VCE Unit 3 Accounting
Summary Notes
May 2012
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.
VCE Unit 3 Accounting - 2012 Revision Notes (page 2)
Understandability
All accounting reports are prepared in a manner that allows them to be understood by the
user.
VCE Unit 3 Accounting - 2012 Revision Notes (page 3)
CHAPTER 4 – DOUBLE ENTRY ACCOUNTING
Date
Apr 1
Apr 1
Particulars
Opening Balance
Cash at bank
NAME OF LEDGER ACCOUNT
Amount
Date
Particular
$ 5000
Apr 1
$ 4000
Amount
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:
Date
Apr 1
Apr 30
Particulars
Balance
Cash receipts
Cash at Bank
Amount
Date
5000
Apr 1
10000
Apr 30
The ledgers are now totalled:
VCE Unit 3 Accounting - 2012 Revision Notes (page 4)
Particular
Cash payments
Balance
Amount
2500
12 500
Date
Apr 1
Apr 30
Particulars
Balance
Cash receipts
Cash at Bank
Amount
Date
5000
Apr 1
10000
Apr 30
15 000
Particular
Cash payments
Balance
Amount
2500
12 500
15 000
The balancing entry is then made on the opposite side to open the new Accounting period:
Date
Apr 1
Apr 30
Particulars
Balance
Cash receipts
May 1
Balance
Cash at Bank
Amount
Date
5000
Apr 1
10000
Apr 30
15 000
12 500
Particular
Cash payments
Balance
A trial balance can be completed once all accounts are balanced:
VCE Unit 3 Accounting - 2012 Revision Notes (page 5)
Amount
2500
12 500
15 000
Trial Balance for Some Buisness – month ending 30 June 2012
Cash at Bank
Bank loan
GST Clearing
Stock Control
Computer
Fittings
Capital
Dr
5 000
Cr
20 000
200
4 000
2 000
500
28 900
8 700
28 900
If Debits do NOT equal
Credits, a error has
been made.
VCE Unit 3 Accounting - 2012 Revision Notes (page 6)
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.
VCE Unit 3 Accounting - 2012 Revision Notes (page 7)
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
Microsoft
Dell
Format identical for debtors schedule
VCE Unit 3 Accounting - 2012 Revision Notes (page 8)
500 000
250 000
20 000
780 000
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
Dec 31
Debtors Control
Debtor – J. Smith
Bad Debts
General Ledger
Debit Credit
500
Subsidiary Ledger
Debit
Credit
500
500
Drawings of stock worth $50 on January 1, 2016
Date
Details
Jan 1
Stock Control
Drawings
General Ledger
Debit Credit
500
500
Subsidiary Ledger
Debit
Credit
Correction of error – Registration paid $250 however recorded as a payment of Wages
Date
Details
Dec 31
Wages
Registration
General Ledger
Debit Credit
250
250
Subsidiary Ledger
Debit
Credit
J. Smith deemed bankrupt – payment received of $0.05 in the dollar, remainder to be
written off
Date
Details
Dec 31
Debtors Control
Debtor – J. Smith
Cash at Bank
Bad Debts
VCE Unit 3 Accounting - 2012 Revision Notes (page 9)
General Ledger
Debit Credit
500
Subsidiary Ledger
Debit
Credit
500
25
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
Qty
IN
Cost
Value
Qty
OUT
Cost
Value
Qty
BALANCE
Cost
Value
When stock is purchased at different prices, the stock must be recorded in the same order it
is received in:
Date
June 1
June 2
Details
Inv. 201
Inv. 203
Qty
1
3
IN
Cost
500
600
Value
500
1800
Qty
OUT
Cost
Value
Qty
1
1
3
BALANCE
Cost
Value
500
500
500
500
600
1800
This way, when stock is sold, the correct value of the Cost of Sale can be recorded:
Date
Details
June 1
June 2
Inv. 201
Inv. 203
June 3
Rec. 42
Qty
1
3
IN
Cost
500
600
Value
500
1800
Qty
OUT
Cost
Value
1
500
500
Qty
1
1
3
3
BALANCE
Cost
Value
500
500
500
500
600
1800
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:
VCE Unit 3 Accounting - 2012 Revision Notes (page 10)
Date
Details
Jun 30
Stock Control
Stock Loss
Stock loss – Memo 1
General Ledger
Debit Credit
600
600
Subsidiary Ledger
Debit
Credit
And is then recorded in the stock card:
Date
Details
June 1
June 2
Inv. 201
Inv. 203
June 3
Rec. 42
Qty
1
3
IN
Cost
500
600
Value
500
1800
June 30 Memo. 1
Qty
OUT
Cost
Value
1
500
500
1
600
600
Qty
1
1
3
3
2
BALANCE
Cost
Value
500
500
500
500
600
1800
600
600
1800
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:
Date
Details
Aug 30
Stock Control
Stock Gain
Stock loss – Memo 2
General Ledger
Debit Credit
600
600
Subsidiary Ledger
Debit
Credit
And then the stock card:
Date
Details
June 1
June 2
Inv. 201
Inv. 203
June 3
Rec. 42
Qty
1
3
June 30 Memo. 1
Aug 30 Memo. 2 1
IN
Cost
500
600
600
Value
500
1800
Qty
OUT
Cost
Value
1
500
500
1
600
600
600
VCE Unit 3 Accounting - 2012 Revision Notes (page 11)
Qty
1
1
3
3
2
3
BALANCE
Cost
Value
500
500
500
500
600
1800
600
600
600
1800
1200
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
Date
Jun 30
Jun 30
Date
Jun 30
Details
General Ledger
Cash Sales
Credit Sales
Profit and Loss Summary
Closing entries
Cost of Sales
Wages
Advertising
Electricity
Insurance
Profit and Loss Summary
Closing entries
Particulars
Expense accounts
Debit
30 000
2 000
Credit
Subsidiary
Ledger
Debit Credit
32 000
14 000
5 250
3 000
200
500
22 950
Profit and Loss Summary
Amount
Date
Particular
22 950
Jun 30
Revenue accounts
VCE Unit 3 Accounting - 2012 Revision Notes (page 12)
Amount
32 000
A balancing entry then is made to Profit and Loss Summary to transfer the profit from Profit
and Loss Summary to Capital:
Date
Details
Aug 30
Profit and Loss Summary
Capital
Transfer of net profit
Date
Jun 30
Jun 30
Particulars
Expense accounts
Capital
General Ledger
Debit Credit
9 050
9 050
Subsidiary Ledger
Debit
Credit
Profit and Loss Summary
Amount
Date
Particular
22 950
Jun 30
Revenue accounts
9 050
Amount
32 000
Drawings need to be transferred separately from Drawings to Capital:
Date
Details
Aug 30
Drawings
Capital
Transfer of drawings
VCE Unit 3 Accounting - 2012 Revision Notes (page 13)
General Ledger
Debit Credit
200
200
Subsidiary Ledger
Debit
Credit
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:
Date
Jun 30
Jun 30
Details
Cash Sales
Credit Sales
Profit and Loss Summary
Closing entries
Cost of Sales
Wages
Advertising
Electricity
Insurance
Profit and Loss Summary
Closing entries
General Ledger
Debit
30 000
2 000
Credit
Subsidiary
Ledger
Debit Credit
32 000
14 000
5 250
3 000
200
500
22 950
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”.
VCE Unit 3 Accounting - 2012 Revision Notes (page 14)
Thus, a Income Statement based on the Closing Entries on the previous page would be:
Revenue
Cash Sales
Credit Sales
30000
2000
32000
Less Cost of Goods Sold
Cost of Sales
14000
14000
Gross Profit
Less Other Expenses
Wages
Advertising
Electicity
Insurance
Net Profit
18000
5250
3000
200
500
VCE Unit 3 Accounting - 2012 Revision Notes (page 15)
8950
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 the Day to
Day activities of the firm –
for example sale of stock,
payment of wages
Inflows from cash sales (not
credit sales), commissions
paid, GST received, debtor
payments
Outflows from wages and
other expenses, payments to
creditors and other day-today payments.
Cash Flows from Investing
Activities
Cash flows from the
purchase and sale of noncurrent assets.
Cash Flows from Financing
Activities
Cash flows from changes to
the financing structure of the
business.
Inflows from the sale of noncurrent assets
Inflows from capital
contributions and bank loans
being taken out
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)
VCE Unit 3 Accounting - 2012 Revision Notes (page 16)
Cash Flow Statement for year ending 30 June 2012
Cash flows from Operating Activities
Collections from Customers:
Cash Sales
Collections from Debtors
GST Collected
Payments to suppliers and employees:
Cash purchases of Stock
Wages
Advertising
Insurance
GST Paid
Net cash provided by Operating Activities:
Cash flows from Investing Activities
Proceeds from sale of Shop Fittings
Payments for new Cash Register
Net cash used in Investing Activities
Cash flows from Financing Activities
Loan from NAB
Capital Contribution
Net cash provided by Financing Activities
Net increase in Cash Held
Cash held at the beginning of year
Cash held at end of year
VCE Unit 3 Accounting - 2012 Revision Notes (page 17)
$
$
50,000
25,000
5,000
80,000
(15,000)
(5,000)
(1,000)
(4,000)
(2,000)
(27,000)
53,000
2,000
(5,000)
(3,000)
20,000
3,000
23,000
76,000
500
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
30 June
Deprecation of Computer
Accumulated Depreciation
of Computer
General Ledger
Debit
Credit
$400
$400
Subsidiary Ledger
Debit
Credit
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
30 June
Deprecation of Computer
Profit and Loss Summary
General Ledger
Debit
Credit
$400
$400
Subsidiary Ledger
Debit
Credit
The Accumulated Depretiation account, however, is merely balanced and carried over to the
next accounting period.
VCE Unit 3 Accounting - 2012 Revision Notes (page 18)
When the balance sheet is prepared, depreciated assets are displayed as follows:
Non-current assets
Computer
less Accumlated Depreciation
$1 500
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 15 th
of the month.
VCE Unit 3 Accounting - 2012 Revision Notes (page 19)
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):
Date
Jan 1
Particulars
Cash at bank
Prepaid Insurance expense
Amount
Date
Particular
$5000
Amount
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:
Date
Jan 1
Date
Jun 30
Particulars
Cash at bank
Particulars
Prepaid insurance
expense
Prepaid Insurance expense
Amount
Date
Particular
$5000
Jun 30
Insurance expense
Insurance expense
Amount
Date
Particular
$2500
These are then treated like any other asset and expense account:
VCE Unit 3 Accounting - 2012 Revision Notes (page 20)
Amount
$2500
Amount
Date
Jan 1
Particulars
Cash at bank
Jul 1
Balance
Date
Jun 30
Particulars
Prepaid insurance
expense
Prepaid Insurance expense
Amount
Date
Particular
$5000
Jun 30
Insurance expense
Jun 30
Balance
$5000
$2500
Insurance expense
Amount
Date
Particular
$2500
Jun 30
Profit and Loss
Summary
$2500
Date
Details
Jun 30
Insurance expense
Profit and Loss Summary
General Ledger
Debit Credit
2500
2500
Amount
$2500
$2500
$5000
Amount
$2500
$2500
Subsidiary Ledger
Debit
Credit
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:
Date
Jun 10
Jun 30
Date
Jun 30
Particulars
Cash at Bank
Accured advertising
expense
Particulars
Balance
Advertising expense
Amount
Date
Particular
$3000
Jun 30
P+L Summary
$200
Amount
$3200
$3200
$3200
Accured advertising expense
Amount
Date
Particular
$200
Jun 30
Advertising expense
$200
Jul 1
Balance
VCE Unit 3 Accounting - 2012 Revision Notes (page 21)
Amount
$200
$200
$200
Date
Details
General Ledger
Debit Credit
200
200
Jun 30
Subsidiary Ledger
Debit
Credit
Advertising expense
Accrued advertising expense
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:
Date
Jun 30
Particulars
Balance
Jun 29
Cash at bank
Accured advertising expense
Amount
Date
Particular
$200
Jun 30
Advertising expense
$200
$200
Jul 1
Balance
$200
Amount
$200
$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).
VCE Unit 3 Accounting - 2012 Revision Notes (page 22)