Accounting Unit 3 Notes_ATARNotes

VCE Unit 3 Accounting Summary Notes

May 2012

VCE Unit 3 Accounting - 2012 Revision Notes (page 2)

CHAPTER 1 THE NATURE OF ACCOUNTING

Accounting Principles Entity The business has a separate identity to the owner of the business. As such, the business transactions and books are kept separate from those of the owner. Going Concern It is never assumed the business will close it is instead assumed the business will have infinity life. Reporting Period The life of the business is divided into equal periods of time to allow for reports to be prepared as it is useless to only look at the businesses performance once the business closes. Historical Cost Transactions are recorded at their original cost as recorded on a receipt or other source document. Conservatism It is aimed to report the lowest amount of profit possible, by only showing gains that are certain to happen, and losses that are probable to occur. Consistency Accounting methods are applied in the same manner each accounting period. Monetary Unit Accounting reports are prepared in the currency of where the report is being prepared.

QUALITIVE CHARASITICS OF ACCOUNTING Relevance Only relevant information to decision making is shown in accounting reports. Reliability Infomation that is free from bias and supported by source documents only is recorded, all other information is excluded. Comparability All accounting reports are prepared in a manner that allows them to be compared to each other.


Understandability All accounting reports are prepared in a manner that allows them to be understood by the user.


CHAPTER 4 DOUBLE ENTRY ACCOUNTING

NAME OF LEDGER ACCOUNT

Date Particulars Amount Date Particular Amount

Apr 1 Opening Balance $ 5000 Apr 1

Apr 1 Cash at bank $ 4000

The left side of a ledger account is known as the debit side, and the right side is known as the credit side. Entries are made into ledger accounts in accordance with this table:

Increase Decrease

Assets Debit Credit

Liabilities Credit Debit

Owners Equity Credit Debit

Revenues Credit Debit

Expenses Debit Credit

The main set of ledger accounts known is known as the general ledger this is where all transactions are made. A second set of ledgers are used, known as the subsidiary ledgers these are used for recording individual debtors and creditors and are summarised into the Debtors Control and Creditors Control accounts. IN ALL CASES DEBITS MUST EQUAL CREDITS. NO EXCEPTIONS. At the end of the accounting period, a ledger may either be footed or balanced (except Revenue and Expense accounts). To foot a ledger, the totals of the debit and credit side are added and written in pencil at the bottom of the ledgers. The smaller figure is taken away from the larger number and written and circled on the larger side. At the end of the Accounting period, accounts are balanced in the following manner: A entry is made on the smaller side to make both sides equal, equal to the difference between the two accounts with the cross reference Balance, like this:

Cash at Bank


Apr 1 Balance 5000 Apr 1 Cash payments 2500

Apr 30 Cash receipts 10000 Apr 30 Balance 12 500

The ledgers are now totalled:


Cash at Bank




15 000 15 000

The balancing entry is then made on the opposite side to open the new Accounting period:

Cash at Bank




15 000 15 000

May 1 Balance 12 500

A trial balance can be completed once all accounts are balanced:


Trial Balance for Some Buisness month ending 30 June 2012

Dr Cr

Cash at Bank 5 000

Bank loan 20 000

GST Clearing 200

Stock Control 4 000

Computer 2 000

Fittings 500

Capital 8 700

28 900 28 900

If Debits do NOT equal

Credits, a error has been made.


CHAPTER 5 CASH JOURNALS

Special Journals are used to group transactions of a similar nature together to aid in posting to ledger accounts. There are: Cash Receipts Journal Cash Payments Journal Credit Sales Journal Credit Purchases Journal

In the Cash Receipts Journal, the name of the account to be credited for the transaction is recorded in the Details column. The customers name is usually not recorded as the details unless it is a credit sale or a payment from a debtor. The Cost of Sales column displays the cost price of the goods sold, while the sales column displays the selling price, ex. GST. The notation CRS may be used when transactions are posted from an electronic cash register at the end of the day to indicate Cash Register Summary. The Bank column should ALWAYS equal the total of all other columns. The same process applies in the Cash Payments Journal. At the end of the accounting period, the journals are totalled and posted to the relevant general ledger accounts. The entries in Cash at Bank use the cross reference Cash receipts / Cash Payments and all other entries except Cost of Sales and Stock Control (in the CRJ) use the cross reference Cash at Bank. Where discounts are granted: The Bank column must equal Debtors less Discount Expense. Where discounts are received: The bank column must equal Creditors less Discount Revenue.


CHAPTER 6 CREDIT JOURNALS

Operate under a simular nature to the cash journals. When posting: For the Credit Sales journal, the cross reference to Debtors Control is Sales/GST and

a second double entry is made to Cost of Sales and Stock Control. For the Credit Purchases journal, the cross reference to Creditors Control is Stock

Control/GST Clearing. These ledgers are posted on balance day to the general ledger. A record of each individual transaction is also recorded, with the date as recorded in the journals to an account in the subsidiary ledger for each individual debtor/creditor. A creditors and debtors schedule can also be prepared using the information from these journals and the subsidiary ledgers:

Creditors Schedule at 30 June 2012

$

Apple 500 000

Microsoft 250 000

Dell 20 000

780 000

Format identical for debtors schedule


CHAPTER 7 GENERAL JOURNAL Used to record all NON CASH transactions within the business, for example balance day adjustments, drawings of stock, correction of errors, writing off bad debts and the like. Examples: Bad debt of J. Smith written off $500 on December 31, 2015.

Date Details General Ledger Subsidiary Ledger

Debit Credit Debit Credit

Dec 31 Debtors Control 500

Debtor J. Smith 500

Bad Debts 500

Drawings of stock worth $50 on January 1, 2016



Jan 1 Stock Control 500

Drawings 500

Correction of error Registration paid $250 however recorded as a payment of Wages



Dec 31 Wages 250

Registration 250

J. Smith deemed bankrupt payment received of $0.05 in the dollar, remainder to be written off



Dec 31 Debtors Control 500

Debtor J. Smith 500

Cash at Bank 25

Bad Debts 475


CHAPTER 9 STOCK

FIFO: First In First Out system The first item of stock received is deemed to be the first item sold for accounting purposes. Stock Card

Date Details IN OUT BALANCE

Qty Cost Value Qty Cost Value Qty Cost Value

When stock is purchased at different prices, the stock must be recorded in the same order it is received in:



June 1 Inv. 201 1 500 500 1 500 500

June 2 Inv. 203 3 600 1800 1 500 500

3 600 1800

This way, when stock is sold, the correct value of the Cost of Sale can be recorded:



June 1 Inv. 201 1 500 500 1 500 500

June 2 Inv. 203 3 600 1800 1 500 500

3 600 1800

June 3 Rec. 42 1 500 500

3 600 1800

To calculate Cost of Sale, add the value of the Out column, not including stock involved in Memos or otherwise not sold. A memo can be recorded in the same manner as a sale. A stock loss can be caused by undersupply to the business, oversupply to customers, theft, recording errors in the stock card, double invoicing or when goods are omitted from the stocktake. These are recorded at the cost price of the eariest stock received This is recorded in the General Journal as having occurred:




Jun 30 Stock Control 600

Stock Loss 600

Stock loss Memo 1

And is then recorded in the stock card:



June 1 Inv. 201 1 500 500 1 500 500

June 2 Inv. 203 3 600 1800 1 500 500

3 600 1800

June 3 Rec. 42 1 500 500

3 600 1800

June 30 Memo. 1 1 600 600 2 600 1200

A stock gain can be caused by oversupply by suppliers, undersupply to customers, recording errors in stock cards or where double counting occurs in a stocktake. All stock gains are recorded at the lowest cost price in the stock card since the last stocktake to comply with the accounting principal of concertisim. Again, this is recorded in the general journal:



Aug 30 Stock Control 600

Stock Gain 600

Stock loss Memo 2

And then the stock card:



June 1 Inv. 201 1 500 500 1 500 500

June 2 Inv. 203 3 600 1800 1 500 500

3 600 1800

June 3 Rec. 42 1 500 500

3 600 1800

June 30 Memo. 1 1 600 600 2 600 1200

Aug 30 Memo. 2 1 600 600 3 600 1800


CLOSING THE GENERAL LEDGER CHAPTER 10

At the end of the Accounting period, all accounts need to be closed in order to determine a profit or loss for the period, and to prepare the ledgers for the new accounting period. On Balance Day, all Revenue and Expense accounts need to be reset to zero so one periods revenue and expenses are not mixed up with the next periods. To do this, first all Revenue and Expense accounts (ie Cash Sales, Wages, Depreatiation) have an equalling entry made, in a similar manner to balancing, with the cross reference P+L Summary. These entries need to also be made in the General Journal. Example balances: Cash Sales $30,000, Credit Sales $2,000, Cost of Sales $14,000, Wages $5,250, Advertising $3,000, Electricity $200, Insurance $500, Drawings $200



Jun 30 Cash Sales 30 000

Credit Sales 2 000

Profit and Loss Summary 32 000

Closing entries

Jun 30 Cost of Sales 14 000

Wages 5 250

Advertising 3 000

Electricity 200

Insurance 500


Closing entries

Profit and Loss Summary


Jun 30 Expense accounts 22 950 Jun 30 Revenue accounts 32 000


A balancing entry then is made to Profit and Loss Summary to transfer the profit from Profit and Loss Summary to Capital:



Aug 30 Profit and Loss Summary 9 050

Capital 9 050

Transfer of net profit

Profit and Loss Summary


Jun 30 Expense accounts 22 950 Jun 30 Revenue accounts 32 000

Jun 30 Capital 9 050

Drawings need to be transferred separately from Drawings to Capital:



Aug 30 Drawings 200

Capital 200

Transfer of drawings


CHAPTER 11 INCOME STATEMENTS

An income statement is a Accounting report used to show the profit or loss for the accounting period in question. Consider the following General Journal entries:



Jun 30 Cash Sales 30 000

Credit Sales 2 000


Closing entries

Jun 30 Cost of Sales 14 000

Wages 5 250

Advertising 3 000

Electricity 200

Insurance 500


Closing entries

These entries can then be used to provide a report on how the business has made its profit for the month of $9,050. When evaluationg a net profit figure, a number of measures need to be considered, such as the trend in regards to profit made, the profit budgeted for, the average for the industry under consideration, and some anayltcal ratios exist. When considering Cost of Goods Sold (COGS), this needs to include the costs included in obtaining stock and preparing it for sale. For example, cartage inwards, buying expenses, customs duties, and packaging expenses. When discounts are given by a business: Discount Revenue should be reported under Other Reveune as it is not the main

way a business earns its revenue. Discount Expense should be reported under Other expenses.


Thus, a Income Statement based on the Closing Entries on the previous page would be:

Revenue Cash Sales 30000

Credit Sales 2000 32000

Less Cost of Goods Sold Cost of Sales 14000 14000

Gross Profit

18000

Less Other Expenses Wages 5250

Advertising 3000 Electicity 200 Insurance 500 8950

Net Profit

9050


CHAPTER 12 CASH FLOW STATEMENTS

A cash flow statement shows movements of CASH in and out of the business during an accounting period, simular to a statement of receipts and payments. Under no circumstances are credit transactions included on a CASH flow statement. A cash flow statement is broken up into three sections:

Cash Flows from Operating Activities

Cash Flows from Investing Activities

Cash Flows from Financing Activities

Cash flows from the Day to Day activities of the firm for example sale of stock, payment of wages

Cash flows from the purchase and sale of non-current assets.

Cash flows from changes to the financing structure of the business.

Inflows from cash sales (not credit sales), commissions paid, GST received, debtor payments

Inflows from the sale of non-current assets

Inflows from capital contributions and bank loans being taken out

Outflows from wages and other expenses, payments to creditors and other day-to-day payments.

Outflows from the sale of non-current assets

Outflows from drawings and repayments

A cash flow statement is always set out in the order Cash Flows from Operating Activities, Cash Flows from Investing Activities and Cash Flows from Financing Activities. (example next page)


Cash Flow Statement for year ending 30 June 2012

Cash flows from Operating Activities $ $

Collections from Customers: Cash Sales 50,000

Collections from Debtors 25,000 GST Collected 5,000 80,000

Payments to suppliers and employees: Cash purchases of Stock (15,000)

Wages (5,000) Advertising (1,000) Insurance (4,000) GST Paid (2,000) (27,000)

Net cash provided by Operating Activities:

53,000

Cash flows from Investing Activities Proceeds from sale of Shop Fittings 2,000

Payments for new Cash Register (5,000) Net cash used in Investing Activities

(3,000)

Cash flows from Financing Activities Loan from NAB 20,000

Capital Contribution 3,000 Net cash provided by Financing Activities

23,000

Net increase in Cash Held

76,000

Cash held at the beginning of year

500

Cash held at end of year

76,500


CHAPTER 13 STRAIGHT LINE DEPREATATION

Deprecation is the process used to match the expenses incurred by the use of non-current assets to revenues earnt in an accounting period, to calculate a profit or loss.

The formula for straight line depredation is:

When the cost of an asset is calculated, the original cost (historical cost principal) and any other cost incurred in preparing the asset for use in the business are considered. For example, when purchasing a secondhand car without registration, the cost incurred in obtaining a roadworthy certificate is considered to be part of the cost of the car. However, the cost of petrol is not considered to be part of the cost. When depretiation is recorded on balance day, an entry needs to be made into the Depretiation of [asset] account (expense) and Accumulated Depreation of [asset] account (negative asset). The following general journal entry is used: Depreation of Computer, cost price $1500 with scrap value $200 and useful life 3 years: (1500) 200 / 3 1200 / 3 $400 per annuum or 26.33%

Date Particulars General Ledger Subsidiary Ledger


30 June Deprecation of Computer $400

Accumulated Depreciation of Computer

$400

When expense accounts are closed off to Profit and Loss Summary, the Depreciation account (not accumulated depreciation) is closed off as this is an expense account:

Date Particulars General Ledger Subsidiary Ledger


30 June Deprecation of Computer $400

Profit and Loss Summary $400

The Accumulated Depretiation account, however, is merely balanced and carried over to the next accounting period.


When the balance sheet is prepared, depreciated assets are displayed as follows: Non-current assets Computer $1 500 less Accumlated Depreciation 400 1 100 The original/historical cost of the asset is shown on all balance sheets for as long as the asset is under the businesses control. The Accumulated Depretiation figure, also known as the expired cost of the asset, shows all depreation that has been accumulated since the asset was purchased by the firm. The remainder is known as the book or carrying value (carrying value preferred) of the asset. Note that displaying deprecation on the Income Statement is acceptable, despite the lack of reliable evidence as the demands of relevance outweigh the demands of reliability. VCAA have also stated on a previous exam Assessors report that it is acceptable to determine depreatiation for half a month if an asset was purchased in the vicinity of the 15th of the month.


CHAPTER 14 BALANCE DAY ADJUSTMENTS

The life of the business is divided up into a series of reporting periods. The problem is that not all financial transactions begin and end within the same period, there are overlaps into other reporting periods. To account for these transactions in an accrual accounting system, Balance Day Adjustments are made. This will also the Revenue and Expense for the period to be calculated more accurately in the determination of Net Profit. For example: Paid $5000 cash for insurance (one year) on January 1. This business uses June 30 as Balance day. Under accrual accounting: $2500 would be recorded as the insurance expense for this accounting period as only half the insurance premium has been used up. To record this, a balance day adjustment is required. When the insurance bill is paid, the double entry on the debit side is made to an account for the prepaid expense (ie prepaid insurance expense, prepaid advertising expense):

Prepaid Insurance expense


Jan 1 Cash at bank $5000

When on June 30, once a trial balance has been prepared, the amount of insurance that has been used up needs to be calculated and the balance day adjustment made:



Jan 1 Cash at bank $5000 Jun 30 Insurance expense $2500

Insurance expense


Jun 30 Prepaid insurance expense

$2500

These are then treated like any other asset and expense account:




Jan 1 Cash at bank $5000 Jun 30 Insurance expense $2500

Jun 30 Balance $2500

$5000 $5000

Jul 1 Balance $2500

Insurance expense


Jun 30 Prepaid insurance expense

$2500 Jun 30 Profit and Loss Summary

$2500

$2500 $2500



Jun 30 Insurance expense 2500

Profit and Loss Summary 2500

Where a expense is owing at the end of the accounting period on balance day, this is handled as follows: $200 advertising owing on June 30: This is recorded into the expense account that it would usually be recorded into (Debit) and a liability account, known as Accured [...] expense. So:

Advertising expense


Jun 10 Cash at Bank $3000 Jun 30 P+L Summary $3200

Jun 30 Accured advertising expense

$200

$3200 $3200

Accured advertising expense


Jun 30 Balance $200 Jun 30 Advertising expense $200

$200 $200

Jul 1 Balance $200




Jun 30 Advertising expense 200

Accrued advertising expense 200

Adjusting entry for advertising owing

NB: In the previous example, assume a $20 GST Clearing debit entry is also made. When the amount is paid off, a sundry transaction is recorded in the Cash Payments Journal for the amount and the following double entry made:

Accured advertising expense


Jun 30 Balance $200 Jun 30 Advertising expense $200

$200 $200

Jun 29 Cash at bank $200 Jul 1 Balance $200

$200 $200

Adjusted trial balances A Trial Balance is prepared after entering all financial transactions in the 5 jounrals then posting to the general ledger. When you have checked that this has been done correctly the BDAs are recorded. When the BDAs are posted to the ledgers an Adjusted Trial Balance is prepared before preparing Financial Reports (Income Statement and Balance Sheet).

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Accounting Unit 3 Notes_ATARNotes

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