transactions don’t fit exactly into accounting periods, some adjustments may have to be made to recorded figures at the end of the accounting period to obtain a more accurate matching. These adjustments are called balance day adjustments.

4.2 Disagree.

The earning of revenue is a process involving several steps. These steps will differ depending on the type of organisation—service, trading, manufacturing, grazing, etc. But attributing reasonable parts of the total revenue to each step would involve much estimation and guesswork. Thus accountants, who only wish to include in the records figures based on objective verifiable evidence, traditionally choose one stage, and say that at this stage the whole of the revenue is earned.

The stage at which accountants usually choose to recognise revenue for trading concerns is at the point of delivery of the goods, because then there is a legal obligation binding on the purchaser. The organisation is therefore more assured of receiving its money.

In the case of service industries (e.g. doctors, accountants, plumbers, electricians), revenue is recognised when the service has been performed.

When revenue is shown in the records, it is called recognising the revenue. This is done when it is deemed to be earned, and recognition is to be differentiated from the actual receipt of cash, which is called realising the revenue.

4.3 The accrual basis of accounting, which is used by most businesses, recognises transactions and events when they have an economic impact on the entity rather than when the associated cash flows occur. The adoption of accrual accounting will necessitate balance day adjustments being made to ensure that assets, liabilities, revenues and expenses are recognised in the correct reporting period, when the effects of transactions occur, i.e. when revenue is earned and expenses are incurred.

Accrual accounting is to be contrasted with cash accounting, where the effects of transactions are recognised only when cash is received or paid out. Cash accounting is still sometimes used in service industries, and was previously used by some government agencies.

4.4 Accrued revenues and prepaid expenses are assets because both of these balance day adjustments mean that money is owing to the business by some other organisation. Accrued revenues are revenues that have been earned in the current accounting period but have not yet been received or recorded. At balance day, they are owing to the business, and will be received at some later time (i.e. assets).

Prepaid expenses are expenses that have been paid and recorded in the current accounting period but will not be incurred until a future accounting period. At balance day, they would be owed (back) to the business, and their benefits will occur in some future accounting period (i.e. assets).

Accrued revenues and prepaid expenses are therefore clearly assets at balance date.

77

4.5 Accrued expenses and unearned revenues are liabilities because both of these balance day adjustments mean that money is owed by the business to some other organisation.

Accrued expenses are expenses incurred in the current accounting period but not yet paid or recorded. At balance date, they are owed by the business, and will have to be paid at some later time (i.e. liabilities).

Unearned revenues or revenues received in advance are revenues that have been received and recorded in the current accounting period, but which will not be earned until a future accounting period. At balance date, and until such time as they are actually earned, they are owed (back) to another organisation (i.e. liabilities).

Accrued expenses and unearned revenues are therefore clearly liabilities at balance date.

4.6

General Journal G Date Particulars Folio Dr Cr June 30 Prepaid expenses 200

Rent expense 200 (Prepaid rent expense—one month at $200 per month)

Prepaid expenses 3 500 Insurance 3 500

(Prepaid insurance—seven months at $500 per month)

Accrued revenue 400 Commission revenue 400

(Commission revenue earned, but not yet received)

Wages and salaries 80 Accrued expenses 80

(Wages accrued at June 30—$80)

4.7

General Journal G Date Particulars Folio Dr Cr Dec 31 Prepaid expenses 200

Advertising 200 (Prepaid advertising)

Sales salaries 800 Accrued expenses 800

(Salaries owing—two days at $400 per day)

Accrued revenue 100 Interest revenue 100

(Interest earned on government bonds—$10 000 at 12% pa for one month)

Rent revenue 620 Unearned revenues 620

(One month’s rent received in advance)

78

4.8 a

Nelson Traders General Journal G

Date Particulars Folio Dr Cr June 30 Sales 1101 60 000

Trading 5102 60 000 (To close off Sales to Trading account)

Trading 5102 3 000 Sales returns and allowances 1101A 3 000

(To close off Sales returns to Trading account)

Trading 5102 27 500 Cost of goods sold 2105 27 500

(To close off Cost of goods sold to Trading account)

d Trading 5102 29 500 Profit and Loss 5103 29 500

(To transfer gross profit from Trading to Profit and Loss account)

Note: The entries closing off Sales returns and Cost of goods sold to Trading could be combined.

b

Nelson Traders Ledger

Sales No 1101

June 30 Trading G $60 000 During year $60 000

Sales Returns No 1101A

During year $3 000 June 30 Trading G $3 000

Cost of Goods Sold No 2105


c Trading No 5102

June 30 Sales returns G 3 000 June 30 Sales G 60 000

Cost of goods sold G 27 500

Profit and Loss (gross profit) G 29 500

$60 000 $60 000

4.9 Gross profit (or loss) is the difference between the revenue earned from the sale of inventories and the cost of goods sold. A gross profit will result if the revenues from (net) sales are greater than the cost of goods sold expense.

Net profit (or loss) is the final profit (or loss) made by a business after taking into account all revenues and expenses for an accounting period. A net profit will result if all revenues earned by the business are greater than all expenses incurred for the period.

79

4.10 The criterion that determines whether revenues and expenses go into the Trading account or the Profit and Loss account is whether the revenues and expenses relate to the sale of goods (i.e. trading) or to some other aspect of operations. The Trading account compares revenues from net sales with the cost of the goods sold (i.e. purchase cost and costs of getting the goods into a condition and location ready for sale, such as customs duty, cartage inwards, packaging and storage). All other revenues (such as rent, commission and fees from services) and all other expenses (such as delivery expenses, office expenses and costs of financing) are included in the Profit and Loss account. (Note that, technically, therefore, only an enterprise dealing in goods [e.g. a trading enterprise] can have a gross profit, while both enterprises dealing in goods and those providing services can have a net profit as the result of their operations.)

4.11 a

P Nui

General Journal P Date Particulars Folio Debit Credit

$ $ June 30 Rent revenue 1106 2 000

Profit and Loss 5103 2 000 (Closing off Rent revenue to Profit and Loss account)

Profit and Loss 5103 7 000 Wages and salaries 2421 7 000

(Closing off Wages and salaries to Profit and Loss account)

Profit and Loss 5103 2 000 Electricity 2407 2 000

(Closing off Electricity to Profit and Loss account)

Profit and Loss 5103 1 500 Insurance 2408 1 500

(Closing off Insurance to Profit and Loss account)

Profit and Loss 5103 1 450 Advertising 2301 1 450

(Closing off Advertising to Profit and Loss account)

Profit and Loss 5103 21 050 Capital 5101 21 050

(To transfer net profit to Capital account)

Note: The entries closing off the various expense accounts to Profit and Loss account could be combined.

80

b

P Nui Ledger


June 30 Profit and Loss G $2 000 During year $2 000

Advertising No 2301

During year $1 450 June 30 Profit and Loss G $1 450

Electricity No 2407


Insurance No 2408




c Profit and Loss No 5103

June 30 Advertising G 1 450 June 30 Trading (gross profit) G 31 000

Insurance G 1 500 Rent revenue G 2 000

Electricity G 2 000

Wages and salaries G 7 000

Capital (net profit) G 21 050

$33 000 $33 000

81

4.12

a G Porter


$ $ June 30 Service fees revenue 1102 25 000

Profit and Loss 5103 25 000 (Closing off Service fees revenue to Profit and Loss account)

Rent revenue 1106 1 000 Profit and Loss 5103 1 000

(Closing off Rent revenue to Profit and Loss account)

Profit and Loss 5103 8 000 Wages and salaries 2421 8 000

(Closing off Wages and salaries to Profit and Loss account)

Profit and Loss 5103 4 000 Consumable supplies expense 2201 4 000

(Closing off Consumable supplies expense to Profit and Loss account)

Profit and Loss 5103 500 Insurance 2408 500

(Closing off Insurance to Profit and Loss account)

Profit and Loss 5103 450 Advertising 2301 450

(Closing off Advertising to Profit and Loss account)



Note: Many of the above entries could be combined to reduce the number of entries processed. 82

b

G Porter Ledger





Advertising No 2301

During year $450 June 30 Profit and Loss G $450

Insurance No 2408






c Profit and Loss No 5103

June 30 Advertising G 450 June 30 Service fees revenue G 25 000

Insurance G 500 Rent revenue G 1 000

Consumable supplies G 4 000

Wages and salaries G 8 000


$26 000 $26 000

83

4.13 a

Hall Traders


$ $ June 30 Sales 1101 50 000

Trading 5102 50 000 (Closing off Sales to Trading account)

Trading 5102 20 500 Sales returns 1101A 2 000 Cost of goods sold 2105 18 500

(Closing accounts to debit of Trading account)

Trading 5102 29 500 Profit and Loss 5103 29 500


Profit and Loss 5103 3 750 Advertising 2301 1 500 Insurance 2408 250 Sales salaries 2305 1 000 Postage 2503 1 000

(Closing expense accounts to Profit and Loss account)

Interest revenue 1104 500 Profit and Loss 5103 500

(Closing off Discount revenue to Profit and Loss account)



84

b

Hall Traders Ledger

Sales No 1101




Insterest Revenue No 1105

June 30 Profit and Loss G $500 During year $500



Advertising No 2301


Sales Salaries No 2305


Insurance No 2408


Postage No 2412


c Trading No 5102

June 30 Cost of goods sold G 18 500 June 30 Sales G 50 000

Sales returns G 2 000


$50 000 $50 000

Profit and Loss No 5103

June 30 Advertising G 1 500 June 30 Trading (gross profit) G 29 500

Sales salaries G 1 000 Interest revenue G 500

Insurance G 250

Postage G 1 000


$30 000 $30 000

85

4.14 a

J Gazzaro


$ $ June 30 Sales 1101 100 000


Trading 5102 82 000 Sales returns and allowances 1101A 2 000 Cost of goods sold 2105 80 000




Profit and Loss 5103 38 000 Delivery expenses 2302 10 000 Sales salaries 2305 20 000 Insurance 2408 5 000 Interest expense 2504 1 000 Rent expense 2414 2 000


Interest revenue 1105 1 000 Commission revenue 1103 1 500

Profit and Loss 5103 2 500 (Closing off revenue accounts to Profit and Loss account)

d Capital 5101 17 500 Profit and Loss 5103 17 500

(To transfer net loss to Capital account)

Capital 5101 25 000 Drawings 5101A 25 000

(Closing Drawings to Capital account)

86

b

J Gazzaro Ledger

Sales No 1101




Commission Revenue No 1103


Interest Revenue No 1105




Delivery Expenses No 2302




Insurance No 2408






Capital No 5101

June 30 Drawings G 25 000 During year 150 000 Profit and Loss G 17 500

Drawings No 5101A

During year 25 000 June 30 Capital G 25 000

c Trading No 5102

June 30 Cost of goods sold G 80 000 June 30 Sales G 100 000 Sales returns G 2 000 Profit and Loss (gross profit) G 18 000

$100 000 $100 000


June 30 Delivery expenses G 10 000 June 30 Trading Sales salaries G 20 000 (gross profit) G 18 000 Insurance G 5 000 Commission revenue G 1 500 Interest expense G 1 000 Interest Revenue G 1 000

Rent expense G 2 000 Capital (net loss) G 17 500

$38 000 $38 000

87

4.15 B Stams


$ $

a June 30 Prepaid expenses 3108 2 000

Insurance 2408 2 000 (Insurance of $2 000 prepaid)

Accrued revenue 3107 1 000 Commission revenue 1103 1 000

(Commission revenue of $1 000 owing)

b Sales 1101 83 700


Trading 5102 52 740 Returns inwards 1101A 2 850 Cost of goods sold 2105 49 890




Profit and Loss 5103 15 597 Delivery van expenses 2303 8 500 Cartage outwards 2302 3 200 Insurance 2408 2 000 Stationery 2416 1 000 Telephone expense 2419 897


Commission revenue 1105 11 000 Rent revenue 1104 721



(To transfer net profit to Capital account) 88

B Stams Ledger

c Sales No 1101


Returns Inwards No 1101A



June 30 Profit and Loss G 11 000 During year 10 000 June 30 Accrued revenue G 1 000

$11 000 $11 000


June 30 Profit and Loss G $721 During year $721



Cartage Outwards No 2302


Delivery Van Expenses No 2303


Insurance No 2408

During year 4 000 June 30 Prepaid expenses G 2 000 Profit and Loss G 2 000

$4 000 $4 000

Stationery No 2416


Telephone Expense No 2419


Accrued Revenue No 3107

June 30 Commission G 1 000

Prepaid Expenses No 3108

June 30 Insurance G 2 000 d Trading No 5102

June 30 Cost of goods sold G 49 890 June 30 Sales G 83 700 Returns inwards G 2 850 Profit and Loss (gross profit) G 30 960

$83 700 $83 700

89


June 30 Delivery June 30 Trading vehicle expenses G 8 500 (gross profit) G 30 960 Cartage outwards G 3 200 Rent revenue G 721 Insurance G 2 000 Commission revenue G 11 000 Stationery G 1 000 Telephone expense G 897 Capital (net profit) G 27 084

$42 681 $42 681

4.16

T Saxon Income Statement for year ended 30 June 2008

$ $

Revenue Fees 150 000 Rent revenue 200 150 200

Less Expenses Advertising 4 000 Sales salaries 25 000 Sales commission 5 000 Office expenses 1 500 Office wages 7 000 Rates 1 000 Rent 2 000 Stationery expenses 200 Telephone 500 Bank charges 100 Interest expense 500 46 800 Net profit $103 400

90

4.17 J Black

Income Statement for year ended 30 June 2008 $ $

Revenue Service fees 20 000 Petrol sales commission 50 000 70 000

Less Expenses Spare parts expenses 5 000 Driveway attendant’s wages 10 000 Advertising 2 000 Motor vehicle expenses 4 000 Office expenses 500 Office wages 5 000 Bad debts 450 Telephone expense 100 Interest expense 1 000 28 050 Net profit $41 950

91

4.18 Harold’s Electrical Services


a $ $

June 30 Prepaid expenses 3108 200 Insurance 2408 200

(Insurance of $200 prepaid)

Service fees revenue 1102 1 000 Unearned revenue 4105 1 000

(Revenue of $1 000 received in advance)

b Service fees revenue 1102 14 000

Profit and Loss 5103 14 000 (Closing Service fees revenue to Profit and Loss account)

Profit and Loss 5103 16 500 Rent expense 2414 1 200 Advertising 2301 500 Motor vehicle expenses 2409 2 000 Consumable supplies expense 2201 10 500 Insurance 2408 800


Capital 5101 2 500 Profit and Loss 5103 2 500

(To transfer net loss to Capital account)

Capital 5101 1 000 Drawings 5101A 1 000

(To transfer drawings to Capital account)

92

c Harold’s Electrical Services Ledger


June 30 Unearned revenue G 1 000 During year 15 000

Profit and Loss G 14 000

$15 000 $15 000



Advertising No 2301


Insurance No 2408

During year 1 000 June 30 Prepaid Expenses G 200

Profit and Loss G 800

$1 000 $1 000

Motor Vehicle Expenses No 2409







June 30 Insurance G 200

Unearned Revenue No 4105

June 30 Service Fees G 1 000

Capital No 5101

June 30 Profit and Loss During year 10 000 (net loss) G 2 500

Drawings G 1 000

Drawings No 5101A

During year $1 000 June 30 Capital G $1 000 93

d


June 30 Rent G 1 200 June 30 Service fees G 14 000

Advertising G 500 Capital (net loss) G 2 500

Motor vehicle expenses G 2 000

Interest G 1 500

Consumable supplies G 10 500

Insurance G 800

$16 500 $16 500 e

Harold’s Electrical Services Income Statement for year ended 30 June

$ $


Less Expenses Consumable supplies 10 500 Advertising 500 Insurance 800 Motor vehicle expenses 2 000 Rent 1 200 Interest 1 500 16 500 Net loss $2 500

4.19 Several differences between the Income Statement and the profit-determining accounts can be noted.

Trading and Profit and Loss accounts are ledger accounts, prepared at the end of the accounting period as part of the double- entry procedure, and are only available to management and others internal to the organisation. Information in the accounts is not generally grouped or classified into different types of revenue and expenses.

The Income Statement is a report that may be prepared at any time it is required, outside the ledger, not as part of the double-entry procedure, and is available to all interested parties. Information in the report is often grouped or classified into different types of revenue and expenses, and, although similar to that in the ledger, it is often in a more readable and understandable form for those not so intimately part of the organisation—nor perhaps so knowledgeable about accounting.

94

4.20 J Baker

Income Statement for year ended 30 June $ $

Sales 10 000 Less Cost of goods sold 1 500 Gross profit 8 500 Add Other revenue Rent revenue 400

8 900 Less Other expenses Advertising 500 Sales salaries 500 Office salaries 700 Insurance 250 Postage 200 Interest expense 100 2 250 Net profit $6 650

4.21

A F Wholesalers Income Statement for year ended 31 December

$ $

Sales 10 000 Less Sales returns 100 9 900 Less Cost of goods sold 4 500 Gross profit 5 400 Add Other revenue Commission revenue 200 Interest revenue 200 400

5 800 Less Other expenses Advertising 1 000 Sales salaries 800 Delivery van expenses 100 Insurance 400 Office salaries 300 Lighting 200 Stationery 200 Loss on disposal of motor vehicle 200 Telephone expense 100 Interest expense 180 3 480 Net profit $2 320

95

4.22 M Trueman


Sales 20 000 Less Sales returns 2 000 18 000 Less Cost of goods sold 7 000 Gross profit 11 000 Add Other revenue Interest revenue 100 Commission revenue 1 600 Rent revenue 200 1 900

12 900 Less Other expenses Sales salaries 1 750 Sales commission 1 500 Lighting 1 000 Office wages 2 000 Rates 2 000 Interest expense 100 8 350 Net profit $4 550

Note: The advertising expense would be carried forward as a prepaid expense to be matched against the revenue it earns in the next accounting period.

96

4.23 S James


a $ $

June 30 Office wages 2411 500 Accrued expenses 4104 500

(Office wages owing at balance day)

Prepaid expenses 3108 200 Insurance 2408 200

(Insurance prepaid)

Commission revenue 1103 100 Unearned revenue 4105 100

(Commission received in advance)

Accrued revenue 3107 100 Rent revenue 1106 100

(Rent revenue owing at balance day)

b Sales 1101 25 000


Trading 5102 7 950 Sales returns 1101A 1 000 Cost of goods sold 2105 6 950




Profit and Loss 5103 9 400 Delivery expenses 2302 500 Office wages 2411 2 500 Sales commission 2306 1 000 Bad debts 2501 400 Interest expense 2504 200 Insurance 2408 800 Advertising 2301 2 000 Stationery 2416 2 000


Commission revenue 1103 100 Interest revenue 1105 1 000 Rent revenue 1106 500




Capital 5101 500 Drawings 5101A 500

(To transfer drawings to Capital account) 97

c S James Ledger

Sales No 1101





June 30 Unearned revenue G 100 During year 200


$200 $200




June 30 Profit and Loss G 500 During year 400

June 30 Accrued revenue G 100

$500 $500



Advertising No 2301


Delivery Expenses No 2302


Sales Commission No 2306


Insurance No 2408

During year 1 000 June 30 Prepaid Expenses G 200


$1 000 $1 000

Office Wages No 2411

During year 2 000 June 30 Profit and Loss G 2 500

June 30 Accrued expenses G 500

$2 500 $2 500

Stationery No 2416


Bad Debts No 2501

During year $400 June 30 Profit and Loss G $400 98




June 30 Rent revenue G 100



Accrued Expenses No 4104

June 30 Office wages G 500



Capital No 5101

June 30 Drawings G 500 During year 40 000

June 30 Profit and Loss (net profit) G 9 250

Drawings No 5101A

During year $500 June 30 Capital G $500

d

Trading No 5102


Sales returns G 1 000


$25 000 $25 000


June 30 Delivery expenses G 500 June 30 Trading

Office wages G 2 500 (gross profit) G 17 050

Sales commission G 1 000 Commission revenue G 100

Bad debts G 400 Interest revenue G 1 000

Interest expense G 200 Rent revenue G 500

Insurance G 800

Advertising G 2 000

Stationery G 2 000


$18 650 $18 650

99

e M Trueman


Sales 25 000 Less Sales returns 1 000 24 000 Less Cost of goods sold 6 950 Gross profit 17 050 Add Other revenue Commission revenue 100 Interest revenue 1 000 Rent revenue 500 1 600

18 650 Less Other expenses Advertising 2 000 Delivery expenses 500 Sales commission 1 000 Insurance 800 Office wages 2 500 Stationery 2 000 Bad debts 400 Interest expense 200 9 400 Net profit $9 250

4.24 a The purpose of preparing a GST clearing account is to determine the net amount of GST that is payable or refundable for a

period; to clear the the GST collected and GST credits received accounts, so they are ready to begin the next accounting period; and to show the net amount payable or refundable for GST as one figure in the statement of financial position.

b It would be possible to have only one account, such as the GST clearing account or a GST payable account, where the amount of GST collected for payment to the ATO and the amount for GST input credits received could be included. This would make the calculation of the net amount of GST payable or refundable easier, but it would make the preparation of the BAS more difficult, as separate figures are required for GST collected and GST credits received. These would be all mixed together in one single account, and would be more difficult to separate, especially if a number of adjustments occurred during the period.

100

4.25 a

J Tyler


$ $ Dec 31 GST collected 4102.2 50 435

GST clearing 4102.1 50 435 (Clearing GST collected to GST clearing account)

GST clearing 4102.1 29 650 GST credits received 4102.2A 29 650

(Clearing GST credits received to GST clearing account)

b

GST Clearing No 4102.1

Dec 31 GST credits received G $29 650 Dec 31 GST collected G $50 435


Dec 31 GST clearing G $50 435 During year $50 435


During year $29 650 Dec 31 GST clearing G $29 650

c $20 785 would be owing to the ATO.

4.26 a

R Muller

Balance Sheet as at 31 December 2008 $ $ $ $

Assets Liabilities Cash at bank 1 000 Accounts payable 8 000 Accounts receivable 12 000 GST clearing (payable) 1 000 Inventories 3 000 Accrued expenses 500 Accrued revenues 300 Unearned revenues 50 Prepaid expenses 200 Loan from bank 1 000 Investments 7 000 Mortgage 4 000 Vehicles 4 000 14 550 Equipment 8 000 Owner’s equity Land 10 000 Capital (1 Jan 2008) 25 000 Patents 500 Add Net profit 10 000

35 000 Less Drawings 3 550 31 450

$46 000 $46 000

10 1

b R Muller

Balance Sheet as at 31 December 2008 $ $ $

Assets Cash at bank 1 000 Accounts receivable 12 000 Inventories 3 000 Accrued revenues 300 Prepaid expenses 200 Investments 7 000 Vehicles 4 000 Equipment 8 000 Land 10 000 Patents 500 46 000 Less Liabilities Accounts payable 8 000 GST clearing (payable) 1 000 Accrued expenses 500 Unearned revenue 50 Mortgage 4 000 Loan from bank 1 000 14 550 Net assets $31 450 Owner’s equity Capital (1 Jan 2008) 25 000 Add Net profit 10 000

35 000 Less Drawings 3 550 $31 450

102

4.27 Bill’s Groceries

Income Statement for half-year ended 30 June $ $

Sales 100 000 Less Sales returns 1 000 99 000 Less Cost of goods sold 27 000 Gross profit 72 000 Add Other revenue Commission revenue 750 Interest revenue 100 Rent revenue 1 850 2 700

74 700 Less Other expenses Advertising 2 500 Delivery van expenses 750 Wrapping expenses 250 Office salaries 1 000 Insurance 250 Postage 750 Interest expense 1 000 6 500 Net profit $68 200

103

Bill’s Groceries

Balance Sheet as at 30 June $ $ $

Assets Cash on hand 100 Cash at bank 2 000 Accounts receivable

J Jones 750 A Lingard 110 B Call 1 750 2 610

Inventories 9 000 Shares in ABC Co 2 000 Office furniture 8 000 Delivery van 10 000 Equipment 2 00 Buildings 13 000 Land 40 000 Patents 3 000 Goodwill 15 000 106 710


S Hutton 150 V Miller 1 000 1 150

GST clearing (payable) 1 000 Loan 9 000 11 150 Net assets $95 560

Owner’s equity Capital, S Barton (1 Jan) 28 360 Add Net profit 68 200

96 560 Less Drawings 1 000 $95 560

104

4.28 a

J Knight


$ $ June 30 Prepaid expenses 3108 200

Advertising 2301 200 (Advertising prepaid)

Office wages 2411 800 Accrued expenses 4104 800

(Office wages owing at balance day)

GST collected 4102.2 4 000 GST clearing 4102.1 4 000

(Clearing GST collected to GST clearing account)



b J Knight Ledger

Advertising No 2301

During year 1 000 June 30 Prepaid expenses G 200

Office Wages No 2411

During year 875

June 30 Accrued expenses G 800


June 30 GST credits received G 2 000 June 30 GST collected G 4 000


June 30 GST clearing G $4 000 During year $4 000


During year $2 000 June 30 GST clearing G $2 000

105

c J Knight


Sales 50 000 Less Sales returns 1 000 49 000 Less Cost of goods sold 18 750 Gross profit 30 250 Add Other revenue Commission revenue 2 000 Interest revenue 250 2 250

32 500

Less Other expenses Advertising 800 Selling expenses 1 100 Electricity 400 Insurance 400 Office wages 1 675 Stationery 200 Telephone expenses 200 Travel expenses 750 5 525 Net profit $26 975

J Knight Balance Sheet as at 30 June

$ $ $ $

Assets Liabilities Cash at bank 8 000 Accounts payable 7 000 Accounts receivable 9 000 GST clearing (payable) 2 000 Inventories 11 000 Accrued expenses 800 Prepaid expenses 200 Mortgage 10 000 Vehicles 22 000 19 800 Buildings 30 000 Owner’s equity Land 20 000 Capital 54 425

Add Net profit 26 975 81 400

Less Drawings 1 000 80 400

$100 200 $100 200 106

4.29 D Knowles

Income Statement for half-year ended 30 June

$ $

Sales 150 000 Less Sales returns 1 500 148 500 Less Cost of goods sold 75 750 Gross profit 72 750 Add Other revenue Rent revenue 1 000

73 750 Less Other expenses Advertising 3 500 Selling expenses 13 000 Insurance 750 Office expenses 2 770 Office wages 13 000 Interest expense 650 33 670 Net profit $40 080

107

D Knowles Balance Sheet as at 30 June

$ $ $

Assets Cash at bank 10 000 Accounts receivable

V Campbell 1 350 S Mayne 880 2 230

Inventories 10 500 Prepaid expenses 250 Shares in TX Co 10 000 Office furniture 10 000 Vehicles 25 000 Equipment 20 000 Buildings 15 000 Land 15 000 Goodwill 50 000 167 980


D Hall 875 M Wallace 1 000 1 875

GST clearing (payable) 5 000 Accrued expenses 1 000 Unearned revenues 275 Mortgage 10 000 18 150 Net assets $149 830

Owner’s equity Capital (1 July) 118 750 Add Net profit 40 080

158 830 Less Drawings 9 000 $149 830

4.30 Reversing entries are entries that are the reverse of adjusting entries made at the end of an accounting period for prepayments and accruals.

A reversing entry needs to be made at the beginning of the new accounting period, following any adjustments. Reversing entries are made for two reasons:

• to ensure that ‘correct’ amounts for revenue and expenses are taken into account in the period to which they actually refer • to cancel the temporary asset and liability accounts created on balance day by balance day adjustments (i.e. prepayments and

accruals).

108

4.31 a Closing entries for revenues and expenses perform two functions:

• they close off all the individual revenue and expense accounts in the ledger so they are clear and ready for the next accounting period.

• they transfer the amounts in the revenue and expense accounts to the Trading and Profit and Loss accounts so that profit or loss figures can be determined.

b Clearing entries for GST accounts, generally prepared at the end of each month, perform two functions: • they clear the individual GST accounts ready for the next period

• they transfer the balances of the GST accounts to the Clearing account so that the GST clearing account in the Balance Sheet will show the resulting GST at the end of this period and the amount to be paid or refunded at the appropriate time during the next period, as one figure.

4.32 The main function of the profit-determining accounts is to determine whether a profit or a loss has been made for the accounting period. These accounts match the revenue for the period with the expenses incurred to earn that revenue. The Trading account matches the revenue earned from selling goods with the cost of those goods sold, and determines whether a gross profit (or loss) has been made on trading. In the case of a trading enterprise, the Profit and Loss account then matches the gross profit and any other revenues with any other expenses incurred, and determines whether a net profit (or loss) has been earned for the period. In the case of a service enterprise, as it does not sell goods, the Profit and Loss account matches any revenues earned with any expenses incurred in earning that revenue, to immediately determine whether a net profit or net loss has been earned.

Some businesses combine the Trading and the Profit and Loss accounts into one account, called a Profit and Loss Summary account. As service entities do not require a Trading account, this alternative is particularly appropriate for them, although it may also be adopted by some trading entities. The resulting profit or loss (and other figures in these accounts) then provides the basis for analysis, interpretation and decision-making concerning the organisation and its future operations.

109

4.33 a

M Newtown General Journal P

Date Particulars Folio Debit Credit $ $

Sept 30 Prepaid expenses 3108 6 600 Insurance 2408 6 600

(Insurance prepaid)

Sales salaries 2305 1 500 Accrued expenses 4104 1 500

(Sales salaries owing at balance day)

Accrued revenues 3107 1 500 Rent revenue 1106 1 500

(Rent revenue owing at balance day)

Commission revenue 1103 300 Unearned revenue 4105 300






e Oct 1 Insurance 2408 6 600

Prepaid expenses 3108 6 600 (Reversing entry)

Accrued expenses 4104 1 500 Sales salaries 2305 1 500

(Reversing entry)

Rent revenue 1106 1 500 Accrued revenues 3107 1 500

(Reversing entry)

Unearned revenue 4105 300 Commission revenue 1103 300

(Reversing entry) 110

b M Newtown Ledger


Sept 30 Unearned revenue G 300 During year 3 000


$3 000 $3 000

Oct 1 Unearned revenue G 300


Sept 30 Profit and Loss G 7 500 During year 6 000

Sept 30 Accrued revenues G 1 500

$7 500 $7 500

Oct 1 Accrued revenues G 1 500


During year 2 400 Sept 30 Profit and Loss G 3 900

Sept 30 Accrued expenses G 1 500

$3 900 $3 900

Oct 1 Accrued expenses G 1 500

Insurance No 2408

During year 7 200 Sept 30 Prepaid expenses G 6 600


$7 200 $7 200

Oct 1 Prepaid expenses G 6 600


Sept 30 Rent revenue G 1 500 Sept 30 Balance c/d 1 500

$1 500 $1 500

Oct 1 Balance b/d 1 500 Oct 1 Rent revenue G 1 500


Sept 30 Insurance G 6 600 Sept 30 Balance c/d 6 600

$6 600 $6 600

Oct 1 Balance b/d 6 600 Oct 1 Insurance G 6 600


Sept 30 GST credits received G 1 545 Sept 30 GST collected G 1 800

Balance c/d 255

$1 800 $1 800

Oct 1 Balance b/d 255


Sept 30 GST clearing G $1 800 During year $1 800


During year $1 545 Sept 30 GST clearing G $1 545

111


Sept 30 Balance c/d 1 500 Sept 30 Sales salaries G 1 500

$1 500 $1 500

Oct 1 Sales salaries G 1 500 Oct 1 Balance b/d 1 500

Unearned Revenues No 4105

Sept 30 Balance c/d 300 Sept 30 Commission Revenue G 300

$300 $300

Oct 1 Commission revenue G 300 Oct 1 Balance b/d 300 c

M Newtown

Income Statement for month ended 30 September $ $

Sales 15 000 Less Sales returns 600 14 400 Less Cost of goods sold 6 900 Gross profit 7 500

Add Other revenue Commission revenue 2 700 Interest revenue 15 Rent revenue 7 500 10 215

17 715

Less Other expenses Advertising 3 000 Delivery vehicle expenses 3 000 Sales salaries 3 900 Insurance 600 Office salaries 600 11 100 Net profit $6 615

112

d M Newtown

Balance Sheet as at 30 September $ $ $

Assets Cash at bank 1 380 Accounts receivable

J Gregorio 5 400 Inventories 56 250 Accrued revenues 1 500 Prepaid expenses 6 600 Vehicles 30 000 Buildings 45 000 Land 45 000 191 130 Less Liabilities Accounts payable

B Bodington 1 035 GST clearing (payable) 255 Accrued expenses 1 500 Unearned revenues 300 3 090 Net assets $188 040

Owner’s equity Capital (1 Sept) 182 250 Add Net profit 6 615

188 865 Less Drawings 825 $188 040

113

4.34 a

A Cooper General Journal P

Date Particulars Folio Debit Credit $ $

June 30 Prepaid expenses 3108 1 000 Insurance 2408 1 000

(Insurance prepaid)

Rent revenue 1106 250 Unearned revenue 4105 250

(Rent received in advance)

Advertising 2301 2 000 Accrued expenses 4104 2 000

(Advertising owing at balance day)

Accrued revenue 3107 575 Commission revenue 1103 575

(Commission owing at balance day)

Interest expense 2504 2 000 Accrued expenses 4104 2 000

(Interest owing on bank loan)





e July 1 Insurance 2408 1 000

Prepaid expenses 3108 1 000 (Reversing entry)

Unearned revenue 4105 250 Rent revenue 1106 250

(Reversing entry)

Accrued expenses 4104 2 000 Advertising 2301 2 000

(Reversing entry)

Commission revenue 1103 575 Accrued revenue 3107 575

(Reversing entry)

Accrued expenses 4104 2 000 Interest expense 2504 2 000

(Reversing entry)

114

b A Cooper

Ledger


June 30 Profit and Loss G 3 575 During year 3 000


$3 575 $3 575

July 1 Accrued revenue G 575


June 30 Unearned revenue G 250 During year 5 000


$7 500 $7 500

July 1 Unearned revenue G 250

Advertising No 2301


June 30 Accrued expenses G 2 000

$12 000 $12 000

July 1 Accrued expenses G 2 000

Insurance No 2408

During year 6 000 June 30 Prepaid expenses G 1 000


$6 000 $6 000

July 1 Prepaid expenses G 1 000


June 30 Accrued expenses G 2 000 June 30 Profit and Loss G 2 000

$2 000 $2 000



June 30 Commission revenue G 575 June 30 Balance c/d 575

$575 $575

July 1 Balance b/d 575 July 1 Commission revenue G 575


June 30 Insurance G 1 000 June 30 Balance c/d 1 000

$1 000 $1 000

July 1 Balance b/d 1 000 July 1 Insurance G 1 000



Balance c/d 5 000

$9 000 $9 000

July 1 Balance b/d 5 000 115






June 30 Balance c/d 4 000 June 30 Advertising G 2 000

Interest expense G 2 000

$4 000 $4 000

July 1 Advertising G 2 000 July 1 Balance b/d 4 000

Interest Expense G 2 000


June 30 Balance c/d 250 June 30 Rent Revenue G 250

$250 $250

July 1 Rent revenue G 250 July 1 Balance b/d 250 c

A Cooper


Sales 98 000 Less Sales returns and allowances 3 000 95 000 Less Cost of goods sold 25 000 Gross profit 70 000

Add Other revenue Commission revenue 3 575 Dividend received 1 000 Rent revenue 4 750 9 325

79 325

Less Other expenses Advertising 12 000 Delivery vehicle expenses 3 500 Insurance 5 000 Office expenses 4 000 Loss by burglary 1 000 Telephone expense 5 000 Bad debts expense 500 Interest expense 2 000 33 000 Net profit $46 325

116

d A Cooper

Balance Sheet as at 30 June $ $ $

Assets Cash in hand 1 000 Cash at bank 10 000 Accounts receivable

D Davis 8 750 B Edwards 1 750 B Murray 2 000 12 500

Inventories 9 000 Accrued revenues 575 Prepaid expenses 1 000 Shares in AGC Ltd 20 000 Office furniture 15 000 Delivery vehicles 20 000 Buildings 50 000 Land 50 000 Goodwill 10 000 199 075


W Hall 3 750 GST clearing (payable) 5 000 Accrued expenses 4 000 Unearned revenues 250 Mortgage 50 000 Loan from bank 15 000 78 000 Net assets $121 075

Owner’s equity Capital (1 June) 84 750 Add Net profit 46 325

131 075 Less Drawings 10 000 $121 075

117

4.35

This year Last year Industry average Gross profit ratio 35.71% 48.39% 50% Net profit ratio 25.00% 22.58% 30% Return on owner’s equity 8.48% 8.24% 12%

Report to J Benton Some pleasing improvements are evident, but problems still exist, and more effort is still necessary to improve profitability and returns from the business.

A particular area of concern is the reduction in the gross profit ratio compared with last year. It is now far below industry averages. The relationship between sales and cost of goods sold will require careful examination.

The net profit ratio has increased pleasingly, and must reflect careful expense control. It should be noted, however, that this is still significantly below industry averages.

Return on owner’s equity has also improved, because of the reduction in the average use of capital. This is pleasing, but is still below the industry average of 12 per cent.

Recommendations:

Special attention must be given to an increase in sales or a proportional reduction in cost of goods sold. Sales returns compared with sales has decreased. This is better, and must represent more careful quality control in purchasing or supplying customers. This must continue, but now more effort must also be put into obtaining better prices for purchases, increasing turnover rates, reducing theft or wastage, and generally increasing sales through better selling methods, credit availability (carefully granted), advertising or pricing. Control of selling, distribution, administration and financing expenses must be continued to maintain the movement towards industry averages.

In the longer term, it will be better to increase sales and decrease costs to achieve a further increase in return on owner’s equity, as it will not be possible to continually reduce capital investment in the business.

A N Accountant, CPA

118

4.36

This year Last year Industry average Gross profit ratio 37.93% 41.33% 40% Net profit ratio 14.48% 25.33% 22% Return on owner’s equity 11.98% 21.84% 18%

Report to R Theodore A number of significant problems in terms of earning capacity and subsequent returns from the business are becoming evident, and must be addressed before they become impossible to rectify. All measures are now below those common in your industry.

The gross profit ratio has fallen slightly, compared with last year, and is now just below the industry average. The relationship between sales and cost of goods sold has moved in a negative direction, and such a trend cannot be allowed to continue.

The net profit ratio has decreased at an even faster rate, and is now just over half the industry average. Much greater efforts will need to be expended on cost control.

Return on owner’s equity has also fallen dramatically, due to the decline in net profit. This does not now represent good use of the capital employed compared with competing businesses, although it is still a reasonably good return compared with other possible alternative uses of the funds.

Recommendations:

Sales have fallen slightly, but the major problem in the gross profit area is the relative increase in cost of goods sold. All aspects of this cost element will need investigation. It is noted that inventories carried are now $2000 higher than last year, despite the reduction in sales. It is recommended that attention be given to investigating cutting this cost by better purchasing arrangements, reducing storage costs and increasing turnover rates, and reducing theft or wastage if these are significant.

Net profit has declined markedly, and considerable effort may be needed to correct this trend. Advertising, selling expenses, and wages and salaries have all risen considerably in the past year (without a corresponding increase in sales). All of these aspects appear to warrant investigation, as they must now be well above industry averages compared with sales. Have advertising methods changed without resulting in better sales figures? What specific items comprise the selling expenses, and can these be better controlled? Are more staff being employed, or has productivity declined? These are the sorts of questions you will have to investigate.

If the net profit can be increased, this will automatically result in an increase in return on owner’s equity if capital employed remains fairly constant. It does not appear that there are any plans for more capital to be employed as the specific items and mix of your assets and liabilities have remained very similar over the past two years. It is noted that you have reduced your withdrawals for personal use, but not at the same rate that profit has declined. The amount withdrawn relative to profits earned is a delicate matter, and may warrant further thought. It would not be wise to create a problem where too little funds are employed in the business to allow it to continue to be viable.

A N Accountant, CPA 4.37 Chapter summary.

119

4.38 Financial reporting case—Woolworths Limited a Financial years 2005 and 2006, but actually compares 52 weeks ended 26 June 2005 with 52 weeks ended 25 June 2006. b i $37 734.2 million

ii $28 405.1 million iii $9444.6 million iv $1026.7 million

c Narrative form. d i $525.9 million

ii $1160.4 million iii $2316.1 million iv $4055.8 million v $4257.6 million vi $4027.8 million

e Note 1 part T explains that revenue is recognised only when it is probable that the economic benefits comprising the revenue will flow to the entity, the flow can be reliably measured and the entity has transferred the significant risks and rewards of ownership.

Sales revenue represents the revenue earned from the provision of products and rendering of services to parties external to the consolidated entity and Company. Sales revenue is only recognised when the significant risks and rewards of ownership of the products, including possession, have passed to the buyer and for services when a right to be compensated has been attained and the stage of completion of the contract can be reliably measured.

Rental income is recognised on a straight-line basis over the term of the lease. Interest income is recognised as it accrues, using the effective interest method. Dividend income is recognised on the date the entity’s right to receive payments is established, which in the case of quoted

securities is the ex-dividend date. f i 9 444.6

37 734.2 ii 1 026.7

37 734.2 iii

= 25.03%

= 2.7%

1 026.7

= 32.81% (2 000.2 + 4 257.6)

g Note 1 part Y explains that the net amount of GST recoverable from, or payable to, the Australian Taxation Office (ATO) is included as a current asset or liability in the Balance Sheet.

120

4.39

Report on Gymnasium Evaluation Profitability

The Income Statement (prepared on a cash basis) indicates that the gym is making a loss of $2500 per half year. But this statement needs to be adjusted to the more correct accrual basis. The asset purchase of $120 000 would be deducted from the expenses, but depreciation expense of $6000 for the half year would have to be included. Membership revenue received in advance would have to be deducted. This would mean taking half of the yearly memberships, three-quarters of the two-year memberships, and all of the three-year memberships from the revenue. A more correct statement would show:

Revenue $ $

Yearly memberships 25 000

Two-year memberships 22 500

Casual class fees 500 48 000

Expenses Depreciation on gym equipment 6 000

Wages and salaries 25 000

Rent of premises 5 000

Electricity 3 000 39 000

Net profit $8 000

Return on investment The more correct profit of $8000 for six months or $16 000 per year is still quite low. However, it is a very good return on investment (ignoring taxation and time implications). The return on owner’s equity would be 32 per cent, far higher than could be earned in a normal investment possibility such as a bank.

Future potential a All gym equipment is new and up to date, so no extra money will be needed in the short term to renew this. b There is scope to earn more from casual fees, but this may not be a very large earner compared with yearly

memberships. Five hundred dollars per month is equivalent to $6000 per year, and perhaps $5000 after advertising. c There may be potential to increase yearly memberships and/or fees and revenues from other sources, such as the sale

or hire of gym and fitness equipment, refreshments, etc.

d No accurate estimate of possible income can be given, but it would appear that a steady income of around $25 000 should be possible with further advertising of both yearly memberships and casual classes.

Conclusion and recommendations The gym would appear to be a reasonable investment. However, a more thorough investigation of the accounting records is strongly recommended in the light of the incorrect inclusion of certain items in the Income Statement.

Further investigation would be needed into possible ways to increase revenues, especially memberships, as these are certainly the main source of revenue for the business.

The final decision must be that of the potential purchaser, taking into account quite a good return on financial investment, possible potential for growth, but a considerable investment of her time and effort.

121

4.40 a

S Chan


$ $ June 30 Prepaid expenses 3108 500

Insurance 2408 500 (Insurance prepaid)

Commission revenue 1103 1 000 Unearned revenue 4105 1 000


Wages and salaries 2421 1 000 Accrued expenses 4104 1 000

(Wages owing at balance day)

Accrued revenue 3107 600 Interest revenue 1105 600

(Interest owing at balance day)





e July 1 Insurance 2408 500

Prepaid expenses 3108 500 (Reversing entry)

Unearned revenue 4105 1 000 Commission revenue 1103 1 000

(Reversing entry)

Accrued expenses 4104 1 000 Wages and salaries 2421 1 000

(Reversing entry)

Interest revenue 1105 600 Accrued revenue 3107 600

(Reversing entry)

122

b S Chan Ledger

Sales No 1101



During year $450 June 30 Trading G $450


June 30 Unearned revenue G 1 000 During year 2 000


$2 000 $2 000

July 1 Unearned revenue G 1 000


June 30 Profit and Loss G 1 600 During year 1 000


$1 600 $1 600

July 1 Accrued revenue G 600



Insurance No 2408

During year 2 000 June 30 Prepaid expenses G 500


$2 000 $2 000

July 1 Prepaid expenses G 500

Office Expenses No 2410


Telephone No 2419




June 30 Accrued expenses G 1 000

$24 950 $24 950



June 30 Balance c/d 4 000 During year 4 000

$4 000 $4 000


123

Accounts Receivable No 3104

During year 1 000 June 30 Balance c/d 1 000

$1 000 $1 000


Inventories No 3106


$5 000 $5 000



June 30 Interest revenue G 600 June 30 Balance c/d 600

$600 $600

July 1 Balance b/d 600 July 1 Interest revenue G 600


June 30 Insurance G 500 June 30 Balance c/d 500

$500 $500

July 1 Balance b/d 500 July 1 Insurance G 500

Loan to Brown Brothers No 3202


$13 000 $13 000


Buildings No 3305


$50 000 $50 000


Land No 3306


$60 000 $60 000


Accounts Payable No 4101

June 30 Balance c/d 16 800 During year 16 800

$16 800 $16 800

July 1 Balance b/d 16 800 124



Balance c/d 5 000

$10 000 $10 000







June 30 Balance c/d 1 000 June 30 Wages and salaries G 1 000

$1 000 $1 000

July 1 Wages and salaries G 1 000 July 1 Balance b/d 1 000

Unearned Revenues No 4105

June 30 Balance c/d 1 000 June 30 Commission revenue G 1 000

$1 000 $1 000

July 1 Commission revenue G 1 000 July 1 Balance b/d 1 000

Capital No 5101

June 30 Drawings G 40 000 Jan 1 Balance b/d 118 000

Balance c/d 102 300 June 30 Profit and Loss (net profit) G 24 300

$142 300 $142 300


Drawings No 5101A

During year $40 000 June 30 Capital G $40 000

Trading No 5102


Sales returns G 450


$110 000 $110 000


June 30 Insurance G 1 500 June 30 Trading

Office expenses G 3 000 (gross profit) G 51 550

Wages and salaries G 24 950 Commission revenue G 1 000 Telephone G 400 Interest revenue G 1 600


$54 150 $54 150

125

c S Chan


Sales 110 000 Less Sales returns and allowances 450 109 550 Less Cost of goods sold 58 000 Gross profit 51 550

Add Other revenue Commission revenue 1 000 Interest revenue 1 600 2 600

54 150

Less Other expenses Insurance 1 500 Office expenses 3 000 Wages and salaries 24 950 Telephone 400 29 850 Net profit $24 300

d

S Chan Balance Sheet as at 30 June

$$

Assets Accounts receivable 1 000 Inventories 5 000 Accrued revenues 600 Prepaid expenses 500 Loan to Brown Brothers 13 000 Buildings 50 000 Land 60 000 130 100

Less Liabilities Bank overdraft 4 000 Accounts payable 16 800 GST clearing (payable) 5 000 Accrued expenses 1 000 Unearned revenues 1 000 27 800 Net assets $102 300

Owner’s equity Capital (1 June) 118 000 Add Net profit 24 300

142 300 Less Drawings 40 000 $102 300

126

f Letter to S Chan.

A N Accountant, CPA

[Address]

[Date]

S Chan

[Address]

Dear Mr Chan

Re: Earning Capacity and Viability of Your Business

An Income Statement, a Balance Sheet and a number of ratios that help to measure its earning capacity have been prepared for your business.

These show you have earned a net profit for the year of only $24 300, so it is clear why you are concerned about your business.

The ratios that have been calculated, however, show that the business has sound earning potential. These ratios are set out below.

Gross profit ratio 47.06%

Net profit ratio 22.18%

Return on owner’s equity 22.06%

The gross profit ratio is sound, showing that the relationship between cost of goods and sales is satisfactory. But it is certainly no better than satisfactory, considering the high-quality products you sell.

The net profit ratio is also sound. Expenses appear well controlled.

Your net profit for the year amounted to $24 300, and average capital invested during the year was $110 150, so you have earned 22.06 per cent on your investment. This is a good financial return, but considering your time, the actual return of $24 300 is certainly not sufficient. Indeed, it is noted that you have withdrawn $40 000 for personal use, so it is obvious that, with a profit of not much more than half this figure, such a situation cannot continue.

Although minor improvements might be made by efforts to increase the gross profit ratio by increasing prices or reducing your cost of goods sold, which will flow through to the net profit and other ratios, the key to your problem is not in the ratios themselves but in the volume of sales turnover you are achieving. No matter how high the ratios, if not enough sales are made, earnings will remain small.

The ratios show that your business has the earning capacity to survive and to provide you with a good income, but only if sales can be increased.

It is strongly recommended that all avenues to increase sales be investigated.

• Would advertising and easier credit improve the sales figures?

• Should a wider range of product, including homewares and accessories, be stocked as value-added items?

• Is the store large enough to show sufficient stock and to be attractive to customers?

Such considerations may mean that the business requires more funds. Required equity could be invested by yourself, borrowed or your loan to Brown Brothers recalled, as it would earn more returns in you own business. (Such measures will also have the added advantage of improving your short-term financial situation, enabling you to repay your bank overdraft and accounts payable.)

I would recommend that the business be continued for at least another year, with all efforts being put into increasing sales (while still containing costs, of course), and consideration be given to an expansion of the business and its product range. The business can be successful.

Yours faithfully A N Accountant

127

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